Inflation Reduction Act: The Proposed New Corporate Minimum Tax

TAX ALERT | July 29, 2022. Authored by RSM US LLP

Executive summary

Sen. Joe Manchin III, D-W.Va. and Majority Leader Charles E. Schumer, D-N.Y. have agreed to a new bill, the Inflation Reduction Act of 2022 (Inflation Reduction Act)1.  In part, the Inflation Reduction Act would enact a new corporate minimum tax of 15% (the New AMT) for large corporations associated with consistently high financial statement income. In general, the rule would apply to corporations that have an average financial statement income greater than $1 billion. However, corporations with a foreign parent that have at least $100 million could be subject to the New AMT in certain cases. The New AMT’s reliance on financial statement income is novel and would likely present enforcement issues for the IRS and compliance challenges for taxpayers. If passed into law, the New AMT would become effective for taxable years beginning after Dec. 31, 2022.

While the $1 billion threshold will exclude most of the middle market, the lower threshold generally applies to companies that are a part of a foreign-owned group. In addition, special attention should be given to commonly controlled companies, prevalent in the private equity space, which would aggregate the income of those companies in measuring whether the threshold is met. Perhaps more concerning to the middle market is the ease with which these rules could become applicable by a further lowering of the income threshold if the current provisions do not create the projected revenue or additional revenue is sought. Further, it is likely that the first time-ever focus on financial statement income would create complexity in any regulations promulgated.


Prior to the Tax Cuts and Jobs Act of 2017, certain corporations were required to calculate an alternative minimum tax (AMT) by comparing regular corporate income tax to AMT and pay the greater amount (Old AMT). In calculating Old AMT, a corporation would first determine its alternative minimum taxable income (AMTI), which was generally taxable income with various adjustments.

Unlike the Old AMT, the New AMT is based on a modified financial statement income similar to book income.   Specifically, the New AMT is calculated as the excess of the tentative minimum tax over the regular tax plus the BEAT  liability for the taxable year. The tentative minimum tax would be 15% of the adjusted financial statement income (AFSI), and it may be offset by AMT foreign tax credits based on taxes paid to foreign countries and included in the Applicable Financial Statement (as defined below).

Applicable corporations

The New AMT would apply only to an “Applicable Corporation,” which is generally defined as a corporation that falls within the average annual adjusted financial statement income (AAAFSI) test for one or more prior taxable years that end after Dec. 31, 2021. This test is met if the AAAFSI for three consecutive tax years (shorter in some circumstances), respectively, is greater than $1 billion. The term Applicable Corporation also may include a Foreign Parented Corporation (defined below) that, for three consecutive tax years (shorter in some circumstances) has an AAAFSI of at least $100 million.  In determining its status as an Applicable Corporation, a corporation must aggregate the AFSI of certain related persons that are under common control or part of a controlled group of corporations under section 52(a) or (b).  For instance, a portfolio company of a private equity (PE) fund may need to include the AFSI of other portfolio companies that are owned by the same fund in determining whether it is an Applicable Corporation. Thus, while the New AMT would generally apply to larger, highly profitable corporations, other corporations might be brought within its scope due to the related party rules incorporated into the Applicable Corporation determination.

Notably, S Corporations, RICs and REITs are not Applicable Corporations. Further, a corporation that has a “change in ownership” or that has a set number of consecutive taxable years (to be determined by the Secretary) in which it does not meet the AAAFSI test may be excepted from the definition an Applicable Corporation.  In addition, the Secretary may make a determination that it is not appropriate to continue to treat the corporation as an Applicable Corporation.

International financial reporting groups

Generally, any corporation that is a member of an International Financial Reporting Group (defined below) with a foreign corporation common parent (Foreign Parented Corporation) will have to include the AFSI of all foreign members of the group in applying the $1 billion threshold. The separate $100 million threshold discussed above for Foreign Parented Corporations does not consider the ASFI of the International Financial Reporting Group. The term “International Financial Reporting Group” means two or more entities where at least one entity is a foreign corporation engaged in a trade or business within the United States, or at least one entity is a domestic corporation and another entity is a foreign corporation, and entities are included in the same applicable financial statement.

Average annual adjusted financial statement income

The AAAFSI is what is used to determine whether the New AMT will be applicable to a corporation. Generally, the term adjusted financial statement income (i.e., AFSI) means the net income or loss of the taxpayer on the taxpayer’s Applicable Financial Statement (defined below) for the taxable year, with certain adjustments. The term Applicable Financial Statement is defined with reference to section 451(b)(3) and includes, for example, financial statements that are prepared in accordance with generally accepted accounting principles (GAAP).

To determine AFSI, the net income or loss as reported on the Applicable Financial Statement is adjusted for various items relating to, but not limited to controlled foreign corporations (CFC), disregarded entities (DRE), cooperatives and taxes. A corporate partner would also include its allocable share of income or loss from the partnership in computing its AFSI. Similar to the section 172(a)(2)(B) rule for net operating losses (NOL), AFSI is reduced by the lesser of (a) the aggregate amount of financial statement NOL carryovers to the taxable year, or (b) 80% of AFSI, computed without regard to any deduction of financial statement NOLs. Additionally, the Secretary would be expected to issue regulations and guidance that would provide additional adjustments not currently listed in the proposed statute.


If enacted, the New AMT would impose a new minimum tax regime on larger corporate taxpayers, though aggregation rules could rope in more middle market taxpayers. Like the Old AMT, the New AMT would be imposed on the excess of a tentative minimum tax over regular tax (and now, BEAT liability) for the taxable year.  Under the New AMT, however, the tentative minimum tax would be based upon a corporate taxpayer’s financial statement income rather than a modified taxable income amount. Due to the differing rules for tax compliance and financial reporting, compliance challenges for taxpayers and enforcement issues for the IRS should be anticipated both in computing the tax and ascertaining whether a corporation has met the income thresholds that would make it subject to the New AMT.

Bear in mind that the proposal described above is subject to change due to political dynamics.

1The Inflation Reduction Act is being proposed through the reconciliation process.  Refer to  H.R. 5376, which was released on July 27, 2022.

2For the text of the proposed New AMT, Refer to Section 10001 of H.R. 5376.

3Base erosion and anti-abuse tax.

4Discussed below, the broader group of the Foreign Parented Corporation also would need to meet the $1 billion test in order to for it to be treated as an Applicable Corporation.

5This includes all persons treated as a single employer under section 52(a) and (b).

6Interestingly, a “change of ownership” is not defined in the text of the proposed legislation.

7This definition reflects what would have been new section 163(n)(3), as proposed in the “Build Back Better Act.”

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This article was written by Eric Brauer, Mark Schneider, Nate Meyers, Nick Gruidl and originally appeared on 2022-07-29.
2022 RSM US LLP. All rights reserved.

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