By Shannon Christensen and Joseph Boris
The 15% corporate alternative minimum tax in the recently signed Inflation Reduction Act of 2022 (PL 117-169) won’t take effect until tax years starting after January 1, 2023, but now is the time to begin engaging clients on the measure. A key discussion starter is whether the tax will even affect a client’s business, either in the near or longer term. This article presents advisory opportunities by arranging clients into three groups: those who clearly will be subject to the new tax, those at or near the threshold, and those who likely won’t be subjected but have concerns and need more information. Even for those who won’t be subject to it, providing an overview of the corporate AMT can open the door to a discussion of a client’s vision for their organization and how tax planning and advisory services can help them reach their goals.
Practitioners may think about organizing their corporate clients into three groups when it comes to advisory services relating to the book minimum tax, as the new measure is often called. First, there are giant multinational corporations whose three-year average financial statement net income from financial reports is entrenched in the definition of an “applicable corporation.” Such clients are clearly subject to the tax, which applies after three consecutive years of $1 billion in profit.
Second are threshold corporations, or those whose average financial statement income is closely approaching or slightly over the definition of an applicable corporation. Depending on the company’s growth strategy, there may be room to assist these clients in steering clear of the new levy.
Finally, there are apprehensive corporations that previously were, or may have been, subject to AMT rules that existed before the Tax Cuts and Jobs Act of 2017 and are now concerned they may have exposure to the book minimum tax. Leveraging a client’s misgivings about such exposure can kick-start a conversation about the client’s research-and-development projects, which may require tax planning and advisory services. This article will address how the new tax affects each of these client groups and potential tax planning and advisory opportunities.
Congress aimed the new tax at large multinationals, which often book billions of dollars in profit while enjoying low effective tax rates. Of course, it was Congress that passed laws allowing corporations to get tax incentives and to take beneficial tax accounting positions in the first place. Rules designed to create financial statement income help investors and stakeholders (banks, creditors, and suppliers, for instance) review a corporation’s financial condition in a comparable manner to another corporation’s financial condition.
Still, big corporations shouldn’t wait for official regulations or guidance to begin modeling their book minimum tax exposure. These businesses should be creating work papers that calculate the tax—to identify areas where more guidance is needed, to ensure their information systems can extrapolate necessary data, and to understand their operational readiness to comply with the measure. Think of the book minimum tax as yet another set of records, separate from regular tax records, required to calculate and track minimum-tax basis, net operating losses, foreign alternative minimum taxes and credits. Short-cutting with a back-of-the-envelope calculation won’t cut it; dig in and model out!
“Most practitioners have not paid attention to this provision, because of the billion-dollar number,” said Arthur Auerbach, an independent CPA based in Atlanta. “However, think about it on the other side of the coin: You may not be directly involved in the calculation of the 15%, or the [consolidated] book income,” but a firm might be doing financial, income tax, or estate planning on behalf of a subsidiary of that big corporation, Auerbach said in a recent webinar hosted by the American Institute of Certified Public Accountants.
In fact, now is the time, while Treasury is open to comments and recommendations, to share concerns with the department on ambiguity in the Act or areas that present the potential for double taxation, especially in the context of controlled foreign corporations. Help your clients draft letters to Treasury to express their concerns and make sure their voice is heard.
Threshold corporations—those approaching or slightly over the definition of an applicable corporation—have the biggest opportunity for tax planning and guidance. Two corporations with a growth mindset will approach the threshold to the book minimum tax differently. Corporations for which growth outweighs concerns over the minimum tax will forge ahead amid what for them is just another cost of doing business. Conscientious corporations with an aversion to paying more tax than is absolutely required will view tax planning to help avoid the book minimum tax as crucial.
