Preliminary guidance on the corporate alternative minimum tax (CAMT) released by the IRS late December does not go far enough to properly address the treatment of depreciation for adjusted financial statement income calculation purposes, according to a practitioner specializing in property tax and accounting matters.
The CAMT was established by the Inflation Reduction Act (PL 117-169) and went into effect January 2023. Often referred to as a “book tax,” the new law is aimed at corporations with average annual adjusted financial statement income in excess of $1 billion for three consecutive tax years. Corporations subject to the CAMT must pay a flat 15% tax based on book income should regular taxable income be less than CAMT liability.
Code Sec. 56 provides for the applicable adjustments used in computing alternative minimum taxable income. In Notice 2023-7, released December 27, the IRS provided interim guidance on the CAMT as a temporary fill-in until proposed regs are issued. The guidance covers several areas factoring into the calculation of the tax, including the treatment of depreciable assets. According to the notice, tax depreciation deductions—as opposed to financial statement depreciation expense—are considered when calculating AFSI for CAMT liability.
Ellen McElroy, an Eversheds Sutherland partner, explained that the IRS’ position currently is that this is limited to depreciation deductions under Code Sec. 167, to which Code Sec. 168 applies. McElroy told Checkpoint in an interview that while limited to Section 168 property, the guidance in part reiterates what is in the statute, but then clarifies that depreciation that’s attributable to inventory can be used to offset AFSI.
“However, it’s limited to the amount of depreciation that’s attributable to the cost of goods sold in a particular tax year,” McElroy explained. “So a taxpayer is going to have to first determine ‘what’s my depreciation deduction for a [Section 168] property?’ Then they’re going to have to determine how much of it is allocated to inventory and how is it allocated to inventory—allocated between cost of goods sold, finished goods, and works in process. And then they’re going to have to go back and evaluate how much of that depreciation is attributable to cost of goods sold so that [they] can use it as an offset to AFSI.”
According to McElroy, whose experience includes time at the IRS Office of Chief Counsel and at a Big Four accounting firm, notices are typically more conservative than the government’s eventual final position, as it is possible to be more “generous” during the rulemaking process, and by contrast “very difficult to pull things back.” As the notice is narrow in scope, she said it was not necessarily drafted in a way that considers the complexities surrounding AFSI calculation when limited to cost of goods sold.
McElroy projected that proposed regs could “see some kind of simplifying convention. She said that the rule currently is “unnecessarily complicated” and hopes the IRS will reconsider its position.
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