US IRS releases interim guidance on 15% corporate alternative minimum tax

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EY Global

13 Jan 2023
Subject Tax Alert
Categories Corporate Tax
Jurisdictions United States
  • The United States (US) Treasury and Internal Revenue Service (IRS) released the first set of guidance on applying the new 15% tax.

  • Taxpayers can rely on this guidance until proposed regulations are issued later this year.

  • The guidance covers some issues that taxpayers have been waiting for, such as a simplified method for determining whether an entity constitutes an "applicable corporation" and the depreciation adjustment for Internal Revenue Code Section 168 (MACRS) property.

  • The guidance also confirms that financial statement gain or loss arising from wholly tax-free acquisitive and divisive reorganizations generally should be excluded from a taxpayer's "adjusted financial statement income" AFSI.

  • The guidance does not address international tax issues or the inclusion in AFSI of other categories of income presented in the consolidated financial statements.

In Notice 2023-7 (pdf) (Notice), the IRS addressed the application of the corporate alternative minimum tax (CAMT), which was enacted under the Inflation Reduction Act of 2022 and is effective beginning in 2023. While the guidance addresses many taxpayer issues, others remain unanswered. Taxpayers may rely on the interim guidance pending the release of proposed regulations, which are anticipated to apply for tax years beginning after 31 December 2022. (For more on the Inflation Reduction Act, see EY Tax Alert, US Inflation Reduction Act includes 15% corporate minimum tax on book income, dated 17 August 2022.)

The IRS said it will be releasing further interim guidance before the proposed regulations are issued, addressing, among other issues, certain issues related to the insurance industry.

The Notice provides a lengthy list of items on which the IRS invites written comments, including which guidance "is needed most quickly." Interested parties should submit written comments to the IRS electronically within 60 days after Notice 2023-7 is published in the Internal Revenue Bulletin.


An "applicable corporation" is liable for the CAMT to the extent that its "tentative minimum tax" exceeds its regular US federal income tax liability plus its liability for the base erosion anti-abuse tax (BEAT). An applicable corporation's tentative minimum tax is a 15% minimum tax on its AFSI to the extent it exceeds the CAMT foreign tax credit for the tax year. The CAMT applies to any corporation (other than an S corporation, regulated investment company, or real estate investment trust) whose average annual AFSI exceeds US$1 billionfor any three consecutive tax years preceding the tax year. When determining AFSI for the $1 billion qualification test, the AFSI of all persons considered a single employer with a corporation under Internal Revenue Code2 Section 52(a) or (b) is generally treated as AFSI of the corporation.

For a corporation that is a member of a foreign-parented multi-national group, the three-year average annual AFSI must be (1) over $1 billion from all members of the foreign-parented multi-national group, and (2) $100 million or more of income from only the US corporation(s), a US shareholder's pro rata share of CFC AFSI, effectively connected income and certain partnership income. A foreign-parented multi-national group means two or more entities if (1) at least one entity is a domestic corporation and another is a foreign corporation, (2) the entities are included in the same applicable financial statement, and (3) the common parent of those entities is a foreign corporation (or the entities are treated as having a common parent that is a foreign corporation).

The three-tax-year period means any three consecutive tax years preceding the tax year in which the tax applies (beginning with three-tax-year periods in which the third year of the period ends after 31 December 2021). For example, the three-tax-year period for a calendar-year corporation possibly subject to the CAMT for 2023 includes calendar years ending 31 December 2020, 31 December 2021, and 31 December 2022. For corporations (or a predecessor) existing less than three tax years, the number of years the corporation has existed is substituted for three. Additionally, any tax year less than 12 months must be annualized.

