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Inflation Reduction Act of 2022: Corporate Alternative Minimum Tax

Inflation Reduction Act of 2022: Corporate Alternative Minimum Tax

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On August 16, 2022, the Inflation Reduction Act of 2022 (the “IRA”) was enacted into law. Among other changes to the Internal Revenue Code of 1986, as amended (the “Code”), the IRA imposes a 15% corporate alternative minimum tax on certain corporations (the “CAMT”).1 In enacting the CAMT, Congress was focused on the phenomenon of very large publicly traded corporations with significant accounting earnings paying little or no tax. Hence the decision by Congress to have the CAMT calculated based on book income rather than taxable income. Congress took this approach rather than restricting tax incentives previously added to the Code by Congress that contributed to the low or no taxable income reported by these otherwise profitable companies. The following discussion is a high-level summary of the CAMT and certain potential implications thereof for corporate taxpayers. As contemplated below, the application of the CAMT in certain contexts is not entirely clear and, absent further regulatory guidance, may apply with respect to certain corporate taxpayers that Congress did not intend to capture.

The CAMT is only one of the significant changes to the Code resulting from the enactment of the IRA. We also published a summary of the renewable energy tax credit provisions, the environmental provisions (including the methane emissions charge) and the excise tax on certain repurchases of corporate stock of the IRA. Stay tuned for additional analysis and insight with respect to the IRA.


  • 15% Minimum Tax: The CAMT imposes a 15% corporate alternative minimum tax on the adjusted financial statement income (“AFSI”) of applicable corporations for taxable years beginning after December 31, 2022.

Applicable Corporations

  • $1 Billion Test (General Rule): A corporation (other than an S corporation, regulated investment company, or real estate investment trust) is generally an applicable corporation if the average annual adjusted financial statement income (“Average Annual AFSI”) of the corporation and the other members of its Controlled Group (defined below) for a three-tax-year period exceeds $1 billion (the “$1 Billion Test”). An applicable corporation is subject to the CAMT in its first taxable year occurring after it satisfies the $1 Billion Test that ends after December 31, 2021.

Observations: The first taxable year for which a corporation could qualify as an applicable corporation is the 2022 taxable year, and the first year in which the CAMT could be imposed on an applicable corporation is the 2023 taxable year. Financial statement losses during a year are taken into account in determining the three-year average in applying the $1 Billion Test, whereas GAAP NOLs (defined below) are taken into account in computing an applicable corporation’s CAMT. As the three-tax-year period used for determining whether a calendar year corporation satisfies the $1 Billion Test for the taxable year ending on December 31, 2023 (the “2023 taxable year”) includes the taxable year ending on December 31, 2020 (the “2020 taxable year”), calendar year corporations with material financial statement losses for the 2020 taxable year may not meet the $1 Billion Test until the taxable year ending on December 31, 2024.

  • $100 Million Test (Members of Foreign-Parented Multinational Groups): Special rules apply to corporations that are members of a foreign-parented multinational group (an “FPMG”). An FPMG is a group of two or more entities, including at least one domestic corporation and one foreign corporation, that are included in the same applicable financial statement and that have, or are treated as having, a common parent that is a foreign corporation.

If a corporation is a member of an FPMG, two separate tests must be satisfied to trigger applicable corporation status. First, the corporation must satisfy the $1 Billion Test with the Average Annual AFSI of such corporation determined by including the AFSI of all members of the FPMG in the Controlled Group. Second, such corporation must also have Average Annual AFSI of $100 million or more taking into account the AFSI of only the U.S. members of such corporation’s Controlled Group for the three-year testing period (the “$100 Million Test”). The $100 Million Test is applied so that a U.S. subsidiary of an FPMG is subject to the CAMT only if the U.S. members of the FPMG in the Controlled Group have sufficient income.

Observations: Presumably this additional $100 Million Test is intended to provide an exception for larger non-U.S.-parented multi-national organizations that have a relatively small U.S. presence. Many aspects of the determination of the members and common parent of an FPMG and the application of the $100 Million Test are uncertain under the statutory language. The uncertainty will hopefully be addressed in short order through regulations promulgated by the U.S. Department of the Treasury (“Treasury”) and other guidance issued by the Internal Revenue Service.

