Fernway DiarySM

Feb 16, 2023

The Treasury Department and the Internal Revenue Service issued Notice 2023-07 on December 27, 2022, providing interim guidance on the application of the new corporate alternative minimum tax (CAMT) created by the Inflation Reduction Act.

The CAMT imposes a minimum tax on the adjusted financial statement income (AFSI) of large corporations for taxable years starting after December 31, 2022. It generally applies to corporations whose average AFSI exceeds $1 billion, as well as US subsidiaries of foreign corporations in cases where the foreign group’s AFSI exceeds $1 billion and the US subsidiaries’ AFSI exceeds $100 million, to the extent that the CAMT exceeds the corporation’s regular federal income tax liability, including any Base Erosion Anti-Abuse Tax (BEAT). Excluded from the CAMT are S corporations, regulated investment companies (RICs), and real estate investment trusts (REITs).

The purpose of the interim guidance is to provide certainty to potentially affected taxpayers on time-sensitive issues related to the CAMT that will be addressed in forthcoming proposed regulations. The notice also states that the Treasury and IRS intend to release further interim guidance on additional CAMT issues, but that “[t]axpayers may rely on the guidance provided in sections 3 through 7 of this notice until the issuance of the forthcoming proposed regulations.”

This interim guidance clarifies which corporations the CAMT applies to, as well as how the tax is to be calculated. Specifically, it addresses the treatment of certain covered nonrecognition transactions, tax consolidated groups, cancellation of indebtedness (COD) income, depreciation of property subject to §168 of the Internal Revenue Code, and certain tax credits. Examples and analysis are included to illustrate the application of the rules provided.

The notice also provides a simplified “safe harbor” method for corporations to determine whether they are an applicable corporation for the first taxable year beginning after December 31, 2022. Laid out in Section 5, this is described by the IRS as giving smaller corporations “an easy method for determining that the new alternative minimum tax does not apply to them.”

While the interim guidance in this notice is intended to address urgent issues related to the CAMT, Section 9.02 provides a list of 20 additional CAMT issues that have not yet been addressed, on which the Treasury Department and IRS request comment. These include:

• After a change in ownership, the facts and circumstances that should be considered relevant for determining if a taxpayer remains an applicable corporation for purposes of the CAMT;
• The extent to which items reported in other comprehensive income (OCI) in a taxpayer’s applicable financial statement (AFS) should be included in AFSI, if any;
• How and to what extent adjustments to AFSI should be made to address a mismatch between the treatment of investment assets and related liabilities for AFSI purposes for reinsurance contracts with imbedded derivatives; and
• The extent to which adjustments to AFSI should be provided to disregard or include mark to market unrealized gains or losses which are otherwise included in AFSI, and whether this should depend on the extent to which a taxpayer marks to market the item for regular tax purposes.

Notice 2023-7 was published in the Internal Revenue Bulletin on January 17, 2023. Comments on guidance provided in the notice, as well as comments on rules not included in the notice, should be submitted by March 20, 2023, per procedures set out in Section 9.03.

Due to the high AFSI threshold for applicability, the new CAMT has been estimated to affect only about 150 companies. Taxpayers who may be affected by the CAMT should review Notice 2023-07 and look for further interim guidance to come from the Treasury and IRS. Those with specific concerns or questions about their individual circumstances are advised to consult a qualified tax professional.

For more information, please contact your US tax advisory team at youradvisor@fernwaysolutions.com or visit us at www.fernwaysolutions.com.

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