Corporate AMT and the Inflation Reduction Act

The Inflation Reduction Act of 2022 introduced the Corporate Alternative Minimum Tax (CAMT), a parallel tax system for large corporations. The CAMT is designed to ensure companies reporting significant profits to shareholders pay a baseline amount of tax. The system applies a 15% tax rate to a company’s financial statement income after specific adjustments, rather than its traditional taxable income.

This tax operates alongside the regular corporate income tax system, which uses a 21% rate. A corporation must calculate its liability under both sets of rules and is obligated to pay whichever amount is higher. This structure limits the extent to which deductions and credits can reduce a highly profitable corporation’s tax payment below the 15% minimum.

Determining Applicability for the Corporate AMT

A corporation’s responsibility to pay the CAMT is determined by its status as an “applicable corporation,” which is based on an income test. A corporation falls under the CAMT if its average annual adjusted financial statement income (AFSI) surpasses $1 billion for any consecutive three-year period ending after December 31, 2021. Once a corporation meets this threshold, it remains an applicable corporation for all subsequent years.

The rules establish a distinct test for U.S. corporations that are part of a foreign-parented multinational group. In this scenario, the U.S. corporation becomes subject to the CAMT if two conditions are met. First, the U.S. entity must have an average annual AFSI of at least $100 million over a three-year period. Second, the entire international financial reporting group must collectively meet the $1 billion average income test.

To prevent companies from avoiding the tax by splitting operations, aggregation rules require that corporations under common control be treated as a single entity when measuring income. The income of all related entities, such as a parent and its subsidiaries, is combined to determine if the group qualifies.

Certain business structures are explicitly excluded from the CAMT regardless of their income levels. The primary entities exempt are S corporations, Regulated Investment Companies (RICs), and Real Estate Investment Trusts (REITs).

Calculating Adjusted Financial Statement Income

The foundation for the CAMT is a company’s Adjusted Financial Statement Income (AFSI). The calculation begins with the net income reported on a corporation’s Applicable Financial Statement (AFS). An AFS is a specific financial report, with priority given to statements filed with the Securities and Exchange Commission (SEC), such as the Form 10-K. If a company does not file with the SEC, other audited financial statements under GAAP or IFRS may qualify.

Once the net income from the AFS is identified, it must be modified through a series of adjustments to arrive at the final AFSI figure. A significant adjustment relates to depreciation. The CAMT rules require corporations to reduce their financial statement income by the amount of tax depreciation allowed under the Internal Revenue Code, effectively substituting tax depreciation for book depreciation.

Another adjustment involves the amortization of wireless spectrum. For tax purposes, the costs of acquiring these licenses can be amortized over a 15-year period. The CAMT calculation allows a deduction for this tax amortization, reducing the financial income base.

The AFSI calculation also requires adjustments related to defined benefit pension plans, where financial accounting expense can differ from actual cash contributions. The AFSI calculation requires that pension expense be replaced with the amount of contributions, aligning the CAMT base with the company’s tax-deductible funding.

The rules also address income from foreign operations. Specific guidance dictates how to adjust financial statement income for dividends received from Controlled Foreign Corporations (CFCs) and other foreign income inclusions to accurately measure the income base.

Computing the Corporate AMT Liability

After a corporation calculates its final Adjusted Financial Statement Income (AFSI), the next step is the computation of the tax liability. The initial calculation begins by taking the final AFSI amount and applying the flat 15% tax rate. This product is known as the tentative minimum tax and represents the baseline tax liability before any credits are considered.

Following this calculation, a corporation can reduce this amount by utilizing its CAMT foreign tax credit. This credit is available for foreign income taxes paid or accrued by the corporation, including those paid by its controlled foreign corporations. The ability to apply these credits prevents double taxation on income earned and taxed in other countries.

The final step is a comparison. The corporation must compare its tentative minimum tax, after applying any CAMT foreign tax credits, to its regular federal income tax liability for the same year. The CAMT is only owed to the extent that the tentative minimum tax exceeds this regular tax liability; if the regular tax is higher, no CAMT is due. Once the governing tax system is determined, general business credits can be applied to reduce the final tax owed.

Understanding the CAMT Credit Carryforward

When a corporation’s tax payment is increased due to the CAMT, the law provides a mechanism to recover that additional tax. This is accomplished through the creation of a CAMT credit, where every dollar of CAMT paid generates a dollar-for-dollar tax credit. This credit is an asset that the company can use to reduce its tax bill in the future.

The purpose of this credit is to smooth out tax liabilities over time. It acknowledges that a company may be subject to the CAMT in one year due to timing differences between financial and taxable income.

The CAMT credit can be carried forward to future tax years indefinitely until it is fully utilized. A corporation can apply the carryforward credit in any future year in which its regular tax liability is greater than its tentative minimum tax for that year. The credit can be used to reduce the regular tax liability down to the tentative minimum tax amount, but not below it.

For example, if a company has a $10 million CAMT credit carryforward and in a future year its regular tax is $50 million while its tentative minimum tax is $42 million, it can use $8 million of the credit. This would reduce its final tax payment to $42 million, leaving it with a $2 million credit to carry forward to another year.