What Should CFOs, the C-Suite, and Tax Execs Know About the CAMT?

The Inflation Reduction Act added the new CAMT to the Code primarily by amending sections 53, 55, and 59 as well as introducing section 56A. The CAMT is a minimum tax based on financial statement income that applies to “applicable corporations.” Whether a taxpayer is an applicable corporation, and thus subject to the CAMT (the Scope Determination) and the potential CAMT tax liability of an applicable corporation (the Liability Determination) are based on adjusted financial statement income (AFSI).1

A corporation determining whether it is an applicable corporation may apply a safe harbor (Safe Harbor Scope Determination) during 2022.2 If the Safe Harbor Scope Determination is not satisfied in 2022 and for all future years, a corporation determining whether it is an applicable corporation must apply the statutory rules (Statutory Scope Determination).3

Under the Statutory Scope Determination’s average annual AFSI test, a corporation generally meets the Scope Determination if the average AFSI of the corporation (together with certain related entities) in the three-tax-year period ending with any tested tax year4 exceeds $1 billion.  Applying the Safe Harbor Scope Determination’s average annual AFSI test, a corporation generally meets the Scope Determination if the average AFSI of the corporation (together with certain related entities) in the three-tax-year period ending with any tested tax year exceeds $500 million.5

¹AFSI for Scope Determination purposes and Liability Determination purposes may (and often will) differ.
²Slightly different rules apply to fiscal year corporations.
³Future guidance could provide for a safe harbor applicable to future years.
⁴A tested tax year is any tax year ending after December 31, 2021.
⁵The Scope Determination includes two aggregation rules. First, the AFSI of a corporation generally includes the AFSI of any person that is treated as a single employer with that corporation under section 52(a) or 52(b). Second, a special aggregation rule applies if the corporation is a member of a “foreign-parented multinational group.”

The CAMT is based on AFSI, not taxable income. Because AFSI diverges in significant ways from taxable income, corporations with a higher than 15 percent effective tax rate cannot assume they have no CAMT liability.

Corporations with far less than $1 billion of financial statement income (or taxable income) may be in scope for the CAMT.  While this may be counterintuitive, the following are reasons that corporations with less than $1 billion of book income on a consolidated financial statement could be in scope:

• Differences between book consolidation and section 52 aggregation (e.g., owners of the corporation or the corporation’s ownership of other entities)
• Treatment of equity interests (e.g., non-consolidated-for-tax subsidiary pays out dividend in year in which the subsidiary has a loss on its financial statement)1
• Covered nonrecognition transaction(s) in a previous year
• Intercompany gains and losses with members outside the consolidated tax group
• Depreciation and disposal of section 168 property
• Repairs capitalized for tax
• Impairment
• Pensions
• Differences in fiscal/tax years

Estimates regarding the number of companies that will be subject to the CAMT (i.e., those that will owe CAMT) vary widely. Economist Martin Sullivan has identified 90 corporations that are likely subject to CAMT,2 while the Joint Committee on Taxation estimates that approximately 150 corporations will be subject to the CAMT.3 Meanwhile, KPMG has determined that more than 300 companies appear to be in scope and more than 1,000 appear to be within striking distance of the $1 billion mark based on public financials from the prior three years.

¹Moreover, while only corporations are subject to the CAMT, the income of noncorporate entities (e.g., partnerships) can increase the CAMT liability of a direct or indirect corporate owner.

²Martin A. Sullivan, “Tax Credits and Depreciation Relief Slash Burden of New Corporate AMT,” Tax Notes Federal (August 22, 2022).

³Proposed Book Minimum Tax Analysis by Industry, Joint Committee on Taxation memorandum (July 28, 2022).

Once a corporation meets the threshold statutory definition of “applicable corporation” for purposes of the CAMT, it remains an applicable corporation subject to relatively narrow exceptions that require a “determination” by the Secretary to change applicable corporation status.  This can be thought of as a once an applicable corporation, (almost) always an applicable corporation rule.