Applicable corporation status

New safe harbor method

Section 5 of the Notice provides corporations a safe harbor or "simplified method" for determining "applicable corporation" status for the first tax year beginning after 31 December 2022. Generally, this one-year safe harbor cuts the dollar thresholds in half and eliminates most of the AFSI adjustments. More specifically, the simplified method provides that a corporation determines whether it is an applicable corporation by applying the rules in Section 59(k)(1) and (2), with the following modifications:

  1. The AFSI dollar thresholds are reduced from $1 billion to $500 million and from $100 million to $50 million.

  2. Most of the AFSI adjustments under Section 56A(c) and (d) are ignored, except the corporation must continue to apply Sections 56A(c)(2)(A) (consolidated financial statements), 56A(c)(2)(B) (consolidated returns), 56A(c)(5) (adjustments for certain taxes), and Section 56A(c)(4) (effectively connected income) in applying the $100 million/$50 million threshold.

  3. AFSI is also determined after taking into account AFS Consolidated Entries,3 except those that eliminate transactions between persons not treated as a single employer under Section 52(a) or (b).

  4. Special rules apply if a corporation has an AFS that covers a year different from its tax year.

For those corporations below the $500 million and $50 million thresholds, the safe harbor may significantly reduce (although not eliminate) the complexity in determining applicable corporation status for their first tax year beginning in 2023.

Additional applicable corporation provisions

Although Section 59(k)(1) provides that an applicable corporation generally retains that status once obtained, Section 59(k)(1)(C) authorizes relief in the event of, inter alia, an ownership change. Neither Section 59 nor the Notice define the term "ownership change," but the Notice does address the impact on applicable corporation status when a target or target group is acquired in certain circumstances. In these situations, the target's status as an "applicable corporation" subject to the CAMT terminates; its historic AFSI (for a purchase of a target group) or its allocable portion of the target group's AFSI (for a purchase of a target out of a combined reporting group) is added to the acquirer group's AFSI for the three-year lookback period to test the acquirer group for "applicable corporation" status. For an acquisition of a target out of a target group, the target's allocated AFSI remains in the target group's AFSI for the lookback period as well. Similar rules apply to corporate divisions. This is welcome guidance to taxpayers in the M&A market who were concerned about the impact of M&A on applicable corporation status and the corresponding diligence required.

Aside from the transactional impact addressed previously, the standards and procedures by which a corporation may "purge" its applicable corporation status under Section 59(k)(1)(C) remain open questions (e.g., the number of consecutive tax years in which a taxpayer does not meet an AFSI test, a list of other facts and circumstances that may be relevant).          

Inclusion of partnership AFSI

Section 7 of the Notice also provides that the AFSI adjustment under Section 56A(c)(2)(D)(i) does not apply in all circumstances when determining applicable corporation status. If a taxpayer is a partner in a partnership, Section 56A(c)(2)(D)(i) requires the taxpayer's AFSI to be adjusted to only take into account the taxpayer's distributive share of the partnership's AFSI.

Taxpayers were uncertain whether the adjustment under Section 56A(c)(2)(D)(i) applied if the corporation and the partnership were not treated as a single employer under Section 52(a) or (b). For purposes of determining whether a corporation is an applicable corporation, Section 59(k)(1)(D) requires the corporation's AFSI to be determined without regard to the required adjustment of the taxpayer's distributive share of the partnership's AFSI. Accordingly, the Notice clarifies that the partnership distributive share adjustment does not apply in all circumstances when determining applicable corporation status.

Determining AFSI

The AFSI is used to (1) establish "applicable corporation" status, and (2) determine the base on which the CAMT is imposed.

Tax-free transactions

The Notice generally treats transactions that would be wholly tax-free for federal income tax purposes under certain specified corporate or partnership rules as tax-free for purposes of determining AFSI, even where gain or loss is otherwise recognized for financial accounting purposes. This is critical guidance for taxpayers engaging in important capital markets transactions. Any increase or decrease in the financial accounting basis of property resulting from a tax-free transaction is ignored for AFSI purposes, requiring taxpayers to separately track their financial accounting basis. In addition, transactions in which gain or loss is partially recognized do not appear to be covered by the exemption from AFSI under the Notice.

