The 15% Corporate AMT: What You Need to Know

6 minutes
people on an ipad with books on the table

What is the Corporate Alternative Minimum Tax?

The Inflation Reduction Act (IRA) of 2022 created the Corporate Alternative Minimum Tax (CAMT), which imposes a 15% minimum tax on the adjusted financial statement income of large corporations for taxable years beginning after December 31, 2022 for federal income tax purposes.

It’s important to note that corporations must calculate their taxes under both the regular corporate income tax rules and under the CAMT, and will be liable for the higher of the two amounts.

This ensures that large multinational corporations with significant operations in the US are also subject to a minimum level of US taxation and prevents them from using certain deductions and credits to significantly reduce their US tax liabilities.

Who is subject to corporate alternative minimum tax (CAMT)?

The CAMT generally applies to corporations with average annual adjusted financial statement income (AFSI) exceeding USD 1 billion over three consecutive years.

Foreign-parented US corporations are subject to the CAMT if their US-earned average annual AFSI equals or exceeds USD 100 million and their aggregate foreign group meets the USD 1 billion threshold.

For a taxable year beginning in 2023,  the US Treasury Department and the US Internal Revenue Service (IRS) have provided a safe harbor that aims to give smaller corporations an easy method for determining whether or not the CAMT applies to them.

Under the safe harbor method, corporations do not have to perform all the adjustments required to arrive at AFSI. Instead, they are subject to the CAMT if their “unadjusted” financial statement income exceeds half of the statutory threshold amounts (i.e. by substituting USD 500 million for the USD 1 billion and USD 50 million for the USD 100 million).

What is Adjusted Financial Statement Income?

AFSI refers to the net income or loss of a corporation for a taxable year as set forth on the corporation’s applicable financial statement, with certain adjustments.

The AFSI is not aggregated with the AFSI of other taxpayers to determine the amount potentially subject to the 15% minimum tax, which is imposed on the taxpayer’s individual AFSI. This means that each corporation’s AFSI is considered individually when calculating the CAMT.

The adjustments made to the financial statement income generally include adding back certain deductions and credits that are allowed under the regular tax rules but not under the CAMT. The specific adjustments required can vary depending on the corporation’s circumstances and the applicable tax laws.

It’s important to note that a corporation cannot determine whether it is subject to CAMT based solely on its financial statements because the AFSI adjustments may reduce or increase its three-year average AFSI below or above the USD 1 billion threshold.

The CAMT seeks to tax economic income that is not captured in taxable income, and to effectively punish corporations for touting large accounting profits while paying no or little income taxes.

Why is it called the Corporate Alternative Minimum Tax (CAMT)?

The CAMT rules in the Inflation Reduction Act, require large corporations to compare 15% of their AFSI with the sum of: (i) the regular 21% tax on their taxable income plus (ii) the base erosion and anti-abuse tax (BEAT). Large corporations then must pay the higher amount between the two.

That means that large corporations will pay income tax at least in the amount of 15% of AFSI (if 15% of AFSI is greater than the sum of the regular tax and the BEAT) or more (if 15% of AFSI is less than the sum of the regular tax and the BEAT). That is why the CAMT is an alternative minimum tax.

According to the Joint Committee on Taxation (JCT), the CAMT is expected to generate additional revenues of USD 222.2 billion for a period from FY 2023 through FY 2031.

How does the new CAMT compare to the 1987 - 2017 AMT?

The US Congress designed both alternative minimum taxes to tax a broader base while applying a lower tax rate. This ensures that corporations pay a minimum amount of tax and prevents them from using certain deductions and credits to significantly reduce their tax liability.

Important differences to note:

  • the 1987-2017 AMT began with taxable income under the tax rules and added back tax deductions and credits into adjusted gross income; while
  • the new CAMT begins with financial statement income and makes adjustments to it.

Are there exceptions?

The CAMT does not apply to S corporations (corporations with no more than 100 shareholders that elect to pass corporate income, losses, deductions and credits through to their shareholders for US federal tax purposes), regulated investment companies (RICs, such as mutual funds), and real estate investment trusts (REITs).

How many corporations will be subject to the CAMT?

According to US Senate Finance Committee Chair Ron Wyden, between 100 to 125 corporations had financial statement income of greater than USD 1 billion in 2019. The Joint Committee of Taxation (JCT) estimated that about 150 corporate groups would pay the CAMT, adjusted down to 125.

Should corporations determine whether they are subject to the CAMT annually?     

Once a corporation becomes subject to the CAMT, it is always subject to the CAMT unless: (1) the corporation has a change in ownership or fails to meet the average AFSI test for a certain number of years; and (2) the Treasury Department determines that it is no longer appropriate to subject the corporation to the CAMT.

