On Sunday, August 7, the Senate passed the Inflation Reduction Act of 2022 (H.R. 5376) . The bill includes a 15% corporate alternative minimum tax, a 1% excise tax on stock buybacks, and numerous environmental and green energy tax credits. Below is a summary of the tax provisions in the bill, which now goes to the House of Representatives for expected approval and onto the president’s desk.
Corporate Alternative Minimum Tax
New law. The Inflation Reduction Act imposes a new 15% corporate alternative minimum tax on the adjusted financial statement income of applicable corporations. (Code Sec. 55(b)(2), as amended by Act Sec. 10101(a)(1))
The minimum tax will apply if it exceeds the taxpayer’s regular tax including its base erosion and antiabuse tax (BEAT) for the tax year. (Code Sec. 55(a)(2), as amended by Act Sec. 10101(a)(2) and Code Sec. 55(a)(3), as amended by Act Sec. 10101(a)(3))
Observation. The Act’s alternative minimum tax can be thought of as a “Book Minimum Tax” because the starting point of the calculation is a corporation’s average annual adjusted financial statement income which includes financial statements prepared in accordance with generally accepted accounting principles (GAAP). This is a departure from the previous calculation of the corporate alternative minimum tax (“Old AMT”) rules, in place prior to the Tax Cuts and Jobs Act (TCJA of 2017), where the starting point was taxable income.
An applicable corporation for a tax year is any corporation (other than an S corporation, regulated investment company (RIC), or a real estate investment trust (REIT) which meets the average annual adjusted financial statement income test (“Income Test”) for one or more earlier tax years that ends after December 31, 2021. (Code Sec. 59(k)(1)(A), as amended by Act Sec. 10101(a)(2))
A corporation meets the Income Test if its average annual adjusted financial statement income for the three-tax-year period (determined without regard to loss carryovers) ending with the tax year exceeds $1 billion. (Code Sec. 59(k)(1)(B)(i), as amended by Act Sec. 10101(a)(2)) Special rules for corporations in existence for less than three years and short corporate tax years apply. (Code Sec. 59(k)(1)(E)(i) and Code Sec. 59(k)(1)(E)(ii), as amended by Act Sec. 10101(a)(2))
However, a corporation that is a member of a foreign parented multinational group, defined below, for any tax year is an applicable corporation if:
- members of the group (determined without regard to the exclusions of income that is not effectively connected and the inclusion of a pro rata share of a CFC’s income) exceeds $1 billion (Code Sec. 59(k)(2)(A), as amended by Act Sec. 10101(a)(2) and
- the adjusted financial statement income of the corporation (determined without regard to loss carryovers) is 100,000,000 or more (Code Sec. 59(k)(1)(B)(ii)(II), as amended by Act Sec. 10101(a)(2))
The $1 billion Income Test is applied (i) by including the income of all corporations that are treated as a single employer under Code Sec. 52(a) (commonly controlled corporations) or Code Sec. 52(b) (commonly controlled entities) and including the income from all partnerships in which the corporation owns an interest and (ii) by disregarding the covered benefit plan adjustment described below. (Code Sec. 59(k)(1)(D)(i), as amended by Act Sec. 10101(a)(2)) The inclusion of members treated as a single employer under Code Sec. 52(a) is applied on the basis of Code Sec. 1563(b) (except for the inclusion of brother-sister controlled group) and the inclusion of members treated as a single employer under Code Sec. 52(b) is applied by treating activities described in Code Sec. 469(c)(5) and Code Sec. 469(c)(6) as trades or businesses. (Code Sec. 59(k)(1)(D)(ii), as amended by Act Sec. 10101(a)(2))
A foreign-parented multinational group for a tax year is two or more entities if (a) at least one entity is a domestic corporation and another entity is a foreign corporation, (b) these entities are included in the same applicable financial statements for the year, and (c) either (I) the common parent of the entities that is a foreign corporation or (II) if there is no common parent, the entities are treated as having a common parent which is a foreign corporation as described below. (Code Sec. 59(k)(2)(B), as amended by Act Sec. 10101(a)(2))
For this purpose, if a foreign corporation is engaged in a U.S. trade or business, then the trade or business is treated as a separate domestic corporation that is wholly owned by the foreign corporation. (Code Sec. 59(k)(2)(C), as amended by Act Sec. 10101(a)(2)) IRS is to provide rules for the application of this definition, including rules for the determination of (i) which entities (if any) are to be treated as having a common parent that a foreign corporation, (ii) which entities to be included in a foreign-parented multinational group, and (iii) the common parent of a foreign parented multinational group. (Code Sec. 59(k)(2)(D), as amended by Act Sec. 10101(a)(2))
Observation. The Joint Committee on Taxation, Proposed Book Minimum Tax analysis, July 28, 2022, estimates that about 150 taxpayers would be subject to the corporate minimum tax annually; estimated to be about 30% of existing Fortune 500 companies. This means the Book Minimum Tax has an incredibly narrow base making 150 companies responsible for raising $313 billion of the anticipated $450 billion required to cover go-green decarbonization expenditures in the Act.