  • Aggregation Rules: In determining whether a corporation satisfies the $1 Billion Test, the AFSI of all persons treated as a “single employer” with such corporation under section 52(a) or section 52(b) is included with certain adjustments. The application of section 52(a) and section 52(b) results in the aggregation of the AFSI of entities that are under common control in certain parent-subsidiary groups, brother-sister groups, and combined groups (any such group, a “Controlled Group”). Generally, domestic and foreign corporations and noncorporate entities engaged in a trade or business are members of a Controlled Group for purposes of the foregoing test if, in relevant part, they are members of (i) a parent-subsidiary group connected through greater than 50% equity ownership or (ii) a brother-sister group where the same five or fewer individuals, estates or trusts directly or indirectly own a controlling interest in each entity (with only identical ownership taken into account). The Controlled Group attribution rules apply to a number of different provisions of U.S. federal income tax law (e.g., the base erosion and anti-abuse tax under section 59A, the small business exception under section 448, and the transition tax under section 965). Despite their common usage, the application of these aggregation rules is unclear in many situations and may have consequences beyond the scope intended by Congress. An amendment to the IRA proposed by Senator John Thune (R-SD) (the “Thune Amendment”) narrowed the application of these aggregation rules with respect to private equity fund structures.

Observations: The Joint Committee on Taxation has estimated that “only approximately 150 taxpayers annually will be subject to” the CAMT. While several organizations and commentators have attempted to identify taxpayers expected to be subject to the CAMT using publicly available data, the application of these complex aggregation rules makes it difficult to identify such taxpayers. As we have analyzed the application of the CAMT, we have identified certain corporations likely to be subject to the CAMT that, in all likelihood, were not its intended targets.

Observations (Up-C Structures): Companies with Up-C structures will need to consider the application of these aggregation rules in determining whether the public corporation is subject to the CAMT. In general, where the public corporation owns a greater than 50% interest in the operating partnership (or the operating partnership is otherwise a member of the public corporation’s Controlled Group), all of the operating partnership’s AFSI is taken into account in applying the $1 Billion Test to the public corporation. However, even if all of the operating partnership’s AFSI is taken into account in applying the $1 Billion Test, only the public corporation’s distributive share of AFSI is taken into account in determining the amount of the CAMT for the public corporation.

Observations (MLPs with Corporate Subsidiaries): It is not uncommon for master limited partnerships (“MLPs”) to have corporate subsidiaries, whether from acquiring existing businesses conducted in corporate form or that were put in place to mitigate qualifying income issues. While these corporate subsidiaries often represent only a small portion of the aggregate revenues of the MLP, these corporate subsidiaries may be subject to the CAMT to the extent the AFSI of the MLP, such corporate subsidiaries, and the other members of the MLP’s Controlled Group in the aggregate satisfy the $1 Billion Test. While this is a clear result of the rules as enacted in the IRA, it is not clear Congress understood the extent to which these rules would apply. MLPs (and other entities treated as partnerships for U.S. federal income tax purposes) with corporate subsidiaries may be surprised by the application of the CAMT to relatively small corporate subsidiaries.

  • Loss of Applicable Corporation Status: A corporation can lose its status as an applicable corporation if (i) such corporation has either a change in ownership or a specified number of consecutive taxable years in which the corporation does not satisfy the $1 Billion Test and (ii) the Secretary of the Treasury determines that it would not be appropriate to continue to treat such corporation as an applicable corporation.

Observations: The grant of authority to the Secretary of the Treasury to determine whether a corporation should no longer be subject to the CAMT means that, until further guidance is released, the circumstances in which a corporation may lose its status as an applicable corporation remain uncertain and subject to approval of the Secretary of the Treasury.

