Inflation Reduction Act Creates New Corporate Minimum Tax

16 августа 2022 г.

The Inflation Reduction Act of 2022, signed by US President Joseph Biden on August 16, 2022, includes a new alternative minimum tax for corporations with profits of more than $1 billion.

On August 12, 2022, the US House of Representatives passed the Inflation Reduction Act of 2022, which the Senate passed on August 7 by a vote of 51-50, with Vice President Kamala Harris breaking the tie. President Biden signed the bill into law on August 16. The new legislation includes a range of measures addressing consumer energy costs and carbon emissions, an extension of benefits under the Affordable Care Act, and federal deficit reduction—as well as significant federal income tax changes.

‘Alternative’ Minimum Tax

One of the provisions in the new legislation would create a 15% “alternative” minimum tax (AMT) on the “adjusted financial statement income” (AFSI) of corporations with profits in excess of $1 billion. The AMT is “alternative” because it applies only to the extent that 15% of AFSI for the taxable year, net of an AMT foreign tax credit, exceeds the “regular tax” for the taxable year. In overall structure, then, the new corporate AMT bears some similarity to the previous corporate AMT, repealed in 2017 by the Tax Cuts and Jobs Act, although there are many differences, including the use of financial statement income as the tax base under the new AMT.

According to a summary of the act’s tax-related provisions released by Senator Chuck Schumer’s office, the provision is intended “to ensure the wealthiest . . . corporations cannot avoid paying their fair share of taxes.” Based on a previous draft of the proposal, the Joint Committee on Taxation estimated that the corporate minimum tax would raise $313 billion in revenue over a 10‑year budget window, making this provision an essential piece of the act’s overall reduction in the federal deficit.

Application of AMT

The new corporate AMT generally applies in a taxable year only to a corporation or group of corporations treated as a single employer (an applicable corporation) whose average AFSI exceeds $1 billion for any three‑year period ending with a year prior to the current taxable year and after December 31, 2021. Thus, in the case of a taxpayer with a year ending January 31, 2022, the provision would apply to a year beginning February 1, 2022.

Once a corporation qualifies as an applicable corporation, it remains an applicable corporation until it has either a change in ownership or a series of years (as determined by the IRS and taking into account the taxpayer’s facts and circumstances) during which its average annual AFSI does not exceed $1 billion. In either case the Secretary of the Treasury must also determine that it would not be appropriate to treat such corporation as an applicable corporation.

A last-minute amendment removed certain modifications to the common control rules that, for purposes of determining whether a corporation meets the $1 billion threshold, would have aggregated entities even if their common owner was not actively conducting a trade or business (for example, where entities are owned by a private equity fund that itself is not viewed as actively conducting a trade or business).

Foreign-Owned US Corporations

Under the new legislation, a domestic corporation that is foreign owned can be subject to the AMT with far less income than a domestic corporation that is US owned. This is because, while a US-owned domestic corporation must have an average that exceeds $1 billion in AFSI to be subject to the tax, a domestic corporation that is a member of a group with a foreign parent need only have an average of $100 million in AFSI, assuming that the “foreign‑parented multinational group” of which it is a member—including members not subject to US taxing jurisdiction—generates an average of $1 billion AFSI.

The definition of “foreign-parented multinational group” requires that at least one domestic corporation and at least one foreign corporation be included on the same applicable financial statement and (1) with a common parent that is a foreign corporation or (2) treated under regulations as having such a common parent. A “branch” rule provides that an unincorporated US trade or business of a foreign corporation is treated as a separate domestic corporation wholly owned by the foreign corporation, meaning that even a foreign group that does not include a US corporation may be subject to the new AMT as modified by the foreign-parented multinational group rules.

As indicated, the AMT applies only to the extent that 15% of the AFSI for the taxable year, net of an AMT foreign tax credit, exceeds the “regular tax” for the taxable year. The “regular tax” is the sum of the income tax, net of credits, and the base erosion anti-abuse tax (BEAT), if applicable.

Detailed technical rules govern the calculation of AFSI in specific circumstances. Notably, the rules ensure that the income of foreign subsidiaries, as reflected on their own financial statements, will be included in the AMT taxpayer’s AFSI, but that such subsidiaries’ net loss in a year cannot currently offset the other income included in the AFSI.

Additional Rules

Other key technical and computational rules include the following:

AFSI is reduced by depreciation allowed under the Internal Revenue Code instead of the depreciation otherwise taken into account on the taxpayer’s applicable financial statement. There is a similar rule for the amortization of a wireless spectrum used in the trade or business of a wireless telecommunications carrier and acquired after December 31, 2007, and before the date of enactment.
A reduction in AFSI reflects any accumulated financial statement net operating losses for taxable years ending after December 31, 2019, capped at 80% of AFSI computed without regard to the losses.
Taxpayers may claim a corporate AMT foreign tax credit, but only if the taxpayer (or a controlled foreign corporation in which the taxpayer is a US shareholder) took the relevant taxes into account on an applicable financial statement. The AMT credit for taxes paid by foreign subsidiaries is further limited to the 15% AMT rate multiplied by the foreign subsidiaries’ income included in the taxpayer’s AFSI. Foreign taxes exceeding this limitation can be carried over for up to five years.
Corporations may apply general business credits up to 25% of their net income tax over $25,000 including net income tax arising from the AMT but not the BEAT, net of the foreign tax credit and certain other credits.
A credit against regular tax liability is available to taxpayers that have an AMT liability for all prior years beginning after 2022. This credit can be applied up to the excess in a year of (1) regular tax liability (including the BEAT and as reduced by the foreign tax credit and certain other credits) over (2) 15% of AFSI, as reduced by the AMT foreign tax credit. In a fashion similar to the old corporate AMT, this credit effectively makes the new corporate AMT a prepayment of regular tax liability.

Additional Resources

The Inflation Reduction Act of 2022 will dramatically affect a range of climate change, healthcare, prescription drug pricing, and tax matters in the United States. Read our LawFlashes for more:

To help clients navigate these changes, Morgan Lewis is providing analysis of the Biden-Harris administration’s executive orders, key agency developments, and enacted and proposed regulations. View our insights >>