A new Corporate Alternative Minimum Tax (CAMT) was added to the Internal Revenue Code (the Code) when the Inflation Reduction Act (H.R. 5376) was signed into law on August 16, 2022. While guidance from the Treasury Department and the Internal Revenue Service on the implementation of the CAMT is much anticipated, businesses should be considering the impact now.
Read the five things you should know as well as answers to frequently asked questions (FAQs) to help you understand how the CAMT may affect your company.
Five things to know about CAMT
The Inflation Reduction Act was signed into law on August 16, 2022 and added to the Code a new CAMT 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).*
The CAMT applies to tax years beginning in 2023. However, the Scope Determination is made by looking at AFSI from the prior three years. To determine whether a calendar year taxpayer is subject to the CAMT for 2023, the relevant years for the Scope Determination are 2020, 2021, and 2022. For a fiscal year taxpayer, however, there are two initial testing periods for the Scope Determination: (1) the fiscal years ending in 2020, 2021, and 2022 and (2) the fiscal years ending in 2021, 2022, and 2023. If the fiscal year taxpayer meets the three-year test for either period, then it is an applicable corporation.
*AFSI for Scope Determination purposes and Liability Determination purposes may (and often will) differ.
2. Many companies may fall within the crosshairs of the CAMT.
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 income (book or tax) also need to be aware that they can be in scope for the CAMT based, for example, on their owners or their ownership of other entities.
Moreover, 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.
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 corporation that are likley subject to the CAMT,* whereas the Joint Committee on Taxation estimates that approximately 150 corporations will be subject to the CAMT.** 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.
*Martin A. Sullivan, “Tax Credits and Depreciation Relief Slash Burden of New Corporate AMT,” Tax Notes Federal (August 22, 2022).
**Proposed Book Minimum Tax Analysis by Industry, Joint Committee on Taxation memorandum (July 28, 2022).
3. In-scope status is hard to shake, even if income falls below the $1 billion threshold in future years.
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 of the Treasury to change applicable corporation status. This can be thought of as a "once an applicable corporation, (almost) always an applicable corporation" rule.
Note that this "(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), then it appears that the target will remain an applicable corporation for all future years—unless and until guidance provides otherwise.
4. Determining AFSI isn’t as simple as finding a financial statement and pulling a number.
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 such 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 (i.e., the Scope Determination) and AFSI for purposes of the Liability Determination may (and often will) differ. Multiple differences exist between AFSI for purposes of the Scope Determination and AFSI for purposes of the Liability Determination. For example, AFSI for purposes of Scope Determination can include amounts from lower-tier entities, upper-tier entities, and brother-sister entities, whereas 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 section 52(a) and section 52(b) apply for Scope Determination purposes but not Liability Determination purposes. As a result, the AFSI of all persons treated as a single employer under such rules with the tested corporation is included for the Scope Determination. Additionally, AFSI can differ because financial statement net operating losses and certain enumerated adjustments to AFSI are not considered for Scope Determination purposes but are considered for Liability Determination purposes.
5. The CAMT and Pillar Two are two new and different book-based taxes.
Despite the CAMT’s adoption of a 15 percent threshold, and its reliance on financial statement income as a starting point for the tax base, the interaction between the CAMT and any forthcoming Pillar Two rules is not clear and remains subject to the politics of the Inclusive Framework. The CAMT likely would not be considered a qualified income inclusion rule, nor would it likely be a qualified domestic minimum top up tax, although it may be considered a “Covered Tax” for Pillar Two purposes. In any event, the CAMT and Pillar Two represent two new and different book-based tax rules, and many large U.S. companies will have to deal with both regimes.