What Is the Corporate AMT in the Inflation Reduction Act?

The Inflation Reduction Act of 2022 introduced the Corporate Alternative Minimum Tax (CAMT). This tax is designed to ensure that the largest and most profitable corporations contribute a base level of federal income tax. The CAMT addresses situations where companies report substantial profits to their shareholders but pay little to no federal income tax due to various deductions and credits under the regular tax system. It establishes a parallel tax calculation based on a company’s financial statement income, often called book income, rather than its taxable income. This approach creates a floor, ensuring that if a corporation’s regular tax liability falls below a certain percentage of its reported profits, it must pay the difference.

Determining Applicability for the Corporate AMT

A corporation’s responsibility to pay the CAMT hinges on its status as an “Applicable Corporation,” determined by income thresholds. The primary measure applies to corporations that report an average annual adjusted financial statement income (AFSI) of more than $1 billion. This average is calculated over a three-consecutive-tax-year period that ends with the tax year in question.

The rules require aggregating the AFSI of all entities treated as a single employer under Internal Revenue Code Section 52. This means the income of all corporations within the same controlled group or businesses under common control are combined when testing against the $1 billion threshold. Once a corporation meets this definition, it retains that status for all future years unless the Treasury Department determines it is no longer appropriate.

A distinct set of criteria applies to U.S. corporations that are part of a foreign-parented multinational group (FPMG). These corporations are subject to a two-part test. First, the entire foreign-parented group must have an average annual AFSI exceeding $1 billion over the three-year period. Second, the U.S. members of that group must collectively have an average annual AFSI of at least $100 million for the same period.

Certain business structures are explicitly excluded from the CAMT. S corporations, Regulated Investment Companies (RICs), and Real Estate Investment Trusts (REITs) are not subject to this tax, as they generally pass their income through to investors.

Calculating Adjusted Financial Statement Income

The foundation for the CAMT is a corporation’s Adjusted Financial Statement Income (AFSI), which begins with the net income or loss reported on its Applicable Financial Statement (AFS). An AFS is a company’s certified financial statement, such as a Form 10-K filed with the Securities and Exchange Commission or another audited statement. This book income figure is only the starting point and must undergo specific adjustments mandated by Internal Revenue Code Section 56A to arrive at AFSI.

One adjustment involves how income from related entities is treated, particularly for corporations with interests in partnerships. The partnership computes its own AFSI, and then the corporate partner includes its distributive share of that partnership’s AFSI in its own calculation. This prevents corporations from excluding income housed within partnership structures from their CAMT base.

Another adjustment is for federal income taxes. Any federal income taxes taken as an expense on the financial statement must be added back to calculate AFSI. This ensures the 15% minimum tax is applied to a pre-tax measure of income. Similarly, foreign income taxes are also added back, though they may be eligible for a separate CAMT foreign tax credit.

Depreciation is an area where book and tax accounting often diverge. For CAMT purposes, AFSI is reduced by tax depreciation deductions allowed under Section 168 of the tax code, rather than the depreciation expense reported on the financial statements. This adjustment allows companies to benefit from accelerated depreciation for CAMT purposes, such as under the Modified Accelerated Cost Recovery System (MACRS).

Further adjustments are required for defined benefit pension plans. All income, costs, and expenses related to these plans recorded on the financial statements are disregarded when calculating AFSI. Instead, AFSI only includes pension costs that are deductible for regular tax purposes, which prevents accounting fluctuations from distorting the CAMT base.

A U.S. corporation must also include in its AFSI its pro rata share of income from its Controlled Foreign Corporations (CFCs). Dividends received from these CFCs are then adjusted to prevent double-counting of the same income.

Computing the Corporate AMT Liability

Once a corporation calculates its Adjusted Financial Statement Income (AFSI), the next step is to compute the potential tax. The process begins with calculating the Tentative Minimum Tax (TMT), which is found by applying a flat 15% rate to the corporation’s AFSI for the taxable year.

After calculating the initial TMT, a corporation can reduce this amount by the CAMT foreign tax credit. This credit is for foreign income taxes paid or accrued by the corporation and its controlled foreign corporations. The availability of this credit ensures that income earned and taxed in foreign jurisdictions is not unfairly subjected to a second layer of tax.

The core of the CAMT calculation is the comparison between this final TMT and the corporation’s regular federal income tax liability for the year. The regular tax liability for this purpose includes not only the standard tax but also any liability from the Base Erosion and Anti-Abuse Tax (BEAT). The CAMT owed is the excess of the TMT over this regular tax liability.

A feature of the CAMT system is the creation of a tax credit for any CAMT paid. The amount of CAMT paid becomes a credit that can be carried forward indefinitely. This credit can be used in future years to reduce the company’s regular tax liability, but it cannot reduce that liability below the TMT calculated for that future year.

Corporate AMT and Tax Credits

The CAMT has a notable effect on the use of various business tax credits, particularly the General Business Credits (GBCs) available under the tax code. These GBCs, which include incentives like the research and development (R&D) credit, are typically used to offset a company’s regular tax liability.

Under the CAMT regime, General Business Credits can be used to offset a portion of both the regular tax and the CAMT. The law allows GBCs to offset up to approximately 75% of a corporation’s combined regular and minimum tax liability. This provision ensures that GBCs continue to provide a benefit even to companies paying the CAMT.

This interaction can lead to a situation where the immediate value of certain tax credits is diminished or deferred. If a corporation is consistently in a CAMT position, its ability to use GBCs to fully eliminate its tax bill is limited. A portion of the credits that might have been used under the regular system could become part of a carryforward to be used in future years.

The Inflation Reduction Act also introduced or expanded numerous clean energy tax credits and provides specific guidance on their treatment. For instance, certain clean energy credits that a company can elect to receive as a direct payment are handled through specific adjustments to AFSI. This ensures the tax benefit does not inadvertently inflate a company’s income for CAMT purposes.