Consolidated groups treated as a single entity

Consolidated groups are treated as a single entity for AFSI purposes. This single-entity treatment presumably achieves simplification and prevents manipulation through altering item location within a group. As is the case with many rules that may interact with the consolidated return regulations, there are numerous questions on the CAMT consequences of a member joining a consolidated group and departing from a consolidated group, such as how CAMT attributes are treated.

Distressed situations — financial statement gain backed out

Financial statement gain that is otherwise taken into account with respect to cancellation of indebtedness income (CODI) that is excluded for tax purposes under Section 108(a) is backed out. This rule creates some parity between tax and financial statement income. In these instances, the CAMT attributes are correspondingly reduced in the financial statements under the principles in Sections 108(b) and 1017. The exact "CAMT attributes," as well as the particular mechanics of the reduction, are not developed in the Notice.

Financial statement gain otherwise taken into account with respect to a bankruptcy emergence is also backed out. A corresponding reduction to financial statement asset basis is required. Unlike excluded CODI, this rule does not turn on whether the gain would be excluded for federal tax purposes (that is, the aforementioned parity with CODI does not appear to be a factor here).

Depreciation adjustment under Section 56A(c)(13)

Section 4 of Notice 2023-7 addresses certain CAMT issues around the depreciation of MACRS property. Generally, Section 56A(c)(13) reduces AFSI by tax depreciation deductions allowed under Section 168, but also requires taxpayers to make adjustments to AFSI to disregard or exclude the book depreciation for "Section 168 Property." The Notice answers some pressing questions for determining the tax depreciation adjustment.

The Notice confirms that the tax depreciation included in cost of goods sold (COGS) is also included in the depreciation adjustment under Section 56A(c)(13). However, AFSI is only reduced by the amount recovered as part of COGS in computing taxable income for the tax year. Accordingly, AFSI is not adjusted by the tax depreciation included in ending inventory. Rather, the amount in ending inventory is tracked and included in the AFSI adjustment when recovered as part of COGS in computing gross income.

Section 4 of Notice 2023-7 requires book depreciation to be disregarded under Section 56A(c)(13). This includes any book depreciation expense, impairment loss, or impairment loss reversal taken into account in the net income or loss on the taxpayer's AFS; an impairment loss reversal includes the amount included in COGS on the AFS, and any amount recognized as an expense or loss on the taxpayer's AFS or reflected in the unadjusted depreciable basis of such Section 168 Property for federal income tax purposes.

The Notice clarifies that the adjustment under Section 56A(c)(13) only applies to Section 168 Property, which is depreciated under Section 168 and is (a) MACRS Property, (b) computer software that is qualified property, or (c) other property that is qualified property and described in Treas. Reg. Section 1.168(k)-2(b)(2)(i)(E-G) (relating to certain qualified film and television productions, qualified live theatrical productions, and certain specified plants). Additionally, the adjustment in Section 56A(c)(13) only applies to the portion of the cost of property that is depreciated under Sections 167 and 168.

Thus, if a portion of the cost of a qualified film production is deducted under Section 181 and the remainder of the property's cost is depreciated under Sections 167 and 168, only the portion of the cost of the qualified film production depreciated under Sections 167 and 168 is considered Section 168 Property. If a taxpayer elects out of additional first-year depreciation (i.e., bonus depreciation) under Section 168(k) for computer software, the property is not considered Section 168 Property because Section 168 does not apply to the computer software.

The Notice confirms that Section 168 Property does not include amounts treated repairs for tax purposes. As a result, the adjustment under Section 56A(c)(13) does not include an expenditure deducted as a repair for federal income tax purposes but capitalized as an improvement for AFS purposes. For determining the appropriate asset to ascertain if there is Section 168 Property, however, the Notice clarifies that the unit of property determination under Treas. Reg. 1.263(a)-3(e) does not apply. Rather, taxpayers should make that determination under Section 168 and its regulations.

