Background

As part of the Inflation Reduction Act of 2022, Congress imposed a new Corporate Alternative Minimum Tax (CAMT) on “applicable corporations.”  An “applicable corporation” is a corporation with a world-wide average annual Adjusted Financial Statement Income (AFSI) that exceeds $1 billion, with at least $100 million of AFSI from a subgroup of U.S. based companies.

An analysis by the Joint Committee on Taxation originally estimated that approximately 150 taxpayers or 30% of the Fortune 500 companies would be subject to this each year.  However, recent developments have revealed that compliance with this new law will be vastly more far-reaching than envisioned.  As discussed below, most corporations will have an additional compliance burden even if they are not subject to CAMT.

Starting with tax year 2023, most corporations, including tax-exempt corporations, will need to complete and file IRS Form 4626 to determine whether they are an applicable corporation.  Applicable corporations then must determine whether they have a CAMT liability.  S-Corporations are not subject to CAMT.

Adjusted Financial Statement Income

Generally, AFSI is an applicable corporation’s net income or loss on its GAAP basis audited financial statements, adjusted for items including:

  • Eliminating intercompany transactions;
  • Eliminating federal income taxes, war profits, income and excess profits taxes with respect to a foreign country or U.S. territory; and
  • Allowing depreciation under Internal Revenue Code (IRC) §167 but removing depreciation under IRC §168 (bonus depreciation).

AFSI is then reduced by financial statement net operating losses (FSNOLs), but only for FSNOLs generated from tax years beginning after 2019.  In addition, FSNOLs can only offset up to 80% of AFSI for any year.

For a tax-exempt entity subject to unrelated business income tax (UBIT), AFSI takes into account the AFSI of unrelated trades or businesses and income derived from debt-financed property to the extent that it is subject to UBIT.

CAMT Scenarios based on AFSI

The following are common scenarios that corporations may fall under:

How is CAMT Calculated?

An applicable corporation that is subject to CAMT will only pay additional taxes to the extent that the Tentative Minimum Tax (TMT) liability, calculated as 15% of AFSI, exceeds the corporation’s regular tax liability plus any base erosion minimum tax.  If the TMT is greater, then the corporation’s tax liability is increased by the difference.

To the extent that a corporation pays CAMT because its TMT is greater than the regular tax liability plus any base erosion minimum tax, a related minimum tax credit is created.  This credit can be carried forward indefinitely and can offset regular tax liability in future years.

What should you do now?

For our existing clients to whom CAMT may apply, we will contact you to discuss the information that we will need from you.

If you have any questions regarding how CAMT may affect you, please don’t hesitate to contact us.

The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting or tax advice. This communication may not be applicable to your specific circumstances and may require consideration of non-tax and other tax factors if any action is to be contemplated. Please contact your tax professional prior to taking any action based on this information. Accuity LLP assumes no obligation to the reader of any changes in tax laws or other factors that could affect the information contained herein.