Treasury Proposes Rules on Corporate Alternative Minimum Tax (2)

The Treasury Department and the IRS proposed long-awaited regulations Thursday to clarify how the new corporate book-income tax will be applied and calculated.

The proposed rules (REG 112129-23, RIN 1545-BQ84) move companies’ attempts to comply with the corporate alternative minimum tax, or CAMT, into a new phase. Many companies will be liable for paying CAMT for the first time Oct. 15, the extended corporate tax-filing deadline for 2023, the first year the tax was in effect.

CAMT requires large companies to pay at least 15% in taxes on the income they report on their financial statements, which can be different from their taxable income. Treasury says the tax is a necessary step to crack down on companies that have been able to pay much less by reducing their taxable profit via aggressive tax-planning strategies and tax deductions, credits, and other advantages that the tax code affords them.

“This is about tax fairness,” Deputy Treasury Secretary Wally Adeyemo told reporters in a call Wednesday. CAMT and the regulations “address significant corporate tax avoidance by some of our most profitable corporations,” he said.

Many tax professionals are still trying to get their heads around the 603-page regulations, acknowledging that while the rules are a comprehensive attempt to address many lingering questions about CAMT, their breadth and complexity will force companies to shoulder a bigger compliance burden and do a lot of new calculations.

“I don’t think anybody has had the time to figure out how all the provisions in the proposed regulations operate together,” said Monisha Santamaria, a principal in KPMG LLP’s Washington National Tax practice. “I think taxpayers have to do a ton of reading and a ton of investment in systems.”

“This is a very challenging law to implement,” said William McBride, vice president of federal tax policy at the Tax Foundation.

Treasury expects CAMT to apply to about 100 companies. Officials didn’t identify those companies, but most pay very little in taxes now, according to Treasury: Without CAMT, the 100 companies would have an average effective federal tax rate of 2.6%, and 25% of them would have an effective rate of zero.

Making those big companies pay more will help level the playing field and give a leg up to small business, Adeyemo said. Treasury estimates CAMT will raise $20 billion in 2025 and $250 billion over the next 10 years.

Codifying Guidance

The proposed regulations detail who 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 financial-statement income for purposes of determining how much income is subject to the 15% minimum tax.

Those adjustments are intended to be limited and targeted; “very few deductions” are allowed under CAMT, an administration official said.

The regulations would largely codify and enact preliminary guidance that Treasury and the IRS have announced in multiple notices issued since December 2022. They also address questions surrounding the tax that haven’t been tackled before now, such as how it will work for US companies with a foreign parent and how mark-to-market measurements of value will be counted.

One area of concern in the regulations, McBride said, is how they address a taxpayer’s income from partnerships in which it’s a partner. The regulations call for a “bottom-up approach,” in which partnerships would calculate their own adjusted financial statement income which would then flow up to the taxpayer. A share of said income would then be counted as part of the taxpayer’s own income subject to CAMT.

That’s a “new and intensive compliance approach” that companies with partnership interests will have to face, and that, along with other provisions of the regulations, will boost companies’ compliance costs, McBride said.

Not everyone is concerned about a greater compliance burden, though. Companies big enough to worry about CAMT have lawyers and accountants actively working to minimize their tax bills and “have embraced complicated legal structures as the price of zeroing out their taxes,” said Matt Gardner, a senior fellow at the Institute for Taxation and Economic Policy. Any company complaints about compliance “seem laughable on their face,” he said.

‘Waste of Resources’

For the first time, the proposed rules also lay out when a company paying CAMT no longer must do so. According to the rules, a company is no longer subject to it if it falls below the threshold of $1 billion average income for five consecutive years, or if it undergoes certain ownership changes.

The regulations also continue a “safe harbor” process that makes it easier for some companies to determine whether CAMT applies to them without having to go through the complex process to calculate adjusted financial-statement income. Companies with less than $500 million in unadjusted book profits can generally continue to deem themselves to be exempt from CAMT, according to the proposed rules, as was the case in the first year after the tax took effect.

But Santamaria said the safe harbor is “helpful for some, but definitely not helpful for many” companies that will still face a burden to show they aren’t subject to the tax.

Many tax observers have seen CAMT as a flawed tax from the start—a less-than-ideal way of raising corporate taxes that stemmed from political compromises—and Thursday’s proposed regulations didn’t do much to change their minds.

The CAMT regulations are “a massive waste of resources,” said Steve Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Center. The two years that Treasury took to formulate the regulations “could have better spent on other projects,” Rosenthal said.

Rulemakers are also under fire over how they’ve treated companies’ input on CAMT guidance. In a separate report Thursday, the Treasury Inspector General for Tax Administration criticized what it said were IRS lapses in tracking, considering, and documenting companies’ comments on the preliminary CAMT guidance it had issued before Thursday’s proposed regulations.

CAMT is separate from the 15% global minimum tax that many countries are now implementing under Pillar Two of the OECD’s 2021 global tax agreement. Thursday’s regulations don’t address how CAMT might interact with the global minimum tax, and CAMT is assessed on a different base of income than the global tax.

Separately Thursday, the IRS extended its waiver of penalties for companies that may have underpaid their quarterly estimated taxes because the rules on CAMT haven’t been clear. In a notice (Notice 2024-66), the agency said companies will be exempt from any such penalties on estimated taxes for taxable years that start during 2024. The IRS had previously waived the penalties for 2023 and for the first two estimated-tax payments of 2024.

Public comments on the proposed rules are due by Dec. 12. A public hearing on the rules is scheduled for Jan. 16.