A corporation that is an applicable corporation retains that status in perpetuity unless (i) the corporation has an ownership change or has a specified number of consecutive tax years, including the most recent tax year, in which the corporation does not meet the Income Test (to be determined by IRS, based on the facts and circumstances), and (ii) IRS determines that it would not be appropriate to continue to treat the corporation as an applicable corporation. However, IRS may later determine that the corporation meets the Income Test for any later tax year. (Code Sec. 59(k)(1)(C), as amended by Act Sec. 10101(a)(2))
IRS will provide regulations or other guidance for the purposes of carrying out these rules, including regulations or other guidance (a) providing a simplified method for determining whether a corporation meets the Income Test and (b) addressing the application of these rules to a corporation that experiences a change in ownership. (Code Sec. 59(k)(3), as amended by Act Sec. 10101(a)(2))
Observation. While starting the calculation for Book Minimum Tax at the adjusted financial statement book net income level is a departure from the pre-TCJA starting point, it is not a novel idea. The global minimum tax (GLoBE) proposed by the Organization for Economic Co-Operation and Development (OECD) and the G-20 also recommend using adjusted financial statement net book income as the starting point in calculating minimum tax liabilities. (see Congressional Research Service: The Pillar 2 Global Minimum Tax, July 7, 2022)
Adjusted financial statement income is the net income or loss of the taxpayer as presented in the taxpayer’s applicable financial statements (defined under Code Sec. 451(b)(3)) for the tax year. (Code Sec. 56A(a), as amended by Act Sec. 10101(b)(1); Code Sec. 56A(b), as amended by Act Sec. 10101(b)(1))
Adjusted financial statement income must be adjusted where the applicable financial statement covers a period other than the tax year (Code Sec. 56A(c)(1)) and a consolidated financial statement for a group of entities is treated as the applicable financial statement for an entity within the group. (Code Sec. 56A(c)(2)(A), as amended by Act Sec. 10101(b)(1))
However, except as provided in IRS regulations, the adjusted financial statement income for the group as a whole, takes into account the items on the group’s applicable financial statement allocable to members of the group, only if the corporations file consolidated returns. (Code Sec. 56A(c)(2)(B), as amended by Act Sec. 10101(b)(1))
Otherwise, the corporation only includes dividends it receives from the other corporation (reduced as provided by IRS) and other amounts that are includible in gross income or deductible as a loss (other than subpart F and GILTI income inclusions or other amounts provided by IRS). (Code Sec. 56A(c)(2)(C), as amended by Act Sec. 10101(b)(1))
Adjusted financial statement income of a disregarded entity owned by the taxpayer is included in adjusted financial statement income (Code Sec. 56A(c)(6)), but adjusted financial statement income of a partnership owned by the taxpayer is taken into account only to the extent of corporation’s distributive share of adjusted financial statement income of the partnership. (Code Sec. 56A(c)(2)(D), as amended by Act Sec. 10101(b)(1))
In addition, the following adjustments are made in determining adjusted financial statement income:
- where the corporation is a shareholder in a CFC, the corporation’s pro rata share of the adjusted financial statement income of the CFC is taken into account. However, no negative adjustment is made. Instead, the negative adjustment is taken into account in a later year in which the CFC has positive income. (Code Sec. 56A(c)(3), as amended by Act Sec. 10101(b)(1))
- a foreign corporation’s adjusted financial statement income is computed by taking into account only income that is effectively connected with the conduct of a U.S. trade or business. (Code Sec. 56A(c)(4), as amended by Act Sec. 10101(b)(1))
- federal income taxes with respect to a foreign country or U.S. possession that are taken into account on the taxpayer’s applicable financial statement are disregarded. However, to the extent provided by IRS, this rule doesn’t apply to income taxes imposed by a foreign country or U.S. possession if the taxpayer does not elect to use the foreign tax credit. IRS shall prescribe regulations or other guidance to provide for the proper treatment of current and deferred taxes, including the time at which the taxes are properly taken into account. (Code Sec. 56A(c)(5), as amended by Act Sec. 10101(b)(1))
- the adjusted financial statement income of a subchapter T cooperative is determined after subtracting cooperative patronage dividends and per-unit retain allocations. (Code Sec. 56A(c)(7), as amended by Act Sec. 10101(b)(1))
- the adjusted financial statement income of an Alaska native corporation is determined by taking special depreciation and depletion deductions. (Code Sec. 56A(c)(8), as amended by Act Sec. 10101(b)(1))