Adjusted Financial Statement Income

  • Applicable Financial Statement Income: In general, AFSI of a corporation for any taxable year is the net income or loss of the taxpayer set forth on the taxpayer’s applicable financial statement with certain adjustments (such adjustments are described below).
  • Applicable Financial Statement: In general, an applicable financial statement is a financial statement certified as being prepared in accordance with GAAP that is (i) a Form 10-K or annual statement to shareholders filed with the SEC, (ii) an audited financial statement used for reporting to shareholders or partners, or for any other substantial non-tax purpose, or (iii) filed by the taxpayer with any U.S. federal agency for any purpose other than U.S. federal income tax purposes. The Secretary of the Treasury may also identify other financial statements that qualify as applicable financial statements.

Observations: The use of financial statement income to determine tax liability is a new concept in the application of U.S. federal income tax laws. As with many aspects of the CAMT, the determination of what constitutes an applicable financial statement for certain corporations will presumably be subject to the issuance of additional guidance from the Secretary of the Treasury. Further, the application of the CAMT with respect to certain investment structures utilizing specific accounting methodologies (e.g., fair value accounting) is not entirely clear and will likewise require clarification via additional regulatory guidance.

AFSI Adjustments

  • General: In general, in determining the amount of AFSI of an applicable corporation to which the 15% minimum tax is applied, a number of adjustments are made, including adjustments: (i) to include only financial statement income related to the appropriate taxable year, (ii) to include only certain income from related entities (e.g., consolidated group members and partnerships), (iii) to only include dividends and certain other amounts from non-consolidated group corporations, (iv) to include only certain foreign income, (v) to adjust for the payment of certain foreign taxes, (vi) to include the income of disregarded entities, and (vii) to take into account tax depreciation instead of book depreciation. These adjustments are described in more detail below.

Observations: While AFSI is calculated taking into account these adjustments, it is notable that AFSI generally does not take into account certain key tax provisions, including section 382 limitations on net operating losses, limitations on interest expense deductions, and limitations on compensation deductions. Further, due to the use of GAAP accounting in determining AFSI, the application of the all events test and economic performance are not relevant in applying the CAMT.

  • Partnerships: A taxpayer that is a partner in a partnership only takes into account such taxpayer’s distributive share of the AFSI of the partnership when determining such taxpayer’s AFSI.

Observations: The IRA does not provide any guidance with respect to how to determine a partner’s “distributive share” for purposes of the CAMT. Presumably Congress intended to reference the distributive share principles of section 704(b) of the Code and regulatory guidance will be issued by Treasury applying those section 704(b) principles (with appropriate adjustments) for purposes of determining a partner’s distributive share of a partnership’s AFSI.

  • Foreign Entities: If a taxpayer is a United States shareholder (“U.S. Shareholder”) of one or more controlled foreign corporations (“CFCs”), subpart F and global intangible low-taxed income (“GILTI”) inclusions are not taken into account and the AFSI of such taxpayer is adjusted to include such taxpayer’s pro rata share of items taken into account in computing the net income or loss set forth on the AFSI of such CFC. If such CFC items result in a net negative amount, no adjustment is made and the following tax year’s CFC-related adjustment to AFSI is reduced by such carried over negative adjustment. Effectively connected income principles apply in determining the AFSI of foreign corporations.

Observations: The application of the CAMT to the AFSI of CFCs represents a new approach to the taxation of CFC earnings. Under the existing CFC anti-deferral regimes, the income of a CFC is subject to various rates of U.S. federal income tax based upon the character of such income as subpart F income, GILTI or other income. For domestic corporate U.S. shareholders, GILTI is currently generally taxed at 10.5% and other income is exempt from tax (after taking into account 50% and 100% dividends received deductions respectively). The approach to taxing CFC income under the CAMT potentially results in GILTI and otherwise exempt income effectively being taxed at the higher rate of 15%, making the regular tax rate generally irrelevant to those categories of income when the CAMT is imposed.

Further, the CAMT provisions do not provide for coordination between the rule on including a pro rata share of CFC items and either (i) the rule on taking into account dividends from non-consolidated group corporations in computing AFSI or (ii) the rule that contemplates applying the CAMT to effectively connected income of a foreign corporation. Presumably, the Department of the Treasury will use its express regulatory authority “to prevent the omission or duplication of any item” to issue guidance preventing double-inclusion of any such CFC income.

