For companies that report over $1 billion in profits to shareholders, the Inflation Reduction Act of 2022 (the Act) includes a 15% corporate alternative minimum tax (CAMT) based on book income. An appliable 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).
To determine whether the new tax applies, companies must first ascertain whether their "average annual adjusted financial statement income" (AFSI) exceeds $1 billion for any three consecutive years preceding the tax year. When determining AFSI for the $1 billion qualification test, the Act generally treats AFSI of all persons considered a single employer with a corporation under IRC Sections 52(a) or (b) as AFSI of the corporation. Affected companies must make several adjustments to AFSI when determining the new tax.
The Act limits general business credits and AMT foreign tax credits for creditable foreign income taxes paid or accrued by CFCs. The CAMT does not apply to corporations that have either changed ownership or fallen below the AFSI threshold for a specified number of consecutive years (to be determined by the U.S. Department of Treasury), conditioned upon the Treasury also determining that it would be inappropriate to continue subjecting the corporation to the tax.
Comprehensive modeling can help applicable corporations consider and plan for any potential increase in their federal income tax liability. Modeling is especially critical post-TCJA given the many complicated and interrelated foreign and domestic tax provisions that can affect a corporation's tax liability, including the CAMT, BEAT, Section 163(j), FDII, GILTI and BEPS Pillar 2.