The IRS has announced that it will grant penalty relief for corporations that did not pay estimated tax in connection with the new corporate alternative minimum tax, or CAMT.
Background
As part of the Inflation Reduction Act of 2022, Congress created the CAMT. The change, which is reflected in section 55 of the Tax Code, imposes a 15% minimum tax on the adjusted financial statement income of large corporations.
Applicable Corporations
A corporation is subject to the CAMT for a taxable year if it meets one of two average annual adjusted financial statement income (AFSI) tests. What that generally means is that CAMT applies to large corporations—those with average annual AFSI exceeding $1 billion as well as U.S. firms with foreign parents who meet certain income limits. And, because the tax relies on AFSI, not taxable income, it also means that corporations with an effective tax rate higher than 15% may still have a CAMT liability.
CAMT does not apply to S corporations, real estate investment trusts (REITs), and regulated investment companies (RICs). That’s a practical exception—those are typically pass-through entities and not subject to corporate income taxes.
CAMT, BEAT AND GLOBE
As you can imagine, corporations can’t simply rely on a line on a tax return to determine whether they are an applicable corporation subject to the CAMT. And figuring out whether they are subject to the tax is just step one—if they qualify, they must then determine the tax due. Under the new rules, corporations would pay the larger of CAMT or the “regular” tax imposed at the 21% rate plus the base erosion and anti-abuse tax, or BEAT.
If that term rings a bell, it’s because BEAT has been in the news lately. It was originally adopted as part of the 2017 tax reform bill to reduce tax avoidance. BEAT generally imposes a 10% minimum tax to reduce the incentive for corporations operating in the U.S. to shift profits out of the country.
And we’re not finished with the alphabet soup just yet. Don’t confuse CAMT with the 15% global base erosion, or GLoBE, tax proposed by the Organisation for Economic Co-operation and Development (OECD). CAMT is a U.S.-focused tax on worldwide income, whereas GLoBE is a minimum tax that would be imposed in each country throughout the world—at least those countries that sign onto the agreement. Under the OECD model rules, Pillar 2 establishes a global minimum tax (how much tax is due), while Pillar 1 allocates taxation rights (who gets taxed and who imposes the tax). You can read more on GLoBE from the OECD here.
Dates
The new CAMT provision is applicable for taxable years beginning after Dec. 31, 2022—meaning it is in play now.
Relief
Just as with individuals, corporations may be required to make estimated tax payments. That can be difficult when you’re not sure how much tax applies and whether the tax even applies to you in the first place.
Considering the challenges of determining which corporations are subject to the tax and how much tax might be due, the IRS will waive the penalty for a corporation’s failure to pay estimated income tax with respect to its CAMT for a taxable year that begins after Dec. 31, 2022, and before Jan. 1, 2024.
It’s worth noting that this isn’t an automatic waiver. Affected taxpayers must still file Form 2220, even if they owe no estimated tax penalty, and complete the applicable lines on Form 1120. The IRS has made clear that failure to follow those instructions could result in a penalty notice (and require a subsequent abatement request).
You can read Notice 2023-42 here.
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