Executive summary: Interim guidance clarifies certain corporate minimum tax issues
On Dec. 27, 2022, the Department of the Treasury (Treasury) and the Internal Revenue Service (IRS) announced (Notice 2023-7) their intention to issue proposed regulations addressing the application of the new corporate alternative minimum tax (CAMT), which was added to the Internal Revenue Code (Code) by section 10101 of the Inflation Reduction Act of 2022.1 Specifically, Notice 2023-7 provides interim guidance regarding certain time-sensitive issues intended to be addressed by the forthcoming proposed regulations. Treasury and IRS also request comments on what issues forthcoming proposed regulations should address, including specific items enumerated in section 9 of the notice. In addition, they anticipate providing further interim guidance on the CAMT prior to issuing proposed regulations.
The interim guidance is effective for taxable years beginning after Dec. 31, 2022, which mirrors the effective date of the new CAMT.
Interim guidance provided by Notice 2023-7
The Inflation Reduction Act of 2022 (the IRA) contains a new corporate alternative minimum tax of 15% (the CAMT) for certain large corporations with consistently high financial statement income. We provided an overview of the final version of the legislation in the following article: “The new corporate minimum tax: overview and highlights.” The CAMT imposes a 15% tax on the “adjusted financial statement income” of certain corporations and corporate groups that meet at $1 billion average annual adjusted financial statement income test ($100 million in the case of certain U.S. corporations that are members of a foreign-parented multinational group—provided the multinational group also meets the $1 billion threshold). Corporations and corporate groups that meet these threshold tests are known as “applicable corporations.” At a basic level, a taxpayer’s adjusted financial statement income is its financial statement income or loss, with certain adjustments.
On Dec. 28, 2022, the IRS and Treasury released Notice 2023-7, announcing their plan to issue proposed regulations addressing the application of the new CAMT. Notice 2023-7 provides interim guidance regarding certain time-sensitive or year-end issues that will be addressed in more detail in upcoming proposed regulations. The notice states that the IRS and Treasury plan to issue additional interim guidance on issues not addressed in the Notice addressing other CAMT issues before publishing proposed regulations. Below are some brief highlights of the key areas of the IRS and Treasury in the Notice. RSM will issue a more detailed analysis of the topics covered in the notice in the coming days.
Safe Harbor for Determining Applicable Corporation Status – Notice 2023-7 permits corporations and corporate groups to use a simplified method to determine if they meet the average annual adjusted financial statement income test. However, the rules around applicable corporation status contained in the Notice create complexities in determining whether the thresholds in the IRA are exceeded.
Certain Corporate Partners and Applicable Corporation Status – In determining applicable corporation status, Treasury and the IRS acknowledge there is uncertainty as to whether a corporate partner takes into account its distributive share of adjusted financial statement income of the partnership when partner and partnership are not a single employer under sections 52(a) or (b). The reference to the single employer concept in determining the distributive share creates complexities which the Notice attempts to clarify, but still leaves unanswered questions.
Depreciation Adjustments – Under the new CAMT, adjusted financial statement income is reduced by tax depreciation and then increased by any book depreciation deductions. The allowance for tax depreciation is generally favorable to taxpayers. This rule can affect whether a corporation meets the average annual adjusted financial statement threshold(s) as well as reduce the amount of tax under the CAMT. Notice 2023-7 provides a complex set of rules for adjusting financial statement income to reflect tax deprecation (rather than book), including special provisions around when the property is put in service.
Nonrecognition Transactions and Adjusted Financial Statement Income – Treasury and the IRS acknowledge that a financial statement may reflect gain or loss from certain nonrecognition transactions involving corporations or partnerships. Notice 2023-7 provides that such gain or loss from nonrecognition transactions generally does is not reflected in the calculation of adjusted financial statement income. However, it is not clear how certain partially taxable nonrecognition transactions will be handled.
Consolidated Groups and Calculation of CAMT – For purposes of calculating the CAMT, Notice 2023-7 provides (without further explanation) that consolidated groups are treated as a single entity. The Notice leaves questions, however, around certain aspects of short tax years and dynamic groups in applying these concepts.
The Notice requests comments on a number of items not addressed in the Notice, for example, around the distributive share of partnership income, special partnership rules for determining adjusted financial statement income, and potential expiration of applicable corporation status.
As noted above, these rules constitute interim guidance until regulations are issued, but leave open more questions on which clarity is needed. We recommend that taxpayers unsure how to apply these rules consult with their tax advisors.
1 P.L. 117-169 (Aug. 16, 2022).
