When Will Corporations Be Required to Pay the Corporate Alternative Minimum Tax?

 Posted on July 18, 2023 in Taxation Law

The tax laws in the United States change regularly, and taxpayers need to be aware of new requirements that may apply to them when filing tax forms, paying taxes to the IRS, or addressing other tax-related issues. One recent change to the tax laws that may affect certain companies involves the Corporate Alternative Minimum Tax (CAMT), which was put in place by the Inflation Reduction Act of 2022. Recently, the IRS issued guidance on the requirements for this tax, and it is also allowing relief from penalties that may apply for companies that have failed to make estimated quarterly tax payments in 2023.

What Is the Corporate Alternative Minimum Tax?

The CAMT is a new tax that must be paid by certain corporations, and this requirement went into effect on January 1, 2023. Corporations that earned an average of $1 billion in annual profits over a 3-year period will be required to pay the CAMT. This tax will also be required for U.S. corporations that are subsidiaries of foreign companies, so long as a U.S. company has at least $100 million in profits and the aggregated foreign group has at least $1 billion in profits. The CAMT will not be required for S-corporations, real estate investment trusts (REITs), or regulated investment companies (RICs). These pass-through entities are not required to pay corporate taxes, and the personal income of owners or investors is taxed instead.

Corporations that are subject to the Corporate Alternative Minimum Tax are required to pay a minimum of 15% of their adjusted financial statement income (AFSI) in a taxable year. These corporations will need to calculate the regular corporate tax that would apply to their taxable income as well as the CAMT that would apply to their AFSI, and they will be required to pay the higher amount to the IRS. When calculating AFSI, certain types of deductions are allowed, including for depreciation of equipment and for state and local taxes. While net operating losses generally cannot be deducted in the current year, they can be carried forward to offset taxable income in future years. These offsets are capped at 80% of taxable income for a given year.

Applicable corporations are required to make estimated quarterly Corporate Alternative Minimum Tax payments. Each payment will be 25% of the required annual payment, which is calculated as 100% of either the taxes owed on the current year's tax return or the previous year's tax return, whichever amount is lower. If estimated quarterly payments are not made as required, penalties may be imposed.

Waiver of Estimated Tax Penalties for 2023

The IRS has issued a notice stating that due to the challenges corporations may face as they determine whether they are required to pay the CAMT, the penalties will be waived for corporations that have failed to pay estimated quarterly taxes during the taxable year beginning on January 1, 2023 and ending on December 31, 2023. Taxpayers will be required to file Form 2220 (Underpayment of Estimated Tax by Corporations) with their annual income tax return, and they must list the applicable penalties on Form 1120, even if the penalties are $0. Failure to meet these requirements could result in penalties being imposed, and a corporation may need to take additional action to request abatement of these penalties.

Contact Our San Jose, CA Corporate Tax Lawyer

If you have questions about whether you may be subject to the Corporate Alternative Minimum Tax or how you can take steps to avoid penalties related to estimated quarterly payments, reach out to the San Jose tax law attorney at John D. Teter Law Offices for legal help. We will advise you on how to respond to IRS notices, tax audits, or other tax-related concerns, and we will work to ensure that you will be able to avoid or minimize tax penalties. Contact our firm at 408-866-1810 to schedule a consultation.

Sources:

https://www.irs.gov/pub/irs-drop/n-23-42.pdf

https://crsreports.congress.gov/product/pdf/R/R47328

https://www.investopedia.com/corporate-alternative-minimum-tax-7092893