- amounts treated as tax credits under an election under Code Sec. 6417 or Code Sec. 48D(d) are disregarded to the extent that these amounts were not taken into account under Code Sec. 56A(c)(5). (Code Sec. 56A(c)(9), as amended by Act Sec. 10101(b)(1))
- the adjusted financial statement income relating to mortgage servicing contracts is adjusted to prevent the inclusion of income before the income is taken into account for federal tax purposes and IRS is directed to provide regulations to prevent the avoidance of taxes on amounts not representing reasonable compensation with respect to a mortgage servicing contract. (Code Sec. 56A(c)(10), as amended by Act Sec. 10101(b)(1))
- except as otherwise provided by IRS, adjusted financial statement income is computed by taking the tax deductions and income with respect to a covered benefit plan (including qualified plans under Code Sec. 401(a), foreign plans and other plans), rather than under the financial statement reporting rules. (Code Sec. 56A(c)(11), as amended by Act Sec. 10101(b)(1))
- the adjusted financial statement income of a tax-exempt entity subject to the Code Sec. 511 unrelated business tax includes only the adjusted financial statement income relating to its Code Sec. 512 unrelated trade or business income and Code Sec. 514 debt-financed income. (Code Sec. 56A(c)(12), as amended by Act Sec. 10101(b)(1))
- the adjusted financial statement income is computed by taking the tax depreciation deductions allowed under Code Sec. 167 on Code Sec. 168 tangible property, rather than the financial statement depreciation. (Code Sec. 56A(c)(13), as amended by Act Sec. 10101(b)(1))
- the adjusted financial statement income is computed by taking the tax amortization adjustments under Code Sec. 197 relating to the qualified wireless spectrum used in the trade or business of a wireless telecommunications carrier where the property was acquired after Dec. 31, 2007, and before the enactment of these rules, rather than the financial statement amortization. (Code Sec. 56A(c)(14), as amended by Act Sec. 10101(b)(1))
- IRS will issue regulations or other guidance to provide for adjustments to adjusted financial statement income necessary to carry out the purposes of these rules including adjustments (a) to prevent the omission or duplication of any item and (b) to carry out the principles relating to certain corporate or partnership transactions. (Code Sec. 56A(c)(15), as amended by Act Sec. 10101(b)(1))
- adjusted financial statement income is determined by taking only 80% of the adjusted financial statement net operating loss and the remainder is carried forward. (Code Sec. 56A(d), as amended by Act Sec. 10101(b)(1))
A domestic corporation may take a corporate AMT foreign tax credit for the relevant foreign or U.S. possessions taxes that are taken into account on the corporation’s applicable financial statement and paid or accrued (for tax purposes) by the applicable corporation. (Code Sec. 59(l)(1)(B), as amended by Act Sec. 10101(c))
In addition, a corporation may take a corporate AMT foreign tax credit for the tax year up to the lesser of (i) the aggregate of the applicable corporation’s pro rata share of the relevant foreign or U.S. possessions taxes that are taken into account on the applicable financial statement of each controlled foreign corporation with respect to which the applicable corporation is a U.S. shareholder and paid or accrued (for tax purposes) by each controlled foreign corporation or (ii) 15% of the corporation’s pro rata share of the adjusted financial statement income of the CFC that is taken into account under Code Sec. 56A(c)(3). (Code Sec. 59(l)(1)(A), as amended by Act Sec. 10101(c))
The unused foreign taxes are carried forward for up to five years. (Code Sec. 59(l)(2), as amended by Act Sec. 10101(c))
Observation. The limit on deemed-paid foreign income taxes attributable to a U.S. shareholder’s pro rata share of the CFC’s income prevents the U.S. shareholder from using its deemed-paid foreign tax credits to reduce alternative minimum tax imposed on non-CFC income.
The corporate general business AMT credit is limited to 25% of the taxpayer’s net income tax exceeding $25,000, without regard to the special empowerment zone rules. (Code Sec. 38(c)(6)(E), as amended by Act Sec. 10101(d))
Where regular tax is higher than the minimum tax, a corporation may carry forward a credit for the net minimum tax for all prior tax years beginning after 2022 to reduce the taxpayer’s regular tax including base erosion anti-abuse tax (Code Sec. 59A) for the tax year. (Code Sec. 53(e), as amended by Act Sec. 10101(e))
Effective date. This provision is effective for tax years beginning after December 31, 2022. (Act Sec. 10101(f), New IRC Sec. 56A)
Continue reading the analysis of the Inflation Reduction Act of 2022 in Federal Tax Update, available on Checkpoint.
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