Tax alert

The new corporate minimum tax: overview and highlights

New corporate minimum tax is based on financial statement income.

Aug 22, 2022
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Executive summary

On Aug. 16, 2022, President Biden signed the Inflation Reduction Act of 2022 into law.1 The House of Representatives previously passed the Inflation Reduction Act on a 220-207 party line vote on Aug. 12, 2022. The Senate previously passed the bill on Aug. 7, 2022, also on a 51-50 party line vote.  The legislation contains a new corporate alternative minimum tax of 15% (the New AMT) for certain large corporations with consistently high financial statement income. We provided an overview of the initial version of the legislation in the following article: “Inflation Reduction Act: The proposed new corporate minimum tax.”  

Notably, the legislation incorporated an amendment intended to prevent, in certain instances, corporations under the common ownership of a private equity partnership from being subject to the New AMT.2  This and other items of significance with regard to the final text of the New AMT are discussed below.

Discussion of significant aspects of the New AMT

The corporate alternative minimum tax imposes a 15% tax on the “adjusted financial statement income” of certain corporations and corporate groups that meet a $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). At a basic level, a taxpayer’s adjusted financial statement income is its financial statement income or loss, with certain adjustments.

The New AMT is calculated as the excess of the “tentative minimum tax” over the regular tax plus the BEAT liability for the taxable year. The tentative minimum tax is now calculated as 15% of a corporation’s adjusted financial statement income, offset by certain foreign tax credits.  

Controlled Group Rules - For purposes of the $1 billion average annual adjusted financial statement income threshold, the adjusted financial statement income (as modified) of certain related entities that comprise a controlled group is taken into account. The bill incorporates, generally, the controlled group rules relating to single-employer status under current law.3 Related entities can include not only corporations but other organizations as well (e.g., sole proprietorships, partnerships, trusts or estates). A controlled group includes a parent-subsidiary group or a brother-sister group or a combination of the two groups. A parent-subsidiary group is one or more chains of organizations that are connected through ownership of a controlling interest (more than 50%) by a common parent organization. A brother-sister group is two or more organizations owned by the same five or fewer persons (individuals, estates or trusts).  

The controlled group rules, however, incorporate only entities that are engaged in a trade or business. Based on the language and background of the amendment, it appears that a private equity partnership may be excluded from the group. For example, assume a partnership holds all the stock of two operating corporations but does not engage in a trade or business directly. Assuming that five or fewer persons do not control the partnership, the partnership and its operating corporations may not constitute a controlled group with its corporations. Thus, the corporations may not have to aggregate their respective adjusted financial statement income for purposes of the $1 billion rule.4

Foreign-Parented Corporations – To determine if it meets the $1 billion average annual adjusted financial statement income threshold, a corporation that is part of a foreign-parented multinational group must include the adjusted financial statement income of all members of the foreign parent’s financial reporting group. This includes other foreign corporations within the foreign parent’s reporting group. Foreign-parented corporations are subject to a separate $100 million average annual adjusted financial statement income threshold; for that test, the general rules with respect to controlled groups noted above will apply. 

Financial Statement Net Operating Loss Carryforwards – A corporation is not permitted to use its financial statement net operating loss (NOL) carryforwards to reduce its average annual adjusted financial statement income. For purposes of calculating its New AMT, however, a corporation’s adjusted financial statement income is reduced by the lesser of (a) its total financial statement NOL carryovers or (b) 80% of its adjusted financial statement income (computed without regard to NOL carryovers). Thus, corporations must exclude financial statement NOL carryovers in determining whether they are subject to the New AMT. Once a corporation is subject to the New AMT, however, its financial statement NOL carryovers may reduce the amount of its tax under the New AMT. Financial statement NOLs may be carried forward indefinitely. 

Adjusted Financial Statement Income Adjustments - The average annual adjusted financial statement income, used to determine whether the corporation meets the applicable AMT threshold, is adjusted for various items relating to, but not limited to, controlled foreign corporations (CFCs), disregarded entities (DREs), cooperatives, taxes, tax depreciation and tax amortization for qualified wireless spectrum, generally wireless spectrum acquired after Dec. 31, 2007, and before Aug. 16, 2022.

Late amendments to the bill modified adjusted financial statement income to be reduced for tax depreciation deductions and then increased by any book depreciation deductions. Adjusted financial statement income is also reduced by any tax amortization allowed related to qualified wireless spectrum and then increased by any book amortization related to such wireless spectrum. The allowance for tax depreciation and amortization is generally favorable to taxpayers, especially those in capital-intensive industries, such as manufacturing and oil and gas, and this rule may reduce the number of corporations that meet the average annual adjusted financial statement threshold(s). For those corporations that exceed the threshold, allowing tax depreciation and certain amortization (instead of book) could reduce the amount of their tax under the New AMT.

Timing - The corporate alternative minimum tax is effective for taxable years beginning after Dec. 31, 2022. 


The New AMT imposes a new alternative minimum tax regime on larger corporate taxpayers.  In contrast to the corporate alternative minimum tax in effect prior to the Tax Cuts and Jobs Act of 2017, the New AMT is based on a corporate taxpayer’s adjusted financial statement income rather than a modification of taxable income. In determining if a corporation is subject to the New AMT, the rules take into account the adjusted financial statement income of certain related entities. As discussed above, however, the Congressional intent of the controlled group rules appear designed to ensure that, in many situations, the adjusted financial statement income of corporations commonly owned by a private equity partnership that is not engaged in trade or business is not aggregated.

As part of the Tax Reform Act of 1986, the U.S. temporarily imposed a minimum tax liability based in part on book income, also known as the Business Untaxed Reported Profits (BURP) adjustment. It is possible that the Department of the Treasury will look to this historical antecedent in drafting guidance on the New AMT. Nevertheless, due to the differing rules for tax compliance and financial reporting, compliance challenges for taxpayers and enforcement issues for the IRS should be anticipated both in computing the tax and ascertaining whether a corporation has met the income thresholds that would make it subject to the New AMT.

1 Pub. L. No. 117-169 (Aug. 16, 2022).

2 See section 13904, “Removal of Harmful Small Business Taxes; Extension of Limitation on Deduction for State and Local, Etc., Taxes.” H.R. 5376.

3 See section 52(a) and (b); Reg. section 1.52-1.

Unless otherwise stated or clear from the context, all references to “section” in this memorandum are to the Internal Revenue Code of 1986 (the “Code” or “IRC”), as amended, and all references to “regulation section” are to the regulations promulgated under the Code. 

4 There are multiple viewpoints related to the common parent organization being required to conduct a trade or business activity. See, for example, Sheppard, Lee A., “Private Equity’s Book Income Tax Problem,” Tax Notes Federal, Vol. 176 (Aug. 15, 2022). Interpretive guidance in this area is light and Treasury and IRS may need to release additional guidance surrounding the controlled group rules and the New AMT.

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