Note that the “almost always an applicable corporation rule” has particular significance for mergers and acquisition transactions: if a target is an applicable corporation (based, for example, on the status of its former owner), the target will remain an applicable corporation for all future years—unless guidance provides otherwise. The first Treasury guidance on the CAMT provides very limited relief.

AFSI is not simply financial statement income. Numerous modifications need to be calculated to arrive at AFSI from any number that appears on the face of a financial statement, and these modifications are based both on financial statement rules and tax rules.

It’s also important to bear in mind that AFSI for purposes of determining whether a corporation qualifies as an applicable corporation under the safe harbor (i.e., the Safe Harbor Scope Determination); AFSI for purposes of determining whether a corporation qualifies as an applicable corporation under the statutory rules (i.e., the Statutory Scope Determination); and AFSI for purposes of the Liability Determination may (and often will) differ. 

Different AFSIs for different purposes happen because the adjustments required to the starting book number will depend on whether the AFSI calculation is for Safe Harbor Scope Determination purposes, Statutory Scope Determination purposes, or Liability Determination purposes.  Generally, fewer adjustments are required for Safe Harbor Scope Determination purposes.  Numerous adjustments to the starting book number are required for both Statutory Scope Determination purposes and Liability Determination purposes. While many adjustments apply for both Statutory Scope Determination purposes and Liability Determination purposes, certain adjustments apply for one purpose but not the other. 

For example, AFSI for purposes of Statutory Scope Determination (and Safe Harbor Scope Determination purposes) can include amounts from lower-tier entities, upper-tier entities, and brother-sister entities, but AFSI for Liability Determination generally only includes the taxpayer’s AFSI (along with certain specified items from other entities). This is because the tax aggregation rules found in sections 52(a) and 52(b) apply for Statutory Scope Determination (and Safe Harbor Scope Determination) purposes but not Liability Determination purposes. Under these rules, the AFSI of all persons treated as a single employer with the tested corporation is included for the Statutory Scope Determination (and Safe Harbor Scope Determination) purposes.

Additionally, AFSI can differ because financial statement net operating losses (NOLs) and certain enumerated adjustments to AFSI are not considered for Statutory Scope Determination (and Safe Harbor Scope Determination) purposes but are considered for Liability Determination purposes.

Applicable corporations are allowed to claim a credit for CAMT paid against regular tax in future years, but the credit cannot reduce that future year’s tax liability below the computed CAMT for that year.

However, there is a potential for permanent or long-term differences. Potential permanent or long-term differences may be due to:

• Share-based payments
• Nonrecurring items such as lawsuits or industrial accidents for which an expense hits the financial statement before it’s deducible for tax
• Deferred tax assets (DTAs) and pre-2020 financial statement NOLs
• Certain pre-effective date nonrecognition transactions
• Treatment of dividends
• Purchase accounting adjustments for non-amortizable assets
• Percentage depletion
• Higher CAMT rate (15 percent) on controlled foreign corporation (CFC) AFSI versus global intangible low-taxed income (GILTI) (10.5 percent rate)
• Qualified business asset investment (QBAI) or other non-GILTI, non-subpart F income of a CFC
• Foreign-derived intangible income (FDII)
• Foreign tax credit carryforwards
• Tax-exempt municipal bond interest income
• Regular charitable deductions of appreciated property

Incorrect.

The Joint Committee on Taxation’s estimate that approximately 150 corporations will be in scope for the CAMT is not determinative and may diverge significantly from the actual number of in-scope corporations.

Incorrect.

The CAMT is a minimum tax based on AFSI, not taxable income. Because AFSI diverges in significant ways from taxable income, corporations with a higher than 15 percent effective tax rate cannot assume that they have no CAMT liability.

Incorrect.

The CAMT is a minimum tax based on AFSI, not financial statement income, per se. Because AFSI diverges in significant ways from financial statement income, it may be necessary to compute AFSI to determine whether a company is in scope for the CAMT.

Furthermore, and perhaps more importantly, corporations with far less than $1 billion of income (book or tax) also need to be aware that they can be subject to the CAMT based on the AFSI of other entities, including, for example, either the AFSI of their direct and indirect owners and/or the AFSI of entities they own directly or indirectly.