  • Depreciation: AFSI is determined by utilizing tax depreciation instead of book depreciation in the case of deductions allowed under section 167 with respect to property to which section 168 applies (i.e., depreciation deductions) to the extent of the amount allowed as a deduction in computing taxable income for such taxable year. Note that an amendment to the CAMT was proposed that would have taken into account the taxable income deductions for intangible drilling costs, geological and geophysical expenditures, and qualified tertiary injectant expenses in computing AFSI. However, that amendment failed in the Senate.

Observations: The adjustment to include tax depreciation in calculating AFSI was a key change in the final version of the IRA. As a result, applicable corporations can reduce their AFSI by taking into account depreciation deductions with respect to tangible property under section 167, which includes bonus depreciation with respect to tangible personal property. However, applicable corporations generally cannot reduce their AFSI for amortization deductions under section 197.

GAAP Net Operating Loss (“NOL”)

  • General: AFSI for any taxable year is reduced by an amount equal to the lesser of (i) the aggregate GAAP NOL (defined below) carryovers to the taxable year or (ii) 80% of AFSI computed without regard to any GAAP NOL deduction. As noted above, GAAP NOLs are not taken into account in applying the $1 Billion Test.
  • Carryover: A financial statement net operating loss for any taxable year can be carried forward to each taxable year following the year of the loss (a “GAAP NOL”).

Observations: While the first year to which the CAMT could apply to a calendar year corporation is the 2023 taxable year, the CAMT allows the carryover of GAAP NOLs beginning with losses recognized in the 2020 taxable year. Accordingly, applicable corporations with large losses recognized in 2020 may have a considerable GAAP NOL carryforward to take into account in computing AFSI.

Tax Credits

  • CAMT Credits: To the extent a corporation is subject to the CAMT in a prior taxable year and in a later taxable year is subject to the regular corporate tax, such corporation may apply the prior amounts paid under the CAMT against its regular tax liability to the extent such credits do not reduce the regular tax liability below the CAMT applicable in such taxable year. Such carryforwards also apply to reduce a corporation’s base erosion anti-abuse tax (or BEAT).

Observations: Similar to the application of alternative minimum tax credits under prior tax regimes, the CAMT credits operate to provide a taxpayer with a credit against the regular tax to the extent such taxpayer was previously subject to the CAMT. In effect, payments under the CAMT are treated as prepayments of a corporation’s regular tax liability to the extent a taxpayer is subject to the regular tax in a later taxable year.

  • General Business Credits: General business tax credits under section 38 may offset up to 75% of a taxpayer’s combined regular tax and CAMT. These credits include many of the renewable energy tax credits that were introduced by or expanded in the IRA. Our summary of these renewable energy tax credits is available here.

Observations: The availability of general business tax credits as an offset to the CAMT may incentivize taxpayers that were not previously cash taxpayers but that may now owe cash taxes under the CAMT to pursue investments that are eligible for renewable energy tax credits.

  • Foreign Tax Credits: Domestic corporations are eligible for a CAMT foreign tax credit to the extent such foreign taxes are taken into account on such corporation’s applicable financial statements and are paid or accrued by such corporation. Additionally, an applicable corporation is eligible for a CAMT foreign tax credit equal to the lesser of (i) the applicable corporation’s pro rata share of the amount of foreign taxes imposed by a foreign country that are taken into account on the applicable financial statement of each CFC with respect to which the applicable corporation is a U.S. Shareholder and paid or accrued by the CFC and (ii) 15% of the applicable corporation’s pro rata share of the AFSI of such CFC. The CAMT permits the carryover to up to five subsequent taxable years of foreign tax credits in excess of the 15% limitation.

Observations: The CAMT’s approach to the application of foreign tax credits is a taxpayer-favorable material departure from that applied in the context of the regular tax because it does not apply the percentage limitation on a category-by-category basis but effectively includes all income and foreign taxes in a single basket for purposes of applying the 15% limitation.

1 Unless otherwise noted, references to “§” or “section” are to the Code or the regulations promulgated thereunder.

This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.