The Cut Inflation Act of 2022, signed by US President Joseph Biden on August 16, 2022, includes a new alternative minimum tax for corporations with profits over $1 billion.
On August 12, 2022, the United States House of Representatives passed the Cut Inflation Act of 2022, which the Senate passed on August 7 by a vote of 51 to 50, Vice President Kamala Harris breaking the tie. President Biden signed the bill into law on August 16. The new legislation includes a series of measures regarding consumer energy costs and carbon emissions, an extension of benefits under the Affordable Care Act and federal deficit reduction, as well as significant tax changes federal income tax. .
‘ALTERNATIVE’ MINIMUM TAX
One of the provisions of the new legislation would create an “alternative” minimum tax (AMT) of 15% on the “adjusted financial statement income” (AFSI) of corporations with profits over $1 billion. The AMT is “alternative” because it only applies to the extent that 15% of the AFSI for the tax year, less an AMT foreign tax credit, exceeds the “regular tax for the tax year. In its overall structure, the new company AMT therefore has some similarities with the old company AMT, repealed in 2017 by the law on tax cuts and employment, although there are many differences, including the use of financial statement income as a tax base under the new AMT.
According to a summary of the law’s tax provisions released by Senator Chuck Schumer’s office, the provision is “to ensure that the wealthiest . . . businesses cannot avoid paying their fair share of taxes. Based on an earlier version of the proposal, the Joint Committee on Taxation estimated that the corporate minimum tax would generate $313 billion in revenue over a 10-year fiscal window, making this provision a key feature. overall reduction in the federal deficit provided for by law.
The new corporate AMT generally applies in a tax year only to a corporation or group of corporations treated as a single employer (an applicable corporation) whose average AFSI exceeds $1 billion for any three-year period ending one year before the current taxation year and after December 31, 2021. Thus, in the case of a taxpayer whose year ends on January 31, 2022 , the provision would apply for one year from February 1, 2022.
Once a corporation qualifies as a Governing Corporation, it remains a Governing Corporation until it undergoes a change in ownership or a series of years (as determined by the IRS and taking into account facts and circumstances of the taxpayer) during which its average annual AFSI does not exceed $1 billion. In either case, the Secretary of the Treasury must also determine that it would not be appropriate to treat that corporation as an applicable corporation.
A late-breaking amendment removed certain changes to the common control rules that, for the purposes of determining whether a company meets the $1 billion threshold, would have combined entities even though their common owner was not actively carrying on a trade or business. business (e.g. when owned by a private equity fund which itself is not considered to be actively carrying on a trade or business).
AMERICAN FOREIGN COMPANIES
Under the new legislation, a foreign-owned domestic company can be subject to AMT with significantly less revenue than a US-owned domestic company. Indeed, while a US-owned domestic company must have an average of $1 billion in AFSI to be taxable, a domestic company that is a member of a group with a foreign parent does not needs only an average of $100 million in AFSI, assuming the “foreign-owned multinational group” of which it is a member, including members not subject to U.S. tax jurisdiction, generates in average $1 billion from AFSI.
The definition of “foreign parent multinational group” requires that at least one domestic corporation and at least one foreign corporation be included in the same applicable financial statement and (1) with a common parent corporation that is a foreign corporation or (2) treated under regulations as having such a common parent. A “branch” rule provides that an unincorporated U.S. business or enterprise of a foreign corporation is treated as a separate domestic corporation wholly owned by the foreign corporation, meaning that even a foreign group that does not include not a US company can be subject to the new AMT as amended by the rules for multinational groups whose parent company is foreign.
As noted, the AMT only applies to the extent that 15% of the AFSI for the tax year, net of an AMT foreign tax credit, exceeds “ordinary tax”. for the tax year. “Normal tax” is the sum of income tax, net of credits, and Base Erosion Anti-Abuse Tax (BEAT), if any.
Detailed technical rules govern the calculation of AFSI in specific circumstances. Notably, the rules ensure that the income of foreign subsidiaries, as reflected in their own financial statements, will be included in the AMT taxpayer’s AFSI, but that the net loss of such subsidiaries in a year cannot currently not offset other income included in the AFSI.
Other key technical and calculation rules include the following:
- AFSI is reduced by depreciation allowed under the Internal Revenue Code in lieu of depreciation otherwise accounted for in the taxpayer’s applicable financial statement. There is a similar rule for the amortization of wireless spectrum used in the trade or business of a wireless carrier and acquired after December 31, 2007 and before the date of enactment.
- A reduction in AFSI reflects any accumulated net operating loss in the financial statements for tax years ending after December 31, 2019, capped at 80% of the AFSI calculated without taking losses into account.
- Taxpayers may claim a foreign corporate AMT tax credit, but only if the taxpayer (or a controlled foreign corporation of which the taxpayer is a US shareholder) has accounted for the relevant taxes in an applicable financial statement. The AMT credit for taxes paid by foreign affiliates is further limited to the rate of 15% AMT multiplied by the income of foreign affiliates included in the taxpayer’s AFSI. Foreign taxes exceeding this limit can be deferred for up to five years.
- Corporations can apply general business credits of up to 25% of their net income tax over $25,000, including net income tax arising from AMT, but not BEAT, net of foreign tax credit and certain other credits.
- A credit against regular tax debt is available to taxpayers who have AMT debt for all previous years beginning after 2022. This credit can be applied up to the excess in a year of (1) regular tax debt (including including BEAT and reduced by foreign tax credit and certain other credits) on (2) 15% of AFSI, reduced by foreign tax credit AMT. Similar to the old corporate AMT, this credit effectively makes the new corporate AMT an advance payment of regular tax liability.