Tax

On September 12, 2024, the Treasury Department (“Treasury”) and the Internal Revenue Service (“IRS”) issued proposed regulations (REG 112129-23, RIN 1545-BQ84) (the “Proposed Regulations”) providing much needed guidance on the application of the corporate alternative minimum tax (“CAMT”). In addition to the Proposed Regulations, Treasury and the IRS also issued Notice 2024-66, which waives the penalty for a corporation’s failure to pay estimated tax with respect to its CAMT for a taxable year that begins after December 31, 2023, and before January 1, 2025.

The Inflation Reduction Act of 2022 (“IRA”) introduced a CAMT on an applicable corporation’s (“Applicable Corporation”) financial statement income. The CAMT is applicable for taxable years beginning after December 31, 2022 and imposes a 15% minimum tax on a corporation’s applicable financial statement income (“AFSI”). The CAMT generally applies to large corporations with an average annual AFSI exceeding $1 billion, which Treasury expects to apply to approximately 100 companies.

The Proposed Regulations, which are more than 600 pages long, codify, and significantly build upon, the interim guidance issued by Treasury and the IRS in Notice 2023-07, Notice 2023-20, Notice 2023-64 and Notice 2024-10, each summarized below:  

• Notice 2023-07. Providing interim guidance on certain issues regarding troubled corporations, consolidated groups, depreciation of property, the treatment of certain tax credits, and determinations of Applicable Corporation status in circumstances involving partnerships. Notice 2023-07 also provided a simplified method for determining whether a corporation is an Applicable Corporation (the “Safe Harbor Process”).
• Notice 2023-20. Providing interim guidance on the determination of an insurance company’s AFSI as it relates to (i) variable contracts and (ii) funds withhold reinsurance and modified coinsurance agreements.
• Notice 2023-64. Providing interim guidance on determining a taxpayer’s applicable financial statements (“AFS”) and AFSI, including guidance applicable to tax consolidated groups and certain foreign corporations (i.e., determinations of Applicable Corporation status, CAMT foreign tax credits and financial statement net operating losses).
• Notice 2024-10. Providing additional interim guidance on determining the AFSI of a U.S. shareholder if a controlled foreign corporation (“CFC”) pays a dividend as well as modified and clarifies interim guidance provided in Notice 2023-64 regarding the AFS of a consolidated group.

In addition to codifying the interim guidance, the Proposed Regulations also provide additional detail on which companies will be subject to CAMT—generally, companies with an average of at least $1 billion in book profits over the previous three years—and what kinds of adjustments will be made to a company’s AFSI for purposes of determining how much income is subject to the 15% minimum tax. The Proposed Regulations significantly build upon the interim guidance by providing additional rules in respect of, but not limited to, troubled companies, consolidated groups, foreign corporations, CFCs, reorganizations, and corporate formations, which were clearly – in the view of Treasury and the IRS – needed to accomplish congressional intent.

The Proposed Regulations retain the Safe Harbor Process set forth in Notice 2023-7, which makes it easier for some companies to determine whether CAMT applies to them without having to go through the complex process to calculate AFSI. Accordingly, under the Proposed Regulations, companies with less than $500 million in unadjusted book profits can generally continue to deem themselves to be exempt from CAMT, as was the case in the first year after the tax took effect.

Finally, we note that the Proposed Regulations address certain questions that had been left unresolved, including, but not limited to: (i) how CAMT works for US companies with a foreign parent, (ii) how earnings from partnerships (including tiered partnerships) will be treated, (iii) how mark-to-market measurements of value will be counted and (iv) when a company paying CAMT is no longer required do so.

Treasury and the IRS have requested comments be provided on the Proposed Regulations by December 12, 2024 and have scheduled a public hearing for January 16, 2025.