On December 27, 2022, the U.S. Department of the Treasury (Treasury) and the IRS issued Notice 2023-7 (the Notice), providing interim guidance to taxpayers on the new corporate alternative minimum tax (CAMT). The CAMT was enacted under the Inflation Reduction Act of 2022 (IRA) and imposes a 15% minimum tax on the adjusted financial statement income (AFSI) of large corporations starting in 2023.
Here are some of the notable highlights of Notice 2023-7:
- Impact of transactions on applicable corporation status and AFSI. If a corporation completes an acquisition during a taxable year, the test to determine whether the corporation is subject to the CAMT is applied as if the target had been in the group for the past three years. If there is a sale or spinoff, the taxpayer is not allowed to reduce its AFSI for the departed member in the years subject to the test (a three-year period). Guidance also is provided for when the financial statement gain or loss of certain non-recognition transactions is excluded from the calculation of AFSI. The Notice provides fact patterns as examples of how the CAMT applies in cases of a covered transaction.
- Treatment of consolidated groups. A tax consolidated group is treated as a single entity for purposes of calculating AFSI for determining applicable corporation status and for calculating CAMT liability.
- Treatment of cancellation of indebtedness (COD) Income. COD income recognized for book purposes is excluded from AFSI up to the amount that is excluded from federal taxable income. The attribution reduction rules of Section 108(b) apply to any AFSI tax attributes.
- Clarification on depreciation adjustments. In general, for purposes of AFSI, tax depreciation is used instead of financial statement income (FSI) for property subject to the accelerated cost recovery system of §168. The Notice provides additional clarification on depreciation adjustments for purposes of computing AFSI, including:
- Adjustment to cost of goods sold (COGS) for book/tax differences in depreciation;
- COGS depreciation capitalized under the UNICAP rules at the end of a tax year remains nondeductible for AFSI purposes;
- If a taxpayer elects out of bonus depreciation for federal tax purposes, they cannot use bonus depreciation for AFSI purposes (consistency principle); and
- The gain or loss on property dispositions must be adjusted for the cumulative book/tax depreciation difference.
- Safe harbor for determining applicable corporation status. The Notice provides a safe harbor for determining whether a taxpayer is an applicable corporation for the first taxable year beginning after December 31, 2022 by choosing to apply a simplified method for determining applicable corporation status. Under the simplified method, a corporation should make the following modifications:
- The AFSI threshold is reduced from $1 billion (global income) and $100 million (U.S. income) to $500 million and $50 million, respectively.
- All the FSI adjustments in §56A(c) and (d) are disregarded, except for specified adjustments for consolidated group members, effectively connected income, and the adjustment for federal taxes.
- Intercompany eliminations for entities that are not treated as a single employer under §52(a) or (b) are disregarded.
- If a corporation has a financial reporting year that differs from its tax year, the applicable corporation test is based on the three-year financial reporting year period that ends in the applicable tax year.
- AFSI adjustments with respect to certain credits. AFSI does not include monetized tax credits (direct or transfer payments) for the Advanced Manufacturing Credit under §48D or other tax credits eligible for direct pay or transfer under §6417 or 6418.
- Application of pro-rata partnership rule. The Notice clarifies that the pro-rata partnership inclusion rule of §56A(c)(2)(D)(i) applies for purposes of calculating the AFSI tax base, but not for purposes of the applicable corporation test. Treasury and the IRS acknowledge there was some confusion on this point based on how the IRA text was drafted.
Although this guidance provides some answers to taxpayers on how to comply with the new CAMT, Treasury and the IRS will issue further guidance in proposed regulations, including on issues related to the treatment under the CAMT of items that are marked-to-market for financial statement purposes, the treatment of certain items reported in other comprehensive income, and the treatment of embedded derivatives arising from certain reinsurance contracts. Guidance also is expected in the future on the inclusion of foreign items.
The interim guidance in the Notice applies for taxable years beginning after December 31, 2022, and taxpayers may rely on this guidance until proposed regulations are issued, likely in the first quarter of 2023.
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