In case you thought things were slowing down around the holidays at the IRS (or at Western CPE), slowing down they are not.
GUIDANCE DROP: The IRS has released initial guidance on the new corporate alternative minimum tax (CAMT), including a safe harbor test for smaller businesses to more easily demonstrate they aren’t subject to the new tax. Notice 2023-7, released on December 27, provides interim guidance on issues regarding the application of the new CAMT just days before the new law takes effect. The IRS has stated proposed regulations will soon follow.
BACKGROUND: The Inflation Reduction Act (IRA) (P.L. 117-169) created the CAMT, which imposes a 15% minimum tax on the adjusted financial statement income of large corporations for taxable years beginning after December 31, 2022. Generally, the CAMT applies to large corporations with average annual financial statement income exceeding $1 billion.
The CAMT applies generally to any company whose average annual adjusted financial statement income for three consecutive tax years exceeds $1 billion, hence why it’s known as a “book tax.” The IRS issued Notice 2023-7 to provide some clarity to taxpayers in advance of the CAMT effective date.
THE GOODS: Generally, Notice 2023-7 provides information on the following:
- how the alternative minimum tax is calculated;
- answers to basic questions about how certain transactions may be treated and certain adjustments that may be considered for purposes of the alternative minimum tax, including adjustments for depreciation and certain tax credits, and
- lowers applicable thresholds and provides smaller corporations a method for determining that the new alternative minimum tax does not apply to them.
WHAT’S MISSING: Although this preliminary guidance wasn’t expected to answer all questions surrounding the no-doubt complicated implementation of the CAMT, some tax pros are saying it could have gone further. Notably, a few key issues remain unaddressed in the interim guidance regarding partnerships, according to Monte Jackel’s recent tweet, principal at Jackel Tax Law and well-known business tax policy expert:
- Under the interim guidance, the treatment of cancellation of indebtedness (COD) income fails to address how taxpayers handle COD income allocated through partnerships;
- The notice does not address how section 52(b) and its regulations apply to partnership entities that are either owned by or who own other corporate and/or partnership entities, which is necessary to determine whether a group of entities is aggregated or not in applying the $1B threshold;
- Also left unaddressed is whether a private equity partnership that owns a number of portfolio corporations can be aggregated under section 52(b) regardless of whether a trade or business exists for the partnership.
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