What the New Corporate AMT Means for Your Business

The new corporate alternative minimum tax (AMT) introduced by the Inflation Reduction Act will have significant implications for certain large corporations once the new tax becomes effective for tax years beginning after December 31, 2022. Corporations will need to calculate their applicable financial statement income (AFSI) for each of the prior three years to determine whether they are “applicable corporations.” When performing the analysis, corporations may be required to apply the aggregation rules for calculating AFSI in cases of common ownership.
 
Which businesses will be affected?
 
All corporations need to determine whether they are applicable corporations so they can understand the impact of various transactions on AFSI and consider appropriate tax planning for each year the corporation becomes subject to the AMT.  Applicable corporations are those organizations that meet the AFSI test and are not exempt from the AMT.

 

How to determine if the corporate AMT will apply to your organization

Is your organization’s business structure exempt from the AMT?
S corporations, regulated investment companies (RICs) and real estate investment trusts (REITs) are not subject to the corporate AMT. While partnerships are not subject to the AMT, the AFSI of a corporation that is a partner in a partnership includes the corporation’s share of the partnership’s AFSI. Other types of organizations need to determine if they are subject to the AMT.
 
Does your corporation meet the income test?
Corporations that have averaged more than $1 billion in AFSI over the past three tax years will be subject to the new corporate AMT. Therefore, each corporation will need to calculate its average AFSI for 2020, 2021 and 2022 to determine whether it will be subject to the tax in 2023. U.S. subsidiaries of foreign corporations will also be subject to the AMT if the overall foreign group meets the greater than $1 billion AFSI test and the AFSI from U.S. sources collectively averages $100 million or more over the same time period.  

Additionally, corporations must calculate the aggregate AFSI of entities under common ownership. The aggregation rules mean that corporations that are individually below the AFSI threshold may cumulatively meet the threshold and be subject to the AMT. While the statute includes an exclusion for fund-owned portfolio companies, there have been some questions regarding the applicability of this exclusion.
 
Given the complexity of calculating AFSI, corporations should begin compiling information now to determine whether they meet the income test. Companies cannot rely on the approaches used for the previous alternative minimum tax. As the rules currently stand, applicable corporations will keep their status in future years, even if their AFSI changes. The Department of the Treasury may release rules that change the status of corporations whose AFSI falls below the income threshold for multiple years.

 

What’s next for applicable corporations?

Applicable corporations should look for IRS guidance in the near future that will help clarify many of the uncertainties that currently exist. The IRS hopes to issue guidance by the end of 2022, so that companies have time to prepare ahead of April 15, 2023, the due date for first quarter estimates for calendar-year corporations.  

 

How BDO can help

BDO can help organizations determine applicable corporation status and calculate AFSI to confirm whether they meet the income test. Our team can also assist with understanding the aggregation rules for calculating AFSI in cases of common ownership, the application of NOLs and tax credits for AMT purposes, and potential planning opportunities to reduce AFSI or increase available tax credits. 

 

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