There is much to be considered about the corporate alternative minimum tax (CAMT) for companies that fall within its threshold and want to remain in compliance
The alternative minimum tax was introduced in the United States in 1969, in order to levy a minimum tax on high-income taxpayers who were thought to use the regular tax system to pay little or no taxes. The corporate alternative minimum tax (CAMT), first introduced as a part of the Tax Reform Act of 1986 for much the same reasoning, was then reintroduced in 2022 as part of the Inflation Reduction Act. This newer, modern CAMT includes more specific (and some would say more complicated) provisions than before.
Modern CAMT: What is it and who is impacted?
The new CAMT imposes a 15% minimum tax on the adjusted financial statement income (AFSI) of large corporations whose three-year average annual AFSI exceeds $1 billion (applicable corporations). The CAMT applies for tax years beginning after December 31, 2022.
This is a significant change from the prior CAMT in that it is based on AFSI, rather than on taxable income, that meets the income threshold over a three year-period. Financial statement income is the income reported to shareholders and is typically higher than the taxable income reported to the U.S. Internal Revenue Service (IRS), mainly because it doesn’t include the same breadth of tax deductions and credits.
The U.S. Congress’ Joint Committee on Taxation stated it believes that only about 150 companies are impacted by the new CAMT, but other estimates sa the number could be at least twice as many.
Four considerations related to CAMT
1. Understanding CAMT rules
It’s crucial for corporate tax departments to have a deep understanding of the new CAMT rules and how it may impact their tax decisions under the Inflation Reduction Act. Since the inception of the new CAMT, more clarity is needed, and throughout 2023 the IRS continuously released clarification on various parts of the regulations. In September, the IRS provided the most comprehensive information around CAMT to date, including how to determine a company’s financial statement income and AFSI and, more importantly when and in what situations “corporations are subject to CAMT, CAMT foreign tax credits, tax consolidated groups, foreign corporations, depreciable property, wireless spectrum, duplications and omissions of certain items, and financial statement net operating losses.”
2. Impact on tax liability
For businesses that fall within the $1 billion threshold, a look at how their tax liabilities are calculated is required. Corporate tax leaders must analyze the regular taxable income and their own financial statements. When a company calculates its tax liability, it must determine its CAMT liability by applying a flat tax rate to an adjusted amount of income, which includes adding back certain tax preference items and making other adjustments. If the CAMT is higher than the regular tax liability, the company must pay the CAMT amount. This can impact companies by limiting the benefits of certain deductions and credits, potentially resulting in a higher tax bill. The specifics of how the CAMT affects a company can vary based on the company’s financial situation, its use of deductions and credits, and any further changes in tax legislation.
3. Financial reporting implications
The implications of the CAMT on financial reporting are multifaceted, including how it can lead to increased tax expenses for a company and impact its net income. Companies must account for this potential tax liability on their financial statements, which could result in a higher effective tax rate reported in their income statement.
4. Strategic planning
CAMT can complicate tax planning and financial forecasting for corporate tax departments, which will now have to consider the CAMT in tax planning. The new rules can introduce additional uncertainty into future tax expense estimations, potentially affecting a company’s investment decisions and earnings projections. Developing a sound strategic tax plan can help a company minimize exposure to CAMT while still maintaining compliance with tax laws. For example, corporate tax departments may have to think about how they adjust the timing of certain deductions or credits to optimize tax outcomes. Under CAMT, certain tax credits are allowed and, if they are not already being taken used, corporate tax leaders should look to clean tax credits (if applicable).
Although the IRS did off some welcome clarification of CAMT issues throughout last year, some additional uncertainties and complexities also arose from those very clarifications. There remain many questions from corporate tax departments as they try and remain compliant while waiting for further updates from tax authorities.
With the information provides so far, however, there is still a lot of complex issues and strategic decisions that corporate tax departments will have to navigate. Therefore, staying abreast of the latest developments from the IRS is critically important at this stage.
