Corporate alternative minimum tax: IRS issues initial guidance

Introduction

The 15% corporate alternative minimum tax (CAMT) was enacted in 2022. The CAMT applies only to some large, profitable corporations and corporate groups. CAMT computations use book income (financial statement income) as a starting point, not taxable income. The IRS has issued its initial guidance addressing the CAMT — Notice 2023-7 (the Notice) — with more to come.

CAMT in general

The CAMT applies only to applicable corporations with annual average adjusted financial statement income (AFSI) that exceeds $1 billion. For a corporation that is a member of a foreign-parented multinational group, the annual average AFSI must be over $1 billion for all members of the group and $100 million or more from only the U.S. corporation(s). When measuring AFSI, aggregation rules may require adding AFSI of multiple companies together. AFSI is based on financial statement net income with numerous adjustments. Average annual AFSI is based on the three tax years preceding the tax year in which the tax applies.

The CAMT is effective for tax years beginning after Dec. 31, 2022. It does not apply to S corporations, regulated investment companies or real estate investment trusts.

CAMT liability arises only if CAMT computations based on AFSI yield a higher result than regular federal income tax and base erosion anti-abuse tax (BEAT) computations for the taxable year. A minimum tax credit is provided to CAMT payers that can be carried forward and utilized in future years to the extent that the regular tax exceeds the tentative minimum tax.

Financial statement net operating loss carryovers reduce the AFSI base for computing the 15% minimum tax. However, this benefit applies only to AFSI losses from taxable years ending after Dec. 31, 2019. Additionally, loss carryovers from prior years can offset no more than 80% of AFSI in the current year. A large corporation with pre-2020 regular tax losses carried forward may see CAMT liability resulting from its inability to apply pre-2020 financial statement losses to reduce AFSI.

The Notice sets forth interim CAMT guidance and announces that the Treasury Department and the IRS intend to release both proposed regulations dealing with the CAMT and additional interim guidance (e.g., another notice) before releasing proposed regulations. Taxpayers may rely on the Notice until proposed regulations are issued.

Highlights of Notice 2023-7