To the former group, for which the book minimum tax is a cost of doing business, begin modeling and identifying areas of concern. Understand that while the book minimum tax is a temporary liability, producing future tax credits against regular tax, it’s possible to be in a situation in which your organization is subject to the tax for several consecutive years without being able to benefit from the credit carryforward. A temporary liability can feel permanent when real cash outlays must be set aside for years into the future to cover tax. R&D growth projects often require cash and the book minimum tax can restrict that cash as a deferred tax asset for years to come.
For corporations in the group that are averse to paying book minimum tax and seeking guidance to stay as far away from being called an applicable corporation as possible, now may be the time to take a hard look at the consolidated group. Aggregation rules are complex, but essentially where a parent company has over 50% control over a corporation or partnership, it must combine those entities into the consolidated group and include all the financial statement book income of the group in determining whether the organization meets the three-year average $1 billion income test. If the organization has been teetering on the edge of divestiture, wherein a corporation willingly cedes control of, but not necessarily investment in, a subcorporation or partnership in the group perhaps now is the time.
The gain associated with a divestiture may overlap several tax years, and divestitures should have a business purpose outside of mere tax avoidance. Organizations in the process of split-offs in 2022 may unintentionally push their financial statement income past the $1 billion threshold into the definition of applicable corporation based on the timing recognition of the divestiture gain. In a recent letter, Ernst & Young urged Treasury to provide immediate guidance to exclude financial statement gain where corporations have been “carefully planning to separate businesses through a ‘split-off’ [that may now] be harmed if guidance is not provided that excepts split-offs from the calculation of financial statement income.”
If a corporation plans on investing in the operations of another entity, it’s important to consider the amount of control the corporation wants or actually needs to avoid bringing the investment entity into the group via aggregation rules. Having control over the investment entity may tip the organization over the $1 billion threshold under the definition of an applicable corporation subject to the book minimum tax. A corporation with an investment of 20% to 50% in another corporation or partnership, exerting little to no control, may use the equity method of accounting for that investment.
The equity method of accounting places the financial statement income of the investment entity outside of net book income by presenting it in other comprehensive income. This may shield the investment entity income from being included in the calculation of the $1 billion income test. In a colloquy during congressional debate over the Inflation Reduction Act, two lawmakers discussed shielding other comprehensive income from the aggregation rules when defining an applicable corporation. Forthcoming Treasury guidance will shed light on whether the legislative intent to exclude other comprehensive income from the calculation of consolidated financial statement income, for purposes of the book minimum tax, will hold true.
Auerbach at the AICPA webinar pointed out that calculating the minimum tax would happen after numerous adjustments are made—mainly for the foreign tax credit and any depreciation that results from calculating the difference between the book depreciation deduction and the tax depreciation deduction.
Finally, if you receive a call from an apprehensive corporate client that had been subject to the pre-TCJA rules on AMT, wondering if they have any exposure to the new book minimum tax, give your response some thought. While many former corporate AMT payers are nowhere near the $1 billion-dollar threshold for the book minimum tax, don’t let an opportunity pass to meet with the client and get an update on their growth strategies and project planning. As your client’s trusted adviser, you are being asked for reassurance and views on the new tax. Many client service opportunities come out of indirect conversations. Learning about a client’s new R&D work can open the door to other advisory services.
“Your client may be the one that invents the electronic hula hoop, and all of a sudden the dollars are going to come flowing in, and you’re going to have to be paying attention to this,” Auerbach said.
Whether your clients are billion-dollar corporations in the thick of planning their book minimum tax liability, threshold corporations seeking advice to protect their organization from ever being exposed, or apprehensive corporations seeking reassurance they won’t be subject to the tax, there are many opportunities for tax planning advisory services. As our profession awaits guidance from Treasury, remember that luck favors the prepared. Modeling out by calculating and planning for any potential book minimum tax liability will serve clients well.
For more of Checkpoint’s coverage of the new corporate alternative minimum tax, see: Federal Tax Coordinator ¶A-8900 (Corporate alternative (book) minimum tax) and Client Letter ¶2150 Corporate alternative minimum tax for tax years beginning on or after Jan. 1, 2023.
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