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Minimum-Taxed Corporations May Pass by Opportunity Zones

Aug. 9, 2022, 8:45 AM

The cornerstone of the proposed Inflation Reduction Act of 2022, passed by the Senate over the weekend, is a corporate alternative minimum tax. Beginning in 2023, the CAMT would generally apply a 15% minimum tax to C corporate taxpayers whose average financial accounting net income exceeds $1 billion. The CAMT tax base would generally be derived from financial accounting income, as adjusted for tax depreciation, financial accounting net operating loss carryforwards, and certain other items. The CAMT could offset regular income tax liability in future years, but not below the minimum tax amount.

Some large C corporations, like AT&T, have reportedly formed or at least have considered investing in qualified opportunity funds. A 2021 Congressional Research Service report on the House-passed version of the CAMT in the Build Back Better bill noted that AT&T was predicted to be among the largest payors of CAMT. However, AT&T may have less exposure to the CAMT as passed by the Senate in 2022.

Unlike the 2021 House-passed version, the Senate-passed version of the CAMT tax base computation allows tax depreciation and amortization of post-2007, pre-enactment, broadband costs, which are the source of most of AT&T’s deferred corporate income tax liabilities as reported on its 2021 annual report. Despite the narrowing of the CAMT tax base, some estimates put the number of large corporations that would be subject each year to the 2022 Senate-passed CAMT at more than 100 annually, with 10-year CAMT liabilities of hundreds of billions of dollars.

The Congressional Research Service report notes that “many of the factors that create differences between book income and tax income are intentional [Congressional] policy choices.” Accordingly, the report concludes that “while [a CAMT] based on book income could serve as a backstop, by increasing tax liability for certain corporations, it could offset or diminish the effects of tax incentives intended to encourage investment or economic activities if the incentives are recaptured by [the CAMT].”

The report observes that “general business credits—such as credits for R&D, clean energy, and housing ... would be allowed” against the CAMT under the 2021 House-passed bill. It notes that each of these three CAMT-allowable credits are considered by the Joint Committee on Taxation as among the six largest corporate tax expenditures. Similarly, the report lists the work opportunity credit, another CAMT-allowable general business credit, as the 10th-largest corporate tax expenditure. Under the CAMT, however, general business credits would be allowed to offset only up to about 75% of the combined CAMT and regular tax. Like the 2021 House-passed version, the 2022 Senate-passed version of the CAMT includes the 75% offset for the general business credit.

Exiting QOFs

Absent the application of the CAMT, a large C corporation can benefit from the general QOF rule that after 10 years of QOF ownership, an investor that sells its QOF interests at a taxable gain can exclude such gain. A similar gain exclusion can be available to the QOF investor if, after 10 years of ownership, a QOF sells an interest in a qualified opportunity zone business or a QOF’s qualified opportunity zone business sells its assets. By contrast, for purposes of the CAMT tax base, a large C corporation’s financial accounting gains derived from the sale or liquidation of QOF interests, qualified opportunity zone business interests, or its assets would be immediately includable.

Entering QOFs

Investors typically perceive the relatively short-term deferral of eligible gains invested in a QOF as less important than the permanent gain exclusion on QOF exits. Absent application of the CAMT, a large C corporation could obtain a benefit from the general QOF rule that an investor who timely invests its 2023, 2024, and 2025 eligible gains in a QOF can defer inclusion of those gains until 2026. But besides being limited to a short-term deferral, this QOF entry rule doesn’t provide a perceived benefit to those large C corporations that, after taking into account carried over and current net operating losses and tax credits, don’t expect to face a regular corporate tax liability before 2026 anyway.

For purposes of the CAMT tax base, 2023, 2024, and 2025 eligible gains included in financial accounting income would be immediately includable and not be deferrable until 2026, even if invested in a QOF.

Conclusion

Large corporations whose marginal financial accounting income from QOF exit and entry transactions would be subject to the CAMT would see the evaporation of their immediate marginal federal corporate income tax benefits from participating in the QOF program. For example, large corporations with foreseeable possible exposure to CAMT throughout the mid-to-late 2030s may find a reduced federal corporate income tax incentive to form QOFs before the QOF program’s 2027 expiration date.

The 2022 Senate-passed version of the CAMT doesn’t mention QOFs. Congress might analogize the QOF program to other socially motivated tax credit programs, such as the low income housing credit and work opportunity credit, which would be creditable against up to 75% of the combined regular and CAMT. Congress might also analogize the CAMT to the individual alternative minimum tax, which favorably fully incorporates the QOF deferral and permanent exemption rules into the calculation of individual alternative minimum taxable income.

If Congress accepts these analogies, Congress should consider modifying the CAMT or QOF rules to largely or completely encompass the QOF exclusion and deferral rules into the CAMT. However, even if Congress does change the CAMT to conform to the regular zero corporate tax QOF exit rule, the OECD Pillar Two minimum tax regime creates another potential obstacle to achieving a worldwide zero corporate tax QOF exit rate.

This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Alan S. Lederman is a shareholder at Gunster, Yoakley & Stewart, P.A. in Fort Lauderdale, Fla.

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