There may be a surprise in store for some partnerships whose investors include an “applicable corporation” — particularly smaller ones.
Regulations for the corporate alternative minimum tax, proposed in September 2024, can affect a broad swath of partnerships, including smaller “mom and pop” partnerships. Under the proposed regulations from the Treasury Department, where an applicable corporation is invested in a partnership, the lower-tier partnership has the obligation to help the applicable corporation up the chain meet its actual CAMT filing requirements.
“The CAMT, at the end of the day, is intended to target a few thousand corporations who will actually be CAMT taxpayers,” said Cameron Johnson, partnerships leader with the Washington tax council practice of Top 10 Firm Baker Tilly. “These corporations are invested in joint ventures and partnerships, which could range from very large partnerships to your mom and pops of the world down the chain. They have to provide a lot of information up the chain to the ultimate taxpaying corporation. Then that corporation can just determine its distributive share of the lower-tier partnerships’ adjusted financial statement income.”
Although the CAMT is intended for a limited number of targets, there are probably hundreds of thousands of partnerships out there that will have to comply with providing all of the information, according to Johnson.
“It’s extremely detailed, complex information,” he said. “Where these partnerships historically have maintained two sets of books to comply with their federal tax filing requirements, they are now going to have to maintain effectively a third set of books for CAMT purposes. They have to dig into financial statement information and make a whole series of adjustments at the partnership level that touch on all areas of tax, ranging from international issues, cost recovery, credits and incentives — all these different adjustments that have to be made and analyzed to flow up to these corporations so that the corporation can calculate and pay whatever CAMT liability they may have.”
Johnson predicts that many partnerships will see the word “CAMT” and believe it’s not applicable to them. “But the unfortunate fact of the matter is that it is applicable, and that these partnerships will get requests from these upper-tier corporations to provide that information that ultimately has to make its way up the chain.”
“This is what we’ve been digging through to bring our local offices and our clients up to speed,” he added. “These proposed regulations are the gift that keeps on giving all year round. Every time we get into them we find more and more, and what we thought was just a few pages of data keeps ballooning. CAMT itself is really its own little tax system that incorporates topics from everywhere in the Tax Code. It takes a lot of work to get all of those to play nice with each other.”
The Treasury Department had a choice to make between a top-down and bottom-up approach to determine a partner’s distributive share. It chose the bottom-up approach, which places the onus on the partnerships at the bottom of the chain. The regs themselves are more than 600 pages, and took more than two years to develop.
Although the huge partnerships of the world will have little trouble understanding and complying with the regs, Johnson believes the administrative burden will be extremely troubling for the small partnerships to deal with.
“As of now, the proposed regulations are in the comment stage,” he said. “It would make sense for some kind of small taxpayer safe harbor or something along those lines to be considered, but as it stands now there is no real differentiation between the smallest of the small partnerships down the chain versus the massive partnerships. The huge partnerships are more equipped to deal with these types of scenarios, but even at their level it’s still a big ask to maintain all of this new data and to analyze it and run it up the chain.”
The statutory scheme is a novel concept in that the starting point is the financial statement, rather than taxable income, he observed.
“As a whole, the statutory scheme is a little vague, and it leaves a lot to Treasury to fill in the details, and that’s what the proposed regulations have done,” said Johnson. “They gave a bit of a blank slate to Treasury to fill in the gaps, which they pushed down from huge, sophisticated corporations into the presumably smaller partnerships down the chain. So it really puts a lot of the burden down the chain rather than on the corporation itself in complying with the proposed regulations.”
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