What are important tax credit rules for the CAMT?

Large corporations must determine the tentative corporate minimum tax for the taxable year, which is (1) 15% of AFSI over (2) the CAMT foreign tax credit (i.e. foreign taxes paid by the corporation that are added back to calculate AFSI on a pre-tax basis).

If the tentative corporate minimum tax is greater than the regular tax, which is the sum of (i) the regular income tax liability, as reduced by the foreign tax credit and (ii) the BEAT, the excess amount is paid as additional tax. The additional tax is the CAMT.

If, in a future year, the tentative corporate minimum tax is less than the regular tax, the corporation can claim a credit for the CAMT paid in previous years to reduce the regular tax. The CAMT credit, however, cannot reduce the tax liability for that future year below the tentative corporate minimum tax.

The corporation’s net income tax, meaning the regular tax and the CAMT, can be reduced by general business credits (GBCs). GBCs are allowed to the extent of 100% of the corporation’s net income tax if the net income tax does not exceed USD 25,000. If the corporation’s net income tax exceeds USD 25,000, GBCs are limited to the sum of USD 25,000 and 75% of the amount by which the net income tax exceeds USD 25,000.

Would the CAMT qualify as the Global Minimum Tax proposed by the OECD and G20?  

The CAMT differs from the 15% global minimum corporate tax proposed by the Organisation for Economic Co-operation and Development (OCED) and G20 as part of the Pillar Two Global Anti-Base Erosion Rules (GloBE) in numerous ways as well, including:

  • the CAMT imposes a minimum tax on worldwide income;
  • GLoBE would impose a minimum tax on a country-by-country basis.

Related

Tax Insights
Corporate Taxation, Digital Economy, Tax Treaties, Transfer Pricing, Tax Management

Base Erosion and Profit Shifting - BEPS

What Is Base Erosion and Profit Shifting (BEPS)?Base erosion and profit shifting (BEPS) refers to tax planning strategies that exploit gaps and inconsistencies in tax rules to:Artificially shift profits to low or no-tax locations where there is little or no economic activity; orErode tax bases through deductible payments such as interest or royalties.Although some BEPS strategies are illegal, many operate within legal boundaries. Nevertheless, BEPS undermines the fairness and integrity of tax systems by giving multinational businesses an unfair advantage over domestic companies. Moreover, the perception that multinational corporations legally avoid income tax undermines and diminishes public confidence and discourages voluntary tax compliance.According to the Organisation for Economic Co-operation and Development (OECD), while BEPS impacts all countries, it disproportionately harms developing countries. This is because developing countries depend more heavily on corporate income tax, particularly from multinational corporations, compared to developed nations. It is crucial to involve developing nations in the international tax dialogue, providing them with the support needed to address their specific challenges and actively participate in the establishment of global tax standards. This inclusive approach ensures that the interests of developing countries are represented, fostering a more balanced and effective global tax framework.
9 minutes
Tax Insights
Mergers and Acquisitions, Corporate Taxation

A Guide to Mergers and Acquisitions

Understanding Mergers and AcquisitionsMergers and acquisitions refer to business transactions in which businesses are combined.Mergers occur when two or more companies join to form a single new legal entity. This process is generally voluntary, and involve companies of similar size, customer base, and operations. Thus, it is often described as a "merger of equals.”On the other hand, acquisitions involve one entity taking over another. Unlike mergers, acquisitions are typically not voluntary, with one company actively purchasing another. Larger companies usually acquire smaller ones. If a smaller company acquires a larger one and retains its name for the post-acquisition entity, it is termed a reverse takeover.Both mergers and acquisitions lead to the consolidation of assets and liabilities under a single entity, making the distinction between the two less clear. As a result, the terms are often used interchangeably, and modern corporate restructurings are commonly referred to as merger and acquisition (or M&A) transactions.
13 minutes
Tax Insights
Digital Economy, Corporate Taxation

The Economic Nexus Revolution: Navigating the Wayfair Era for Remote Sellers and Marketplace Facilitators

The advancement of our modern world, and the emergence of the digital age, brought about increased occurrences of untaxed online sales and with it a pressing need to re-evaluate US state sales tax nexus laws.The landmark US Supreme Court ruling in South Dakota v. Wayfair, Inc., in 2018 was a pivotal moment for previously unreachable online sales (i.e. those conducted online by out-of-state sellers and marketplace facilitators), as it brought about the advent of the “Wayfair Era,” a time of transition and adaptation to new sales tax obligations across US states. Here's what you need to know.
6 minutes