What Is Notice 2023-7? CAMT and Penalty Relief

The Internal Revenue Service (IRS) issued Notice 2023-7 to provide guidance on the Corporate Alternative Minimum Tax (CAMT), a provision from the Inflation Reduction Act of 2022. This tax regime targets certain large corporations, altering how their liabilities are calculated. The guidance details how to determine if the tax applies and how to calculate the income subject to it. Alongside these technical rules, the IRS provided penalty relief, giving corporations a transitional period to adapt to the new law without facing penalties for underpayment.

Determining CAMT Applicability

A corporation’s obligation under the CAMT depends on its status as an “applicable corporation.” This status is based on a corporation’s average annual adjusted financial statement income (AFSI), which must exceed $1 billion over a three-year period. For corporations that are part of a foreign-parented multinational group, a two-part test applies. The foreign-parented group’s worldwide income must exceed the $1 billion threshold, and the U.S. entities within that group must have an average annual AFSI of at least $100 million.

The IRS introduced a simplified safe harbor method for this determination. This alternative allows a corporation to conclude it is not an applicable corporation without performing the full AFSI computations. To qualify for this safe harbor, a corporation’s financial statement income, without the detailed AFSI adjustments, must fall below certain thresholds. For domestic corporations, the average annual income must be less than $500 million.

For a U.S. corporation within a foreign-parented group, the safe harbor requires the group’s global income to be under $1 billion and the U.S. entity’s income to be less than $50 million. This simplified test helps corporations determine if they are outside the scope of the CAMT. Meeting the safe harbor criteria means a corporation is not required to file Form 4626, the form used for calculating the alternative minimum tax.

Key Interim Guidance on Income Adjustments

The IRS guidance outlines rules for calculating Adjusted Financial Statement Income (AFSI), the tax base for the CAMT. This calculation requires several adjustments to a corporation’s financial statement income.

An adjustment pertains to depreciation, and the initial guidance on this was later modified by subsequent notices that taxpayers must apply. The guidance also addresses the treatment of federal income tax credits, allowing certain “covered credits” to reduce the final tax liability.

The rules also clarify how to handle AFSI for corporate transactions, such as tax-free reorganizations. In these cases, any gain or loss recorded for financial accounting purposes is eliminated from the AFSI calculation. This prevents transactions that are non-taxable for regular income tax from triggering a CAMT liability, requiring companies to track asset basis separately for regular tax, financial accounting, and CAMT purposes.

Estimated Tax Penalty Relief

The IRS has provided transitional relief from penalties for the underpayment of estimated taxes related to the CAMT. This relief was initially granted for a corporation’s first taxable year beginning after December 31, 2022. The IRS later extended this waiver to cover taxable years beginning before January 1, 2025.

This relief allows corporations a grace period to navigate the new law’s requirements. Accurately determining status as an “applicable corporation” and calculating AFSI involves significant challenges. The waiver ensures companies are not penalized for good-faith errors while adapting to the CAMT.

This penalty waiver is automatic for qualifying corporations, so they do not need to submit a separate request. The relief is focused on underpayments linked to the CAMT itself. It does not absolve a corporation of its responsibility to pay estimated taxes related to its regular income tax liability.

How to Claim the Penalty Waiver

To claim the penalty relief, a corporation must use Form 2220, Underpayment of Estimated Tax by Corporations, when filing its annual tax return. A corporation claiming the waiver must write the appropriate notice designation at the top of the form. This notation signals to the IRS that it is claiming relief.

On the specific line designated for the underpayment penalty, the corporation should enter zero. This applies the waiver and ensures no penalty amount related to the CAMT underpayment is assessed for that tax year.