The Corporate Minimum Tax: How to Get Ready

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The Corporate Minimum Tax: How to Get Ready

A corporate alternative minimum tax (CAMT) will be imposed on selected firms with annual adjusted book income of more than $1 billion averaged over a three-year period…

The Inflation Reduction Act, which President Biden signed into law on August 16, 2022, comprises a number of measures designed to help climate and healthcare programs. The new law includes several tax methods to help support these programs.

Notably, those firms reporting annual adjusted book income of more than $1 billion averaged over three years will be subject to the corporate alternative minimum tax (CAMT). By December 31, 2022, these corporations will be required to pay the greater of 15% of their adjusted financial statement income or their base erosion anti-abuse tax plus their ordinary U.S. federal income tax.

In addition, “covered corporations” are subject to a 1% excise tax on the fair market value of equities they repurchased from shareholders within a particular tax year. Any domestic company with stock traded on a recognized securities market is considered a covered corporation. The excise tax does not apply to buybacks that are considered dividends, contributed to a retirement fund, total less than $1 million, or are conducted by regulated investment businesses or real estate investment trusts.

These and other significant changes to the corporate tax structure in the United States brought about by the Inflation Reduction Act would necessitate intensive planning and modeling by firms in order to fully comprehend their implications.

How can firms become ready?

Corporations in the CAMT group should not wait for additional advice before calculating their adjusted financial statement income tax exposure. The first step should be to take a step back and evaluate your corporation’s tax business strategy in its entirety. Corporations should begin by attempting to answer issues such as: How will the Act’s provisions influence our business based on our current strategy and structure? What is our current effective tax rate, and what will it be in the future?

To really understand how the CAMT will affect your firm, you must model for numerous situations, such as double taxation, taking advantage of new tax credits and incentives, and executing buybacks versus paying dividends. Organizations should have already begun these modeling activities to allow enough time to develop any modifications required to maximize your prospective tax exposure.

This exercise assists businesses in identifying areas of concern where extra guidance may be required. Gathering secondary and tertiary perspectives from numerous service providers can help organizations effectively map out every iteration or situation.

Service providers’ Roles

Navigating the alternative minimum tax may appear different to different firms depending on their overall corporate strategy. A service provider’s role is to ask probing questions that disclose an organization’s current financial status, to pinpoint its ultimate aim or vision, and to efficiently advise.

Service providers will discover that corporations are at varying stages of preparation; some may have already prepared their books for the lowest possible tax liability, while others may be seeking help on how to successfully model their company strategy. To deliver superior advice to a firm, service providers must have a solid awareness of their client’s future business and operational aspirations in order to successfully map out the path to get there.

The Inflation Reduction Act introduces several new concepts, each of which will have a different impact on organizations. By soliciting feedback from multiple service providers, your company will be better equipped to model out each iteration.

The tax laws are very complex. Our short blog articles cannot cover in full all the nuances of the rules. Your specific facts may hold various opportunities and possible risks that only trained, experienced, and highly qualified tax specialists can spot. We encourage you to find such help, rather than trying to figure it all out on your own. Consider giving this marketplace a try by posting your project and signing up here.

If you are a licensed tax professional interested in helping others either part or full-time, or ad hoc, come on in! Happy to have you. Our marketplace has the full suite of tools to communicate with clients including compliance calendars, task and message management, and billing. You can also quickly connect to knowledgeable colleagues who can complement your services with the ones you do not provide. Register here.

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