The IRS has issued a third notice with additional guidance designed to help corporations determine whether the new corporate alternative minimum tax applies to them and how they calculate the tax. Notice 2023-64 follows two notices released in January 2023 and clarifies important issues, such as the applicable estimated tax penalties, what constitutes financial statement income and which financial statements can be used. The IRS expects to issue proposed regulations soon which will incorporate rules from the notices. Until then, taxpayers can rely on the notices to comply with the new tax, which took effect in 2023.
New Corporate Minimum Tax
The Inflation Adjustment Act imposes a 15% minimum tax on the adjusted financial statement income of large corporations, those with average annual financial statement income in excess of $1 billion. The tax applies to corporate taxable years beginning after December 31, 2022. Tentative minimum tax is determined by applying a 15% tax rate to the adjusted financial statement income of the corporation, after taking into account the AMT foreign tax credit and financial statement net operating losses. General business credits also can offset the tax, and financial statement income can be reduced by tax depreciation. The complicated rules for determining financial statement income are still under development by the IRS.
Estimated Tax Penalties Waived
Because of the difficulty of determining the tax the first year it applies in 2023, the IRS announced in June 2023 in Notice 2023-42 that it will waive penalties for corporation estimated income tax due for AMT liability. The penalty waiver is in effect for taxable years that begin after December 31, 2022 and before January 1, 2024.
Types of Financial Statements
The guidance provides a list of applicable financial statements (AFSs) that meet the requirements for the AMT, in the following priority order:
- GAAP statements: Prepared in accordance with US generally accepted accounting principles.
- IFRS statements: Prepared in accordance with international financial reporting standards.
- Other government and regulatory statements: Include a financial statement, other than a tax return, filed with the Federal Government or any federal agency, a state government or state agency, a foreign government or foreign agency or a self-regulatory organization.
- Unaudited external statements: A financial statement, other than a tax return, that is unaudited and is prepared using GAAP, IFRS or any other accepted standards issued by an accounting standards board.
- Certified financial statement: Certified by an independent financial statement auditor in conformity with the relevant financial accounting standards.
- Restatements: That are reissued to correct original financial statements.
- Annual and periodic financial statements: If a taxpayer with different financial accounting and taxable years is required to file both annual financial statements and periodic financial statements covering less than a 12-month period with a government agency, the taxpayer must prioritize the annual financial statements over the periodic financial statements.
- Financial statements covering group of entities: If a taxpayer’s financial results are consolidated with the financial results of other taxpayers on a consolidated AFS, the taxpayer’s AFS is the consolidated AFS. Exceptions to the use of separate financial statements include a corporation that is a member of a tax consolidated group and members of a foreign-parented multinational groups.
Other Rules for Financial Statement Income
The notice clarifies that financial statement income (FSI) includes all items of income, expense, gain and loss reflected in the net income or loss of the taxpayer shown on the income statement. Those items must be included regardless of whether they are realized, recognized or otherwise taken into account to determine regular tax liability. For example, FSI includes income reported on the income statement included in a taxpayer’s AFS for a taxable year even if the income would not be taken into account as AFS revenue for that taxable year. Similarly, FSI includes gain or loss reported on the income statement even if gain or loss is deferred or not recognized for regular tax purposes. The IRS gives the example of gain on a like-kind exchange that qualifies for nonrecognition treatment. The deferred income would be included in FSI.
The notice also includes interim rules for:
- what is included in consolidated FSI for tax consolidated groups;
- foreign tax credits;
- determining the FSI of foreign corporations;
- adjustments for accounting method changes and tax depreciation;
- amortization of wireless spectrum;
- adjustments to prevent duplications and omissions; and
- carryovers of financial statement net operating losses
With the three IRS notices, the tight 2023 timeline and the upcoming proposed regulations, large corporations must work diligently to put their applicable financial statement calculation process in place. Consult your Frazier & Deeter tax advisor to develop your strategy.