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| Author | Grais, Susan Minasian |
Corporations & Shareholders
Inflation Reduction Act includes 15% corporate minimum tax on book income
On Aug. 16, 2022, President Biden signed into law the Inflation Reduction Act, P.L. 117-169. For applicable corporations that report over $1 billion in profits to shareholders, the act includes a 15% corporate alternative minimum tax based on book income.
The corporate alternative minimum tax was introduced in the House Ways and Means Committee's Build Back Better Act (BBBA) proposal in November 2021 (House BBBA). It was then modified by the Senate Finance Committee in its December 2021 BBBA proposal (Senate BBBA). The tax, which applies to tax years beginning after Dec. 31, 2022, is primarily a revenue raiser.
15% minimum tax and applicable corporations
An appliable corporation is liable for the corporate alternative minimum tax to the extent that its "tentative minimum tax" exceeds its regular U.S. federal income tax liability (computed before taking into account general business credits) plus its liability for the base-erosion and anti-abuse tax (BEAT). An applicable corporation's tentative minimum tax is 15% of its adjusted financial statement income to the extent the tax exceeds the corporate alternative minimum tax foreign tax credit for the tax year. The corporate alternative minimum tax applies to any corporation (other than an S corporation, regulated investment company, or real estate investment trust) whose average annual adjusted financial statement income exceeds $1 billion for any three consecutive tax years preceding the tax year. When determining adjusted financial statement income for the $1 billion qualification test, the act generally treats adjusted financial statement income of all persons considered a single employer with a corporation under Sec. 52(a) or (b) as adjusted financial statement income of the corporation.
For a corporation that is a member of a foreign-parented multinational group, (1) the three-year average annual adjusted financial statement income must be over $1 billion from all members of the foreign-parented multinational group (without regard to certain adjustments as specified in Sec. 59(k)(2)(A)), and (2) the corporation must have average annual adjusted financial statement income, determined without regard to loss carryovers, of $100 million or more. A foreign-parented multinational group means two or more entities if (1) at least one entity is a domestic corporation and another is a foreign corporation; (2) the entities are included in the same applicable financial statement; and (3) the common parent of those entities is a foreign corporation (or the entities are treated as having a common parent that is a foreign corporation).
Three-tax-year period
For purposes of determining whether a corporation has average annual adjusted financial statement income in excess of $1 billion and is subject to the corporate alternative minimum tax, the three-tax-year period means any three consecutive tax years preceding the tax year in which the tax applies (beginning with three-tax-year periods in which the third year of the period ends after Dec. 31, 2021). For example, to determine whether a calendar-year corporation is subject to the corporate alternative minimum tax for 2023, the three-tax-year period includes calendar years ending Dec. 31, 2020; Dec. 31, 2021; and Dec. 31, 2022. For corporations (or a predecessor) existing less than three tax years, the act substitutes the number of years the corporation has existed for three. Any tax year less than 12 months must be annualized.
Exceptions
The corporate alternative minimum tax does not apply to corporations that have either changed ownership or fallen below the adjusted financial statement income threshold for a specified number of consecutive years (to be determined by Treasury), conditioned upon Treasury's also determining that it would be inappropriate to continue subjecting the corporation to the tax. The exception no longer applies if the corporation meets the three-year average adjusted financial statement income test for any tax year beginning after the year for which the determination applies.
Adjusted financial statement income
The act adds new Sec. 56A, which defines "adjusted financial statement income" of a corporation (taxpayer) as the taxpayer's net income or loss reported in the taxpayer's applicable financial statement--as defined in Sec. 451(b)(3) --with adjustments for certain items. If a taxpayer's financial results are reported on the applicable financial statement for a group of entities, the act treats that consolidated financial statement as the taxpayer's applicable financial statement. Special rules apply for cooperatives, Alaska Native corporations, and mortgage servicing companies.
Although the act requires Treasury to issue regulations and/or other guidance as necessary on adjustments to adjusted financial statement income, Sec. 56A(c) requires the following general adjustments:
* Taxpayers must make unspecified adjustments when the applicable financial statement covers a period other than the tax year.
* For a consolidated group, adjusted financial statement income includes items from the group's applicable financial statement that are properly allocable to members of the group.
* For a corporation not included on a consolidated return with the taxpayer (e.g., an unconsolidated subsidiary), the taxpayer includes in adjusted financial statement income only dividends received from the corporation and other amounts required to be included in gross income or deductible as a loss (other than amounts included under Secs. 951 and 951A).
* For a taxpayer that is a partner in a partnership, adjusted financial statement income includes only the taxpayer's distributive share of adjusted financial statement income of the partnership.
* For a U.S. shareholder of a controlled foreign corporation (CFC), adjusted financial statement income includes the shareholder's pro rata share of items taken into account in computing the net income or loss on the CFC's applicable financial statement, with adjustments similar to those applicable in computing the taxpayer's adjusted financial statement income. Any negative adjustment for a CFC (or aggregate negative adjustment for multiple CFCs) must be carried forward to the next succeeding tax year.
* Adjusted financial statement income for a foreign corporation is determined under the principles of Sec. 882 (regarding effectively connected income).
* For a taxpayer with a disregarded entity, adjusted financial statement income includes the disregarded entity's adjusted financial statement income to the extent it is not otherwise included on the taxpayer's applicable financial statement.
* The taxpayer must adjust adjusted financial statement income to disregard federal income taxes or income, war profits, or excess profits taxes (within the meaning of Sec. 901) imposed by a foreign country or possession of the United States. No adjustment is required for income, war profits, or excess profits taxes imposed by a foreign country or possession of the United States if the taxpayer chooses not to claim foreign tax credits for the tax year.
* Adjusted financial statement income is adjusted to disregard tax refunds attributable to elections made under Sec. 48D(d) and Sec. 6417.
* For taxpayers with "covered benefit plans":
** Adjusted financial statement income is adjusted for:
** Single-employer qualified defined benefit pension plans;
** Adjusted financial statement income is determined by:
* A tax-exempt entity's adjusted financial statement income includes only the adjusted financial statement income of its unrelated trade or business, or adjusted financial statement income from debt-financed property to the extent that income qualifies as unrelated business taxable income.
* Adjusted financial statement income is reduced by (1) tax depreciation deductions allowed under Sec. 168 and (2) tax amortization deductions allowed under Sec. 197 only for qualified wireless spectrum.
** "Qualified wireless spectrum" is defined as wireless spectrum that is used in the trade or business of a wireless telecommunications carrier and was acquired after Dec. 31, 2007, and before the date of enactment.
** Adjusted financial statement income does not include book depreciation and amortization with respect to such property (so the reduction to adjusted financial statement income equals the tax depreciation and amortization noted previously).
Note: The adjustments for defined benefit pensions and partnership distributive shares apply only to a corporation that is subject to the corporate alternative minimum tax for determining its adjusted financial statement income to compute the corporate alternative minimum tax amount. In contrast, when applying the adjusted financial statement income three-tax-year qualification test, adjusted financial statement income is determined without regard to these adjustments (i.e., adjusted financial statement income is based on defined benefit pension amounts included in book income and partnership income that must be aggregated under Sec. 52).
Deduction for financial statement net operating loss
The act allows taxpayers to deduct financial statement net operating losses (NOLs) from adjusted financial statement income. The deduction...
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