Partnerships Must Act Now to Get Ready for Minimum Tax Rules

If the Treasury Department finalizes its proposed regulations for the corporate alternative minimum tax, partnerships with corporate owners should prepare to keep an additional CAMT set of books and records.

This will require a collective effort from people with knowledge of the partnership’s business operations, tax experience, proficiency in financial accounting principles, and understanding of the regulations. Partnerships should plan to expend additional time, money, and other resources to ensure compliance.

Among the affected entities will be many partnerships that have a corporate owner (either directly or indirectly through intermediary partnerships) that themselves are required to meet CAMT reporting requirements. This will include the largest companies as well as any corporate owners that meet the safe harbor rules.

Under the proposed safe harbor rules, corporate groups with less than $500 million of adjusted financial statement income, or AFSI, generally are exempt for a three-year period from filing their CAMT information. This threshold is reduced to $50 million for corporate groups with foreign parents. However, these corporate groups are still required to maintain records to substantiate how they determined that they qualified for the safe harbor.

While the tax departments of the largest companies—the originally intended targets of these regulations—should possess the financial accounting knowledge needed to dissect the CAMT, many partnerships may not. Corporate partners may not receive sufficiently detailed reports of the partnership’s operations to allow them to calculate their share of the partnership AFSI. In these instances, the corporate partner can request the required information to compute their AFSI from their partnership investment.

Once requested, the proposed regulations impose a variety of information reporting and filing requirements that must be met no later than the due date of the partnership’s tax return for the year. Partnerships that fail to meet these requirements would be subject to penalties.

The proposed regulations favor a multi-step, bottom-up approach to determine a corporate partner’s AFSI. This approach requires the partnership to determine its own AFSI by making the same type of adjustments that corporations make. The proposed regulations also require the CAMT partner to track its basis in the partnership using CAMT principles.

The bottom-up approach relies on a corporate partner recognizing only its pro rata share of the partnership AFSI as determined under financial statement principles. In essence, while financial accounting and tax accounting provide two separate ways to “keep score” of a partnership’s operations, the bottom-up approach is a hybrid of these two methods. This approach may trigger an AFSI that exceeds the partner’s distributive share of taxable income—the AFSI of the corporate partner may exceed the taxable profits of the partnership.

The proposed regulations also adopt a deferred sale approach that requires additional adjustments for certain nontaxable partnership transactions. Some contributions to, and distributions from, a partnership of assets with built-in gain or loss will require adjustments and tracking for CAMT purposes even when they may not be required for financial statement or tax purposes.

These deferred sale adjustments (the difference between fair value and tax basis determined at the time of the tax deferred transaction) will amortize into the partnership’s AFSI over an applicable recovery period. As a result, the partner will have three different adjustments: one for financial statement purposes, one for tax purposes, and a third for CAMT purposes.

Certain transactions that previously had little tax impact could trigger AFSI adjustments under the proposed regulations. For example, transactions that dilute a partner’s ownership would change the financial accounting distributive share. Such changes would require corporate partners to identify these transactions and provide information to all their CAMT-impacted partners when requested, placing a bigger burden on partners.

The proposed regulations also take an expansive approach to applying CAMT to foreign parented multinational groups, and compliance is expensive. A domestic or foreign partnership could be treated as a foreign parented multinational group, for example. By including a partnership as a deemed foreign corporation, the reach of CAMT rules could apply to domestic or foreign private equity structures, which is well beyond the scope of what was expected.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Scott Austin is principal with Forvis Mazars, where he focuses on corporate, international, and ASC 740 issues as a member of the firm’s professional standards group.

Michael Cornett is managing director with Forvis Mazars, where he focuses on international tax issues with the firm’s Washington National Tax Office.

Howard Wagner is managing director with Forvis Mazars, where he focuses on M&A and Subsector C issues with the firm’s Washington National Tax Office.

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