The Notice provides that the adjustment under Section 56A(c)(13) applies to all Section 168 Property placed in service in any tax year, including tax years beginning before the effective date of the CAMT (i.e., before 1 January 2023). As a result, taxpayers must reverse book depreciation on Section 168 Property even if no tax depreciation is recognized on a particular Section 168 Property during the tax year. For example, the Notice requires taxpayers to reverse any book depreciation included in their 2023 AFS even if the asset has $0 tax depreciation in 2023 because it was fully depreciated for tax (e.g., bonus depreciation) in a prior tax year (e.g., 2019 or 2022). This will require tax departments to spend additional time identifying such assets and removing the book depreciation from their CAMT calculations.

The Notice requires taxpayers disposing of Section 168 Property to adjust their AFSI to redetermine any gain or loss taken into account on the taxpayer's AFS with respect to the disposition. The Notice also requires taxpayers to adjust the AFS basis of the Section 168 property to take into account all current and prior Section 56A(c)(13) adjustments, including those that would have been made in tax years preceding the effective date of the CAMT had the CAMT applied in those years. This will also require company tax departments to perform additional tracking of potential basis adjustments for Section 168 Property.

AFSI adjustment for certain credits

Section 6 of the Notice excludes from AFSI proceeds from certain credits described in Sections 48D, 6417, and 6418. Specifically, the Notice adjusts AFSI to disregard:

  1. Amounts treated as a payment against the tax imposed by subtitle A under a Section 48D(d) or 6417 election, provided that such amount (or portion thereof) is not otherwise disregarded under Section 56A(c)(5)

  2. Amounts received from the transfer of an eligible credit, as defined in Section 6418(f)(1)(A), that is not includible in the taxpayer's gross income by the application of Section 6418(b) or is treated as tax-exempt income under Section 6418(c)(1)(A), provided that such amount (or portion thereof) is not otherwise disregarded under Section 56A(c)(5)

  3. Amounts that are received under a Section 48D(d)(2) or 6417(c) election and treated as tax-exempt income under Sections 48D(2)(A)(i)(II) or 6417(c)(1)(C), provided that the amounts are not otherwise disregarded under Section 56A(c)(5)


The CAMT is effective for tax years beginning after 31 December 2022. The Notice provides taxpayers guidance they may follow in determining their AFSI for purposes of determining applicable corporation status and calculating the CAMT before the issuance of proposed regulations. Notice 2023-7 states that taxpayers "may" rely on the notice. Thus, it seems that taxpayers may choose whether to implement the guidance. However, it is not clear whether there is any sort of "consistency" requirement under which a taxpayer choosing to follow any part of Notice 2023-7 must follow all its parts.

The Notice does not provide guidance on the inclusion in AFSI of other categories of income presented in the consolidated financial statements (e.g., other comprehensive income items or gain/loss from discontinued operations) or specific international tax issues. Other issues that are not fully addressed in the Notice include (1) the extent of the consequences of predecessor and successor status, and (2) the potential for duplicative inclusions (which is acknowledged but not developed in the Notice). In particular, the absence of guidance on other categories of income included in AFSI makes it challenging for companies to calculate their CAMT basis. Hopefully, additional guidance will be forthcoming on these issues.


For additional information with respect to this Alert, please contact the following:

Ernst & Young LLP (United States), National Tax M&A Group – International Tax and Transaction Services
  • Marc Countryman

  • Brian Peabody

  • Karen Sowell

  • Lulu Ma

Ernst & Young LLP (United States), National Tax – Accounting Periods, Methods, and Credits
  • Scott Mackay

  • Rayth Myers

  • Dan Penrith

  • Ken Beck

Ernst & Young LLP (United States), Tax Accounting and Risk Advisory Services
  • Angela Evans

Published by NTD’s Tax Technical Knowledge Services group; Andrea Ben-Yosef, legal editor

For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.

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    1. Currency references in this Alert are to the US$.

    2. All “Section” references are to the Internal Revenue Code of 1986, and the regulations promulgated thereunder.

    3. The term "AFS Consolidation Entries" means the financial accounting journal entries that are made for AFS purposes in order to present the financial results of an AFS Group as though all member of the AFS Group were a single company, including journal entries to eliminate transactions between members of such group.