Yes.

Special rules apply to foreign-parented multinational groups (FP MNGs), defined as groups with two or more entities included in the same “applicable financial statement” with respect to the same tax year if (1) either (i) at least one entity is a foreign corporation with U.S. effectively connected income (ECI)1 or (ii) one entity is a domestic corporation and another entity is a foreign corporation; and, generally, (2) the common parent of those entities is a foreign corporation. There is broad regulatory authority for the Treasury Department to determine the members of a FP MNG.

For FP MNGs, the $1 billion AFSI threshold is modified to also include non-U.S.-related financial statement profits of foreign corporations. There is also a special $100 million AFSI test for FP MNGs that takes into account only the group’s U.S.-related AFSI of foreign corporations and AFSI of domestic corporations, including controlled foreign corporation (CFC) income. The additional $100 million test applies based on the same average three-year period that is used for the $1 billion test.

¹For this purpose, a U.S. ECI branch is treated as a separate entity.

On December 27, 2022, Treasury released Notice 2023-7, its first guidance addressing the CAMT and its many uncertainties. On February 13, 2023, Treasury released Notice 2023-20, addressing CAMT issues of consequence to the insurance industry. Additional interim guidance, followed by a notice of proposed rulemaking (proposed regulations), is expected. Final regulations are not expected in 2023.

Notice 2023-7 provides interim guidance on the application of the CAMT and addresses certain “time-sensitive issues” created by the CAMT. Taxpayers may rely on the interim guidance in sections 3 through 7 of the notice until proposed regulations are issued. Section 3 addresses CAMT issues regarding subchapters C and K of chapter 1 of the Code, troubled corporations, and affiliated groups of corporations that join in filing (or that are required to join in filing) a consolidated return. Section 4 addresses CAMT issues with respect to the depreciation of section 168 property. Section 5 describes a safe harbor method for determining whether a corporation is an “applicable corporation” subject to the CAMT. Section 6 describes rules regarding the treatment of certain federal income tax credits under the CAMT. Section 7 addresses the determination of applicable corporation status when certain partnerships are involved.

Notice 2023-20 is “intended to help avoid substantial unintended adverse consequences to the insurance industry.” The relief in the notice is limited to the insurance industry. Taxpayers may rely on sections 3 through 5 of Notice 2023-20 until proposed regulations are issued. Section 3 addresses certain CAMT issues regarding variable contracts and similar contracts. Section 4 describes CAMT issues regarding funds withheld reinsurance and modified coinsurance agreements. Section 5 addresses issues that arise under the CAMT for certain formerly tax-exempt entities whose exemption from federal income tax was repealed by statute and for which Congress provided special rules for determining the tax basis in assets held when the repeal of the exemption became effective. 

Like the legacy alternative minimum tax (AMT) regime, we believe companies should account for the incremental tax owed under the CAMT as it is incurred and continue to measure their deferred taxes at regular tax rates—at enactment and going forward. An entity would recognize a deferred tax asset for any AMT credit carryforwards.

For deferred tax assets related to AMT credit carryforwards, Topic 740 requires that a company’s expectation of its AMT status be considered when evaluating its valuation allowance for those carryforwards. This is necessary because a company, depending on its facts and circumstances, could be subject to the AMT in perpetuity. In that case, it is often difficult for a company to conclude that all or some of the benefits of the AMT credit carryforwards are more likely than not to be realized when it is relying on future taxable income exclusive of reversing temporary differences.

For deferred tax assets other than AMT credit carryforwards, we believe a company may elect to either consider or disregard its CAMT status when evaluating its deferred tax assets under the regular tax system. For example, a company that forecasts reducing its regular tax with an existing NOL carryforward in a year that it is subject to the CAMT may not benefit at all from that deferred tax asset if it anticipates always being an AMT taxpayer. If that company elects to consider its CAMT status, it would recognize a valuation allowance on the deferred tax asset.

Accordingly, determining whether a company expects to be subject to the AMT in perpetuity is an important assertion in accounting for the new CAMT.