IRS delivers ‘crucial guidance’ on 15% minimum tax

Dive Brief:

Amid a surge of year-end tax guidance, the Internal Revenue Service (IRS) handed financial executives and CFOs some interim advice on issues related to the 15% Corporate Alternative Minimum Tax (CAMT) that many corporate tax preparers have been puzzling over since the new tax was signed into law as part of the Inflation Reduction Act in August.
The new minimum tax on large companies that earn more than $1 billion annually triggered a groundswell of questions last year from a growing chorus of voices — ranging from the American Institute of CPAs (AICPA) to Ernst & Young (EY) — who have been pressing the U.S. Treasury for guidance, particularly on how to calculate whether a firm is subject to the new tax in cases involving mergers and acquisitions (M&A). The tax went into effect Jan. 1.
In its Notice 2023-7, the IRS said it “clarifies which corporations the CAMT applies to and how the alternative minimum tax is calculated…Critically, it also gives small corporates an easy method for determining that the new alternative minimum tax does not apply to them,” according to a Dec. 28 IRS news release.

Dive Insight:

The interim guidance was welcomed by a number of tax preparers but some were careful to note that the guidance did not address all the outstanding issues. EY, which has been outspoken about the need for direction, in particular welcomed the clarity that the guidance gave to companies involved in mergers and acquisitions.

”The Treasury Department and the IRS made a good start to addressing the many issues raised by the new CAMT that is based on financial statement income and not taxable income,” wrote Karen Gilbreath Sowell, EY global transaction Advisory Leader — Tax, Law, Workforce and co-director of EY’s National Tax Mergers and Acquisitions Group, in an emailed response to questions.

The notice generally provides that, where a transaction would be wholly tax-free for federal income tax purposes under certain specified corporate or partnership rules, it will also be tax-free for purposes of determining adjusted financial statement income (AFSI), even where gain or loss is otherwise recognized for financial accounting purposes, Sowell said.

“This was critical guidance for taxpayers engaging in important capital markets transactions…The guidance will allow corporations and partnerships to continue to engage in tax-free restructurings, acquisitions and dispositions.” Sowell wrote.

Separately, Monisha Santamaria, a partner with KPMG Washington National Tax, rated some of the IRS’s CAMT guidance on a “safe harbor” method for determining whether a corporate is subject to the tax as mixed, with “good”, “bad” and “ugly” components.

In an emailed response to questions from CFO Dive, Santamaria said the guidance was good because it “employs simplified rules” that will provide relief to corporations that are clearly not “applicable corporations,” bad because the safe harbor will not cover many corporations and ugly because of its complexity.

“Any taxpayer seeking to apply the safe harbor will need to identify the members of its section 52 single employer group and eliminate consolidation entries between persons not treated as a single employer under section 52(a) or (b),” Santamaria wrote.