When A Billion Really Isn’t A Billion

The moment it was signed into law, the Inflation Reduction Act sent big company corporate tax and finance departments into overtime calculating the effects it would have on their bottom lines. One group in particular is still hunting for answers: those whose companies may have touched the $1 billion mark once but won’t likely do it again anytime soon.

The Inflation Reduction Act generally requires companies that annually report over $1 billion in book income, averaged over a three-year period, to pay a 15 percent minimum tax rate on that income, called the corporate alternative minimum tax (CAMT). Some firms may already be meeting that requirement, but corporations that have certain credits or deductions that lower their tax rate below 15 percent of their book income may be subject to additional tax liability to make up the difference.

The CAMT starts with adjusted financial statement income. Financial statement net operating losses can be carried forward and reduce financial statement income for purposes of the tax. Additionally, minimum tax liability can be reduced by general business credits, and companies can use accelerated depreciation (under the Internal Revenue Code) in calculating financial statement income for the minimum tax.

One-Time Windfall, Lifetime Tax?

On the surface, the CAMT seems straightforward, but these requirements are stoking concern among a specific group of companies. Some firms that have one-time activities that count toward their book income, such as the sale of a business unit, are concerned that those transactions will push them over the threshold for the tax even though these companies wouldn’t otherwise be subject to the CAMT.

Take, for example, electric and natural gas utility CenterPoint. According to the Wall Street Journal, the utility sold two businesses during the three-year period from 2020 through 2022, which falls squarely within the three-year period that will be used to determine the applicability of the minimum tax. These sales produced substantial book and tax gains—on which CenterPoint paid regular corporate income tax— and those gains would also likely subject the company to the minimum tax. The IRS has released guidance providing relief for corporations that have realized gains in transactions in which no gain or loss is recognized for tax purpose but has not provided relief for corporations that have extraordinary gains in recognition transactions.

The company has argued in a comment letter to U.S. regulators that this is indicative that the three-year test is not a fair gauge of whether a firm should be subject to the CAMT. Some trade groups have suggested that companies should be able to lop a year off their three-year snapshot to account for these types of abnormalities. But thus far, the government hasn’t indicated a willingness to provide a carve out for these instances.

Companies Lack Clarity

While the IRS did issue guidance in September clarifying many aspects of the new rules with regard to certain common M&A transactions, it hasn’t addressed the phenomenon that occurs when companies that wouldn’t otherwise meet the $1 billion threshold trigger the tax due to a one-time transaction. Currently, the best interpretation offered by one Big Four consultant on a recent webinar was: “These rules can be thought of as heads, you win, tails I lose.” Which is to say, that parties on both sides of the transaction will be have a CAMT liability.

With the massive commitment ($700 billion) the U.S. government made in the Inflation Reduction Act, companies can rest assured that compliance with this law will be a priority, as the CAMT is the main revenue driver to offset some of the healthcare and climate expenditures in the law. Whether a firm is consistently hitting the billion-dollar mark on their book income, or they’re simply pushed over that limit by a one-time acquisition, the IRS is going to expect corporations to comply. And failure to comply will result in the imposition of interest and penalties.

For corporate tax and finance departments, until the government provides further insight on any concessions they are making for a one-time event, vigilance will have to act as the ultimate safeguard. Firms will have to be prepared to pay that tax, whether they think it should apply to them or not, until they have guidance otherwise. Failure to do so will not just result in large financial liabilities, but – should a company get labeled as a corporate tax dodger – a PR nightmare that could pale in comparison to whatever the financial liabilities would be.