IRS Issues Long-Awaited Corporate Alternative Minimum Tax Regs

Over two years since the enactment of the Inflation Reduction Act (P.L. 117-169), the Treasury Department and IRS has issued proposed regs implementing the corporate alternative minimum tax (CAMT) under Code Sec. 55 (REG-112129-23; IR 2024-235, 9/12/2024).

Generally, the 15% minimum tax is based on adjusted financial statement income (AFSI) and applies to large corporations with average annual AFSI exceeding $1 billion beginning tax years after December 31, 2022.

Sometimes referred to as the “book minimum tax,” the Department has grappled with the complexities of the statute and implementing the law pursuant to congressional intent. Going back to January 2023, the IRS has issued a total of seven notices providing interim guidance and various forms of transition relief while the agency worked on the rules package released to the public on Thursday, which spans 600 pages.

The proposed regs — issued under Code Sec. 56A, Code Sec. 59, and Code Sec. 1502 — seek to provide definitions and clarification on the determination of AFSI, as well as whether a taxpayer is an applicable corporation subject to the CAMT. The regs also include several statutory adjustments to AFSI and explain how the tax applies to consolidated groups, partnerships, and in “international contexts,” including the foreign tax credit.

Treasury expects about 100 companies to fall within the scope of the CAMT and emphasized that the $1 billion threshold means profits, and not gross sales. However, certain businesses may be impacted by the regs “irrespective” of their size as defined by the Small Business Administration’s Office of Advocacy, which estimated that 99.9% of U.S. businesses are considered small businesses.

“Crafting the rules to implement this tax has been one of the most significant projects the Treasury Department has undertaken in decades,” Treasury said in a press release, acknowledging the “significant amount of authority” delegated by Congress to the Department. During the legislative process, “Congress chose to retain only a small number of regular tax preferences for the purpose of the minimum tax,” the release continued. “The proposed rules follow suit and generally do not create adjustments to the tax base other than those directed by Congress.”

Speaking with reporters on a press call Wednesday afternoon, Deputy Treasury Secretary Wally Adeyemo said the imposition of the tax “is about fairness” since 60 of the companies subject to the CAMT “pay less than 1% in taxes annually.” Without the CAMT, over 20 would have continued to pay an effective tax rate of zero. Across all companies subject to the CAMT, the average effective federal tax rate is 2.6%.

“It’s also about revenues,” Adeyemo added. “This will allow us to collect over a 10-year period $250 billion. And we’ll ensure that we’re in a position where we are paying for the things that we are doing on behalf of middle-class, working-class Americans on a going -forward basis.” He said the tax will bring in “about $20 billion in revenue in 2025 alone” and addresses a “major problem in our tax system where some of the most profitable corporations of the country report record profits to shareholders while using complex tax strategies to pay little to no taxes.”

These companies, Adeyemo said, leverage expensive accountants and lawyers to have a “competitive advantage over small businesses” and pay “lower tax rates than nurses, firefighters, police officers, and teachers.”

Also on Wednesday’s call was White House National Economic Adviser Lael Brainard, who condemned congressional Republicans for attempting to eliminate the CAMT and give “the biggest corporations hundreds of billions of dollars in additional tax breaks while underfunding the IRS so it can’t collect the taxes owed by the ultra-wealthy and large corporations.”

Under the proposed rules, a “CAMT entity” would include “any entity identified” in Code Sec. 7701 other than a disregarded entity. But the regs clarify that “not all such entities are applicable corporations, nor are all relevant to the determination of CAMT liability for an applicable corporation, or to the determination of CAMT status.”

For the purposes of adjusted financial statements (AFS), the regs are consistent with Code Sec. 56A(b) and Code Sec. 451(b)(3). The regs mostly retain the list of financial statements and their order of priority as described in Section 451(b)(3) and Reg §1.451-3(a)(5) but also add certain certified statements issued by an accounting standards board charged with developing accounting standards for one or more jurisdictions. These would “take a higher priority” than financial statements filed with government agencies not subject to certification requirements but would “take a lower priority than financial statements certified as being prepared in accordance with GAAP or IFRS,” per the regs.

In response to a commenter who requested guidance on what it means for a statement to be certified, the IRS says it generally follows the definitions set forth by the Public Company Accounting Oversight Board. Such a financial statement is either:

• certified by an independent financial statement auditor,
• subject to a qualified or modified opinion by an independent financial statement auditor, or
• subject to an adverse opinion by an independent financial statement auditor, but only if the auditor discloses the amount of the disagreement with the statement.

The regs provide that taxpayers may rely on certain sections of interim guidance in prior notices for tax years ending on or before September 13, 2024, the date the regs were set to publish in the Federal Register. But this does not apply to “unmodified text of sections 4.02(5)(b)(i) or 6.02 of Notice 2023-64 for any tax return filed on or after December 15, 2023.” Additionally, if a taxpayer relies on sections of previous guidance, those sections must be relied upon in their entirety. Once that position is taken, the taxpayer must continue to rely on such sections in a similar fashion until the first tax year in which the final regulations are applicable.

A Treasury official told reporters on background that the bulk of proposed rules apply to calendar year 2024. Since the CAMT took effect in 2023, taxpayers may apply the rules to tax year 2023 or reasonably interpret the statute on their own until the regs are finalized.

The IRS also issued on Thursday Notice 2024-66, which waives the penalty under Code Sec. 6655(a) for a taxpayer’s failure to pay estimated CAMT for tax years beginning December 31, 2023, and ending before January 1, 2025. Form 2220, Underpayment of Estimated Tax by Corporations, will be modified accordingly to reflect that estimated tax penalties will not include CAMT liability for the waiver period. The notice says this decision comes in light of the “challenges” in determining if a taxpayer is an applicable corporation subject to the tax, as well as with determining CAMT owed. Notice 2024-33 and Notice 2024-47 are now obsolete.

“The proposed rules released by Treasury today are an important step toward realizing Congress’ efforts to address the most egregious U.S. corporate tax avoidance and ensure the largest and most profitable corporations in the country cannot pay little to no taxes,” said Treasury Secretary Janet Yellen.

For more on the corporate alternative minimum tax, see Checkpoint’s Federal Tax Coordinator ¶ A-8900.