On December 27, 2022, Treasury issued Notice 2023-7, which provides guidance regarding the new Corporate Alternative Minimum Tax ("CAMT") that taxpayers can rely on until Treasury publishes additional guidance. As mentioned in prior coverage, the Inflation Reduction Act of 2022 added the CAMT, which applies in taxable years beginning after 2022. The CAMT applies to "applicable corporations," which are corporations with an average Adjusted Financial Statement Income ("AFSI") exceeding $1 billion for any three consecutive tax years ending after 2021 (for certain foreign-parented corporations, a similar $100 million test must also be satisfied). The AFSI of a corporation is generally based on the income listed on its audited financial statements used for SEC reporting or other nontax purposes, subject to several adjustments. The CAMT does not apply to S corporations, regulated investment companies ("RICs"), real estate investment trusts ("REITs"), or certain corporations whose income is combined with unrelated businesses under common ownership of an investment fund or partnership.
Summarized below are key takeaways from Notice 2023-7:
First Year Safe Harbor for Determining Applicable Corporation Status:
- The Notice contains a safe harbor for a corporation to determine whether it is subject to the CAMT for the corporation's first taxable year beginning after 2022. Under the safe harbor, a corporation can use a simplified method of calculating AFSI that eliminates many of the adjustments to the income reported on the corporation's Applicable Financial Statement and can calculate its average AFSI based on its Applicable Financial Statement period rather than its taxable year if the two differ. However, a taxpayer will only be exempt from the CAMT under the safe harbor if the taxpayer's average AFSI is $500 million or less (or for certain foreign-parented corporations, $50 million or less). A corporation that does not qualify for CAMT exemption under the safe harbor may yet qualify for exemption under the statutory thresholds summarized above.
The Effect of Nonrecognition Transactions on CAMT:
- The Notice clarifies the effects of certain transactions that qualify entirely for income tax nonrecognition (e.g., liquidation of subsidiaries into a corporate parent, reorganizations, contributions of property to partnerships and controlled corporations, certain spin-offs and split-offs, and distributions from partnerships) on a corporation's AFSI. Generally, any financial statement gain or loss directly resulting from such a nonrecognition transaction will be excluded from AFSI, and any related adjustment to the financial accounting basis of assets resulting from the transaction will be disregarded for AFSI calculations going forward. This beneficial rule will, of course, require taxpayers to track their adjusted financial accounting bases for AFSI purposes. The treatment of partially taxable transactions is not clear, and the Notice requests comment on this issue.
- The Notice also clarifies how corporations engaged in acquisitive transactions are to calculate AFSI.
- When a standalone target or entire target group is acquired, the acquirer group will add the target or target group's AFSI to the acquirer group's AFSI for the prior three-taxable-year period ending with the taxable year of the acquisition. A target or target group's "applicable corporation" status before the acquisition ends as of its acquisition.
- If an acquirer acquires a target company from a group that is consolidated for financial accounting purposes, the acquirer group will add to its AFSI a portion of the target group's AFSI allocated to the target for the prior three-taxable-year period ending with the taxable year of the acquisition. The AFSI allocable to the target does not decrease the target group's AFSI for the taxable years preceding the acquisition. A target's "applicable corporation" status before the acquisition ends as of its acquisition.
- Similar rules apply in the case of a controlled corporation in a spin-off or split-off transaction. The controlled corporation will be allocated a portion of the distributing group's AFSI for the prior three-taxable-year period ending with the taxable year of the spin-off or split-off, but this allocation will not decrease the distributing group's AFSI. The controlled corporation's "applicable corporation" status ends as of the spin-off or split-off.
- Any reasonable method can be used for allocating AFSI in these transactions until proposed regulations are issued, which are expected to provide a mandatory allocation method.
Cancellation of Debt and Bankruptcy:
- The Notice provides that taxpayers can exclude from financial accounting gain any cancellation of debt income excluded for Federal income tax purposes, e.g. for insolvent debtors to the extent of insolvency and debts discharged in a Chapter 11 bankruptcy. The Notice also provides that the debtor taxpayer must reduce its financial statement attributes by the amount of income tax attributes that must be reduced due to the excluded cancellation of debt income. The Notice does not specify which financial statement attributes are to be reduced or the method to allocate the reduction among these attributes and Treasury requests comments on these topics.
- The Notice also provides that any financial statement gain or loss and adjustments to the financial statement basis of the taxpayer's assets resulting from emergence from bankruptcy should be excluded from AFSI. Treasury has requested comments regarding any other financial statement effects of bankruptcy emergence and the appropriate treatment of bankruptcy emergence transactions that generate taxable income.
Guidance Regarding Tangible Depreciable Assets:
- Tax depreciation deductions rather than financial statement depreciation deductions generally should be used when calculating AFSI for depreciable tangible assets for which the taxpayer claims tax depreciation deductions.
- Taxpayers will be required to reduce their financial statement basis in depreciable tangible assets subject to this rule for CAMT purposes to reflect these tax depreciation deductions, including any such assets placed into service before the CAMT was effective. This basis reduction should increase taxpayers' AFSI recognized when these assets are sold.
- Any tax depreciation capitalized into inventory will reduce the taxpayer's AFSI when the relevant assets are sold. Corresponding financial statement adjustments will be disregarded.
Effect of Partnerships on Applicable Corporation Status:
- The AFSI of a taxpayer that is a partner in a partnership should be adjusted to include only the partner's distributive share of the partnership's AFSI when determining the taxpayer's CAMT liability, but no adjustment should apply when determining whether the taxpayer is an applicable corporation subject to the CAMT. The Notice confirms that this "distributive share" adjustment will not apply when determining a partner's applicable corporation status whether or not the partnership is included in the taxpayer's single employer group.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.