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The Curbing Inflation Act 2022 imposes a minimum business books tax (“BMT”) of 15% for tax years commencing after December 31, 2022. The BMT is a 15% tax on the Applicable Financial Statement Income (“AFSI”) of certain domestic corporations. , offset by certain foreign tax credits and business credits (subject to limitations). The AFSI is based on the company’s net income or net loss as reported in its applicable financial statements, subject to several adjustments. A company subject to the BMT is only liable to additional tax to the extent that its liability to tax under the BMT would exceed the sum of its liability to ordinary corporate income tax and Base Erosion Anti-Avoidance Tax (“BEAT”). The main features and ambiguities of BMT are summarized below.
Scope of the book The minimum tax is wider than it seems
- Generally, the BMT only applies to domestic corporations (excluding S corporations, REITs, and RICs) whose average AFSI exceeds $1 billion over a three-year period (“Book Income Test”). However, several nuances expand the scope of application of BMT:
- For accounting income test purposes only, the AFSI of entities that are treated as a single employer with a company under the relevant rules of Article 52 on controlled groups are added to the AFSI of that company.
- A U.S. subsidiary of a foreign-invested group is subject to BMT if the group’s average AFSI exceeds $1 billion over a three-year period and the U.S. subsidiary’s average AFSI is $100 million or more over a three-year period.
- Once a company crosses the income threshold and becomes subject to BMT, it will generally remain subject to BMT even after its average AFSI falls below the income threshold. The law provides that the BMT can only cease to apply to a company if and until (i) the AFSI of the company falls and remains below the income threshold for a certain number of years of imposition (as determined by the Treasury) or there is a change in ownership, and (ii) the Treasury determines “that it would not be appropriate to continue to treat this company” as subject to BMT. Thus, it appears that once a company is subject to BMT, it will continue to apply for years to come unless and until the Treasury steps in.
- The Sinema and Thune amendment to earlier versions of the new legislation removed language from the final law treating Section 212 investment activities as a trade or business for the purposes of the section’s controlled group rules. 52. This amendment was motivated by concern that the AFSI of investment funds and their holding companies would otherwise be combined and subject to the BMT; advice would be welcome to confirm that the funds will be exempt from tax.
Credit for minimum tax paid on books
- Similar to the Corporate Alternative Minimum Tax which was repealed in 2017, a corporation that pays additional tax under the BMT is entitled to a minimum tax credit which can be used to reduce the corporation’s regular income. and tax payable in subsequent tax years, although not below the company’s provisional tax liability under the BMT in a tax year.
Depreciation and amortization adjustments
- The AFSI calculation requires that the deductions for accounting depreciation of tangible assets be replaced by the equivalent tax deductions under Section 167, including additional depreciation. Since corporations are generally allowed to depreciate assets more quickly for tax purposes than for accounting purposes, this adjustment should benefit corporations with recently acquired depreciable assets by producing a greater reduction in accounting income.
- In contrast, AFSI generally incorporates accounting amortization deductions for intangible assets, with the notable exception of certain wireless spectrum investments, for which Section 197 tax amortization deductions replace their accounting equivalents. .
Interaction with the second pillar
- Although the BMT scheme and the OECD “pillar two” scheme are similar in that they both impose a minimum tax rate of 15% based on book income, there are significant differences between the two. . Notably, the BMT is calculated on a blended global basis, whereas Pillar Two takes a country-by-country approach. Therefore, it is not clear whether BMT would be classified favorably for Pillar Two purposes and, if so, how BMT’s liability would be assigned to the relevant controlled foreign companies for Pillar Two purposes. Our previous commentary on Pillar Two can be found here.
Deduction for Financial Statements Reports NOL
- A corporation’s federal income tax net operating losses (“NOL”) cannot be used to reduce AFSI, although a corporation’s “financial statement NOL” can reduce up to at 80% of its AFSI. A NOL financial statement is a net loss reported in the company’s financial statements for tax years ending after December 31, 2019.
- This deduction applies for purposes of calculating a company’s liability under the BMT, but does not apply in determining whether the company is subject to the BMT.
Problems for companies in difficulty
- Distressed companies may be particularly affected by the BMT given the limited availability of financial statement NOLs, the general inability to exclude write-off of debt taxable income from accounting income, and the possible unlimited application of the BMT even after the fall of the AFSI of a company.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.
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