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New Corporate Alternative Minimum Tax Regulations Released with Penalty Waiver for 2024

New Corporate Alternative Minimum Tax Regulations Released with Penalty Waiver for 2024, Frazier & Deeter

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    Two years ago, the Inflation Reduction Act established a 15% corporate alternative minimum tax (CAMT) on large corporations with average annual incomes exceeding $1 billion over a 3-year period. The tax was to take effect for taxable years beginning after 2022. Since then, the IRS has released four notices providing interim guidance on how the minimum tax will work.

    The IRS has issued proposed regulations that incorporate the guidance and address how to determine adjusted financial statement income (AFSI), which is used to measure the tax. Recognizing the ongoing difficulty of compliance even with the notices and 600+ pages of regulations, the IRS has waived the penalty for a corporation’s failure to pay estimated tax on its CAMT for a taxable year that begins in 2024.

    Key Provisions of the Regulations

    The proposed regulations provide definitions and general rules for determining and identifying AFSI. The tax is imposed on the excess of 15% of AFSI, less the foreign tax credit, over the regular corporate tax. Special rules apply for determining the CAMT foreign tax credit. Additionally, financial statement net operating losses carryovers may reduce AFSI. A modified calculation of AFSI applies to corporations that are members of a foreign-parented multinational group.

    The rules also provide a simplified method for some entities when determining whether a corporation is subject to the CAMT. Under the simplified method, the average annual AFSI tests are applied with the following modifications: the dollar thresholds are reduced from $1 billion to $500 million, and the dollar thresholds for a U.S. subsidiary of a foreign parent group are reduced from $100 million to $50 million. The proposed regulations also address the application of the CAMT to affiliated corporations filing a consolidated income tax return.

    Other major sections of the regulations cover foreign-parented multinational groups, controlling interests, details on the CAMT foreign tax credit and how consolidated groups determine their CAMT liability. The proposed rules also cover the aggregation of corporate subsidiaries of investment partnerships.

    Critical Compliance Considerations

    The 15% minimum tax applies if it exceeds the amount that would be owed under the regular 21% corporate tax regime. This means that the corporate tax is increased only to the extent that the tentative minimum tax exceeds the regular tax plus the base erosion and anti-abuse tax (BEAT).

    The minimum tax calls for a new calculation of income that is different from regular book and tax accounting—adjusted financial statement income. These calculations will have to be performed on an ongoing basis to ensure yearly compliance. Affected corporations must maintain books and records sufficient to demonstrate whether the corporation is an applicable corporation for any taxable year, including the identification of all persons treated as a single employer with the corporation.

    The IRS has asked for public comments on the regulations by mid-December 2024 and will hold a hearing on January 16, 2025. The IRS considers both the comments and the testimony at its hearing when finalizing the regulations.

    The CAMT adds a layer of complexity to tax computation for large corporations, meaning affected entities must establish procedures now to comply going forward. The IRS is trying to ease corporations into the new tax regime with its penalty waiver. Beneficial changes to the regulations may be made after the agency receives public comments.

    Frazier & Deeter will be carefully tracking these developments for large corporate clients. For guidance on how the new regulations may impact your business, or to talk to one of our experts, please contact us here.

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