Three Key Points of the Proposed Corporate Alternative Minimum Tax Regulations
The U.S. Treasury released over 600 pages of proposed regulations for the 15% corporate alternative minimum tax (CAMT) last month, providing long-awaited clarity for businesses, but the compliance burden may exceed expectations. Ernst & Young tax partner Tim Powell noted that while the regulations simplify certain processes, they also add complexity to the treatment of partnership investments. This article summarizes three key points: the permanent safe harbor, the confirmation requirements for partnership contributions, and the tiered flow-through of partnership operating information.
The U.S. Treasury Department last month released more than 600 pages of proposed regulations detailing how the 15% corporate alternative minimum tax (CAMT) will be implemented. Companies have been eagerly awaiting clear guidance since President Biden signed the Inflation Reduction Act in 2022, which enacted the CAMT, and the release of these regulations finally addresses that need.
However, according to Tim Powell, a tax partner at Big Four accounting firm Ernst & Young, the details companies received from the Treasury may not fully align with expectations, as certain parts of the proposed rules indicate that this new tax could impose a greater compliance burden than anticipated.
"From a compliance cost perspective, it leans negative," Powell said of the proposed regulations. He added that he believes the number of companies that will actually owe the tax is far smaller than the number that will bear the compliance burden, which he estimates to be in the thousands.
Although early projections indicated that around 150 large companies with annual revenue exceeding $1 billion might be subject to the tax, the new proposed regulations reinforce earlier expectations that the tax's complexity will require finance executives at more companies to prepare, as CFO Dive previously reported.
These regulations are not yet final. Companies and taxpayers can submit public comments by December 12, with a public hearing scheduled for January. Given that this is an entirely new tax regime, Powell expects the feedback to be substantial.
"I would be surprised if the final regulations look exactly like these proposed regulations," Powell said. "This is new for a lot of people, including the government, and therefore subject to change."
For now, Powell outlined several elements in the newly released regulations that CFOs and companies should note—not all of which are unfavorable to businesses. These points include:
1. Permanent Safe Harbor
A proposal in the new regulations would make permanent the "safe harbor"—a simpler method for determining whether a company is subject to the tax. Under this structure, companies can generally rely on their financial statements, extracting essentially a three-year average income figure to determine the tax's applicability, and companies only need to do this to demonstrate they are not subject to the CAMT, Powell said.
"They've done a fairly good job of trying to make it simple for taxpayers, providing an easy way out," he said. Nevertheless, for multinational companies owned by foreign entities, the process is more complex. In such cases, they must look at their organization's global income to determine whether it exceeds the $500 million threshold under the safe harbor provision, and they must also review the income of the company's U.S. group, which must be below $50 million to qualify for safe harbor protection.
2. Partnership Contributions Require Gain Recognition
Before the new regulations, prior guidance allowed companies with investments in partnerships to avoid reflecting their gains and losses when calculating whether they were subject to the CAMT, Powell said.
"One of the significant changes is that the proposed regulations deviate from that and say, 'Actually, we're not going to treat it as non-recognition, but rather require recognition of these gains, though not all at once—allowing them to be spread over a period of time,'" he said, calling the change a "less favorable" outcome for companies with substantial investments in partnerships.
3. Partnership Information Must Be Passed Up the Chain
Prior to the regulations, there was no guidance on how companies investing in partnerships should reflect their share of income from the partnerships' adjusted financial statements, Powell said.
Some companies had hoped for a simpler alternative approach for partnerships, such as not being required to provide information on the partnerships in which they invest if they are merely minority investors. "The regulations do provide guidance, but perhaps not the kind most people hoped for," Powell said. "They require that you must ask all partnerships in the chain, passing the information up level by level until it reaches the corporate partner."