What Is the IRA Corporate Minimum Tax?

The Inflation Reduction Act of 2022 created the Corporate Alternative Minimum Tax (CAMT), a 15% minimum levy on the financial statement income of the largest corporations. The objective of the CAMT is to ensure that highly profitable companies contribute a minimum amount of tax, even if various deductions and credits would otherwise lower their regular tax bill.

Unlike the regular federal income tax that relies on taxable income, the CAMT uses a corporation’s adjusted financial statement income (AFSI) as its starting point. This means the profits reported to shareholders are now directly linked to a potential tax liability, targeting the gap between a company’s publicly reported profits and its tax obligation under standard rules.

Determining Applicability for the Corporate Alternative Minimum Tax

A company must first determine if it is an “applicable corporation” subject to the CAMT. A corporation falls under the CAMT if its average annual adjusted financial statement income (AFSI) for any three-consecutive-year period exceeds $1 billion. S corporations, Regulated Investment Companies (RICs), and Real Estate Investment Trusts (REITs) are exempt from this rule.

This income test involves aggregation rules. To determine if the $1 billion threshold is met, the income of all corporations treated as a single employer under Internal Revenue Code Section 52 must be combined. This means a parent corporation must include the financial income of its subsidiaries and affiliated entities, which prevents companies from avoiding the tax by spreading income across multiple legal entities.

The rules differ for U.S. corporations in a foreign-parented multinational group. A two-part test applies: the group’s average annual AFSI must exceed $1 billion, and the U.S. corporation or its aggregated U.S. operations must have an average annual AFSI of at least $100 million over the same three-year period.

Calculating Adjusted Financial Statement Income

The foundation of the CAMT is Adjusted Financial Statement Income (AFSI). The calculation begins with the net income or loss reported on a corporation’s Applicable Financial Statement (AFS), such as an audited statement prepared under GAAP or IFRS. This book income figure is the starting point and must be modified through a series of adjustments to arrive at the final AFSI.

One adjustment involves federal and foreign income taxes. Any federal income tax expense recorded on the financial statements is added back to book income. Foreign income taxes paid or accrued are also added back, though they may be partially claimed later as a foreign tax credit against the CAMT itself. This ensures the tax base is calculated on a pre-tax basis.

Depreciation is another area of adjustment because financial statements use different methods than tax rules. The CAMT rules require an adjustment to align book depreciation with tax depreciation allowed under Internal Revenue Code Section 168. This means substituting the financial statement depreciation expense with the tax depreciation amount.

Adjustments are also required for net operating losses (NOLs). For CAMT purposes, a corporation uses its financial statement NOLs, not the NOLs calculated for regular tax purposes. This means that losses recognized for book purposes can be carried forward to reduce AFSI in future years.

Further modifications are made for defined benefit pension plans. The AFSI must be adjusted for the difference between the pension expense recorded on the financial statements and the amount of contributions actually made to the pension plan for the year.

Certain tax credits can also impact the AFSI calculation, particularly those related to green energy initiatives. The value of specific credits may need to be accounted for in the AFSI. These numerous adjustments transform standard book income into the specific AFSI figure that is multiplied by the 15% tax rate.

Computing the CAMT Liability

Once a corporation has determined its Adjusted Financial Statement Income (AFSI), the next phase is to compute the actual tax liability. This is a comparative exercise that pits the new minimum tax against the company’s regular tax obligation.

• Calculate the Tentative Minimum Tax (TMT). This is done by taking the AFSI, reducing it by any available financial statement net operating loss carryforwards, and then multiplying the result by 15%.
• Reduce the TMT by applying the CAMT foreign tax credit. This credit is for foreign income taxes paid or accrued by the corporation and its controlled foreign corporations, subject to certain limitations. The result is the adjusted TMT.
• Compare this adjusted TMT with the corporation’s regular federal income tax liability for the year. The regular tax liability is the amount calculated under standard rules, plus the Base Erosion and Anti-Abuse Tax (BEAT).
• Determine the CAMT payable, which is the amount by which the adjusted TMT exceeds the corporation’s regular tax liability. If the regular tax liability is higher, no CAMT is due, as a corporation pays the greater of the two calculations.

For example, if a company’s adjusted TMT is $20 million and its regular tax liability is $18 million, its total tax due is $20 million. The $2 million excess is the CAMT.

The CAMT Credit Carryforward

When a corporation pays the CAMT because its tentative minimum tax exceeded its regular tax liability, it generates a minimum tax credit. This credit can be carried forward indefinitely to be used in future years.

The purpose of this credit carryforward is to prevent a form of double taxation. The CAMT can accelerate tax payments on income that will eventually be subject to the regular tax system. The credit allows the corporation to recoup the extra tax it paid in a CAMT year against its regular tax in a future, higher-tax year.

A corporation uses this credit to reduce its regular tax liability in a subsequent year. The credit becomes usable in any year where the company’s regular tax liability is greater than its tentative minimum tax for that year.

A limitation on the credit is that it can only reduce a future year’s regular tax liability down to that year’s tentative minimum tax. It cannot be used to lower the tax bill below the TMT or generate a refund. For instance, if a company has a regular tax of $30 million, a TMT of $25 million, and a $10 million credit, it can only use $5 million of the credit, reducing its tax liability to $25 million.