A partnership is not subject to a new alternative minimum corporate tax, but the income from its financial statements could determine whether its partner is subject to it.
Confusion persists for partnerships over who and how much tax is paid as practitioners await guidance on AMT from companies outlined in President Joe Biden’s tax and climate law, known as the Tax Act. reduction in inflation.
Relevant corporations or corporations that meet an income test, excluding S corporations, regulated investment companies or real estate investment trusts, will need to determine whether they exceed the $1 billion average annual income threshold applicable to financial statements over a three-year period and are therefore subject to corporate AMT – the so-called book tax.
For corporations that are a partner in a partnership, it is less clear what income corporations will need to count from the partnership to determine the corporation’s AMT and its applicability.
“There are more questions than answers,” said Victoria Glover, Washington National Tax partner at Deloitte.
Applicability and liability
Consolidating a corporation’s accounting income to reflect the income of its partnership’s financial statements raises questions about what portion of the income should be included and what reporting will be required from the partnerships to the partner company .
Financial statement income to calculate whether corporations are subject to the rule and their tax liability will often be different, said Monisha Santamaria, director of KMPG’s Washington National Tax Practice.
“Because they can be different, it’s very confusing, especially in the context of the partnership,” Santamaria said.
In determining adjusted income from the financial statements of an applicable company that is a partner company, the Inflation Reduction Act specifies that income is “adjusted to take into account only” the distributive part of the AFSI of the partnership.
One might worry that a company would consider all of the revenue from the partnership rather than just the business partners’ share, Glover said.
The corporate AMT provision “has never been reviewed by a committee and has very little legislative history since it was passed by the House,” Glover said. “And obviously there have been significant changes that have been made along the way. And so I think, with respect to this provision, in particular, there are more questions than answers about how this provision works.
Shares can be calculated in different ways depending on whether a taxpayer interprets it literally under section 704(b) of the tax code or takes into account other areas such as section 743 adjustments and 704(c) allowances, which affect the taxable partner’s share. income, said Glenn Dance, a former IRS official and now a partner at Holthouse, Carlin & Van Trigt LLP in Irvine, Calif.
Partners with different tax preparers might interpret distributive actions differently, he said.
“Someone is going to be taxed on a lot of book income,” Dance said. “And someone else is going to be taxed on too little book earnings. And once people find out that’s how the world works, they’ll find ways to make sure they’re still playing. the game the right way.
Treasury will also need to clarify whether non-recognition events will continue to be tax-exempt and how they plan to handle tiered partnerships, Glover said.
Burden on partnerships
It is “unusual” for a company to receive a distributive share of revenue from a partnership, said Michael D’Addio, director of Marcum LLP. The partners file a Schedule K-1 with taxable income information, not financial statement income, unless there is a provision in the agreement.
Practitioners expressed concerns with additional reporting requirements for partnerships with extended foreign income forms earlier this year.
Corporations will need to obtain information regarding their share of income from this partnership’s adjusted financial statements by requesting the information from the partnership, or the IRS may create a rule requiring the partners to provide this information.
Until the IRS guidelines are released, companies will have to develop their own procedures for receiving information from partnerships, which D’Addio says is difficult to do.
A general rule requiring all partners to provide revenue in their financial statements would place a burden on partnerships to develop information that is not affected by the company’s AMT, D’Addio said. He expects requests for financial statement information during tax filing season.
“You should expect that for most partnerships it would be a bit of a stretch to provide this information across the board,” D’Addio said. About 150 taxpayers are expected to be subject to the corporate AMT, according to a reportof the Joint Committee on Taxation.
“I think everyone is just trying to figure out how the basic operations of this provision work and what the congressional intent of this provision was,” Glover said.