Notice 2023-64: Interim Guidance for the Corporate AMT

The Inflation Reduction Act of 2022 established a new Corporate Alternative Minimum Tax (CAMT). This tax regime imposes a 15% minimum tax on the profits large corporations report on their financial statements. In response, the Department of the Treasury and the Internal Revenue Service (IRS) issued interim guidance, which culminated in proposed regulations released in September 2024. The proposed regulations incorporated and expanded upon the framework provided in earlier notices. While the regulations are now the primary source of guidance, the principles established in the earlier notices remain relevant to understanding the structure of the CAMT.

Determining Corporate Tax Applicability

The CAMT applies to “applicable corporations” that meet a specific financial threshold. The primary test involves calculating the corporation’s average annual adjusted financial statement income (AFSI) over a three-taxable-year period ending before the current taxable year. If this average exceeds $1 billion, the corporation falls within the scope of the CAMT.

A corporation becomes an applicable corporation if it meets the test in any taxable year ending after December 31, 2021. Once a corporation meets this definition, it remains an applicable corporation for all subsequent years, even if its AFSI later drops below the $1 billion threshold.

For U.S. corporations that are part of a foreign-parented multinational group, the aggregate AFSI of all group members must exceed $1 billion. In addition, the U.S. members, including U.S. subsidiaries and branches of the foreign parent, must have an average annual AFSI of at least $100 million.

A foreign-parented multinational group consists of two or more entities included in the same consolidated applicable financial statement (AFS) with a common foreign parent. The CAMT rules use the consolidated AFS of the ultimate foreign parent to ensure the worldwide income of the group is considered when testing its U.S. operations.

Guidance for Controlled Foreign Corporations

The CAMT framework provides rules for U.S. shareholders of Controlled Foreign Corporations (CFCs), where U.S. shareholders own more than 50% of the stock. The guidance addresses how income from these CFCs is incorporated into the U.S. shareholder’s AFSI. This is a departure from the regular tax system, where CFC income is often deferred until it is repatriated to the United States.

A key element is the treatment of “covered CFC distributions.” These are dividends paid by a CFC to its U.S. shareholder out of earnings not already included in the shareholder’s AFSI. The guidance clarifies that these distributions are included in the U.S. shareholder’s AFSI in the year they are received to prevent double counting of income.

The rules also provide instructions for handling inclusions under Subpart F and Global Intangible Low-Taxed Income (GILTI) rules. For regular tax purposes, a U.S. shareholder includes its pro-rata share of a CFC’s Subpart F income and GILTI in its gross income annually. For CAMT purposes, these amounts are also adjustments to financial statement income to determine AFSI.

The guidance also addresses complexities that arise when a CFC pays a dividend to another CFC within the same multinational group. These intra-group distributions can have cascading effects on the AFSI of the ultimate U.S. shareholder. The rules provide for ordering and adjustments to track the earnings and profits of CFCs to determine the AFSI consequences.

Adjustments to Financial Statement Income

The CAMT framework outlines several required adjustments to a corporation’s financial statement income to arrive at its AFSI. These adjustments are designed to align certain items more closely with their treatment for regular income tax purposes or to address specific policy concerns.

Depreciation Adjustments

For financial accounting, companies depreciate assets based on their estimated useful lives, while tax depreciation follows specific schedules. For CAMT purposes, AFSI is adjusted by replacing financial statement depreciation with tax depreciation for certain property. This means corporations subtract book depreciation from financial income and then add back tax depreciation.

Qualified Wireless Spectrum

The cost of qualified wireless spectrum is amortized over a specific period for regular tax purposes. A similar adjustment is required for the CAMT, where financial statement amortization for the spectrum is replaced with the amount allowed for tax. This ensures consistency between the two tax systems.

Financial Statement Net Operating Losses

A financial statement net operating loss (FSNOL) is a net loss on a company’s AFS. A corporation can reduce its AFSI with an FSNOL carryforward, but this deduction is limited to 80% of AFSI computed before the FSNOL deduction. This rule mirrors the limitation on net operating loss deductions in the regular tax system.

Accounting for Foreign Income Taxes

The treatment of foreign income taxes is a distinct step in the CAMT calculation, which is handled through the CAMT Foreign Tax Credit (CAMT FTC). A taxpayer’s CAMT FTC is based on its pro-rata share of the income taxes paid or accrued by its CFCs and reflected on their financial statements. This requires careful tracking of tax payments made in foreign jurisdictions.

The total amount of foreign taxes that can be credited in a given year is limited. The credit cannot exceed the portion of the tentative minimum tax that is attributable to the taxpayer’s foreign-source AFSI. This creates a separate foreign tax credit system for the CAMT, which operates in parallel to the regular foreign tax credit.

Transition and Applicability

The proposed regulations generally apply to taxable years ending after September 13, 2024. For taxable years ending on or before this date, taxpayers may rely on certain provisions of the proposed regulations, provided they apply the rules consistently.