The CAMT, passed as part of the Inflation Reduction Act of 2022,1 is first applicable to tax years beginning after Dec. 31, 2022. The CAMT imposes a 15% minimum tax on the adjusted financial statement income (AFSI) of an applicable corporation. In general, a C corporation qualifies as an applicable corporation subject to the CAMT only if the average annual AFSI exceeds $1 billion. This threshold drops to $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 AFSI is its financial statement income or loss, with certain enumerated adjustments.
The CAMT is calculated as the excess of the “tentative minimum tax” over the regular tax plus the BEAT liability, for the taxpayer year. The tentative minimum tax is calculated as 15% of a corporation’s AFSI, offset by certain foreign tax credits.
As discussed, the Proposed Regulations are largely consistent with prior interim guidance (see Notice 2023-64 and Notice 2023-7), albeit with some clarifications. Several items in the proposed rules are of particular note:
- Simplified Safe Harbor (modified): The Proposed Regulations largely preserve the simplified safe harbor method introduced in Notice 2023-7 for determining if a corporation is an applicable corporation subject to the CAMT. The simplified safe harbor method applies to smaller companies with an average annual AFSI of $500 million or less. For corporations that are part of a foreign-parented multinational group, their average annual AFSI must be less than $50 million to meet the safe harbor.
- Termination of applicable corporation status: The Proposed Regulations address how and when a corporation may terminate its status as an applicable corporation. Specifically, this status can terminate (a) as a result of certain specific ownership changes or (b) by failing to meet the average annual AFSI thresholds for 5 consecutive years.
- Partner’s distributive share of AFSI: Section 56A(c)(2)(D)(i) states that taxpayers that are partners in partnerships must adjust their AFSI to take into account their distributive share of the AFSI of the partnership. The Proposed Regulations would impose a bottom-up approach under which partnership AFSI is determined first and then allocated amongst the partners. Contrast this method with a top-down approach in which the partner’s starting point is the amount of partnership income (or loss) that it (the partner) reported on a financial statement. In applying the bottom-up approach, the Proposed Regulations would impose significant additional reporting requirements on partnerships.
- Adjustments to income for troubled companies: The preamble of the Proposed Regulations points out that, absent adjustments to AFSI, troubled companies (e.g., insolvent or in bankruptcy) would have additional tax liabilities under the CAMT that would impede them from achieving solvency or emerging from bankruptcy. Consistent with interim guidance, the Proposed Regulations state that AFSI does not include income from the cancellation of debt that is excluded from gross income under section 108(a).
- Depreciation and AFSI: The Proposed Regulations clarify that taxpayers must adjust AFSI to reflect tax depreciation. Thus, AFSI reflects tax rather than financial statement depreciation. Depending upon the year and the circumstances, this rule could be beneficial or detrimental to a given taxpayer.
Conclusion
The Proposed Regulations represent welcome guidance in addressing the CAMT rules. Proposed regulations are not binding on taxpayers; however, corporations and their tax advisors should thoroughly understand and adapt to these regulations, understanding whether (and how) the rules apply to their company. Stakeholders have the opportunity to comment on the Proposed Regulations within 60 days of their issuance.
Please note that the information provided in this article is intended for general guidance and informational purposes only. Tax laws and regulations are complex and subject to change, and the application of such laws and regulations can vary widely based on the specific facts and circumstances involved. Therefore, we strongly advise consulting with a qualified tax professional or legal advisor.
