On August 16, 2022, President Biden signed into law the Cutting Inflation Act of 2022 (the Act), a sweeping bill with significant tax, energy, and health implications.1 This alert covers two key aspects of the Corporations Tax Act:
the new 15% alternative minimum corporate tax, and
the new 1% excise tax on the redemption of shares.
In particular, the Act does not increase the regular tax rates for individuals or corporations. It also does not address the state and municipal $10,000 tax deduction limit. The law also does not change the taxation of “deferred interest” (as was proposed in an earlier version of the bill). It does, however, increase IRS enforcement funding by $80 billion over the next 10 years.
Alternative Minimum Corporate Tax
Effective for tax years beginning after December 31, 2022, the law imposes an alternative minimum tax (AMT) of 15% on “adjusted financial statement income” (basically, accounting income subject to certain adjustments ) of an “Applicable Company”.
An applicable corporation is generally any corporation — but not an S corporation, real estate investment trust, or regulated investment company — whose average annual adjusted financial statement (or AFSI) revenue exceeds $1 billion for three consecutive years ( without taking into account the net operating losses of the financial statements) . For the purposes of determining whether a company is an applicable company, the ISFA of all companies in a controlled group (usually determined using a 50% threshold) is taken into account.2 Once a company has met this $1 billion minimum average accounting income test, the company continues to be treated as an applicable company, even if its AFSI falls below the $1 billion threshold, at unless the Treasury specifically decides otherwise.
To calculate the AFSI, the relevant company starts with its net income or net loss on its “applicable financial statement” (or AFS).3 For a national company, its AFS will often be its accounting financial statements (or more accurately, GAAP) filed with the Security and Exchange Commission. The AFSI is then adjusted to, among other things, use accelerated tax depreciation (instead of accounting depreciation which may not have been taken into account in the accounting result).
In addition, the AFSI is reduced by net operating loss carryforwards after 2019 (and only after 2019), subject to a cap of 80% of the company’s AFSI for the applicable year ( similar to the 80% limit on the use of operating losses for ordinary corporate income tax purposes).
Once the AFSI has been calculated, an applicable company determines its “provisional minimum tax”, which is 15% of the AFSI for the tax year. less the corporation’s “foreign corporate AMT tax credit” for the tax year.4
If the company’s applicable “provisional minimum tax” is greater than its regular corporate income tax (plus its “Base erosion and anti-abuse tax” or BEAT, liability), the company pays that excess (reduced by any general corporate credit) as a corporate AMT. Conversely, if the applicable company’s “provisional minimum tax” is less than its normal income tax (plus its BEAT tax), no corporate AMT is generally due.
Significantly, the new corporate AMT does not comply with the so-called “Pillar II” minimum taxation rules set out by the Organization for Economic Cooperation and Development. Therefore, if Pillar II is finally adopted, a company may be subject to this additional Pillar II tax regime (in addition to this new company AMT).
Excise tax on redemption of shares
Effective for “repurchases” of shares by a “covered company” after December 31, 2022, the law imposes a non-deductible annual excise tax (on the repurchasing company, not the redeemed shareholder) equal to 1% of the total fair market value of the shares redeemed. inventory for the tax year less the aggregate fair market value of all shares issued by the company during that tax year (including in connection with capital increases or compensation stock awards).
A “covered company” is generally any domestic company – excluding S corporations, REITs and regulated investment companies – whose stock is traded on an established stock market (such as the NYSE or NASDAQ) .5 Private companies are generally excluded. However, even where the target company does not redeem the shares directly, the company may still be subject to excise tax if a “specified affiliate” (generally any affiliate controlled by the target company, determined with a vote of 50 % or a value threshold) redeems the shares of the company.
The scope of “buybacks” under the law is wide, covering not only traditional share buybacks or repurchases by a corporation, but also any transaction that the Treasury determines to be “economically similar” to a corporate share buyback. a society.
In particular, “buyouts” may include cash consideration in certain traditional taxable stock acquisitions or taxable merger transactions to the extent that they are financed by the target company (for example, from the target company’s balance sheet or by as new debt issued or assumed by the target company in connection with the transaction).
Cash payments to dissenting shareholders, cash paid in lieu of fractional shares, certain corporate liquidations, special purpose acquisition company (SPAC) shareholder buyouts in a “deSPAC” transaction, spin-offs and even Boot payment (usually cash or non-stock property) as part of a tax-deferred reorganization can be taken under this new regime. In addition, the law applies to redemptions of preferred (not just common) stock by a target company, even if, for example, that redeemed preferred stock is compulsorily redeemable under its existing pre-law terms.6 As one can imagine, future guidance from the Treasury on these types of issues will certainly be welcome.
Fortunately, the law provides for certain exceptions, including for share buybacks to the extent that (a) the buybacks are part of a tax-deferred reorganization (other than potentially boot), (b) the redeemed shares are paid to an employer-sponsored corporation pension plan, employee stock purchase plan, or similar plan, (c) the aggregate value of redemptions for the taxation year does not exceed $1 million, (d) the redemptions are made by dealers in the ordinary course, or (e) the redemptions are treated as dividends for US federal income tax purposes.
Niya Tang and Amy Tranckino also contributed to this article.
1 Future alerts from Sheppard Mullin could focus on the law’s other health, climate and energy tax incentives.
2 A similar aggregation rule applies to all trades or businesses (whether or not incorporated) under common control. Although the final version of the law has been revised to avoid or minimize the application of AFSI aggregation rules to portfolio companies owned by private equity funds, some uncertainty may remain, less until further guidance is provided.
3 Special rules apply in the context of consolidated groups, unconsolidated partnerships and interests, foreign subsidiaries and “ignored entities”.
4 A domestic corporation’s “foreign corporate AMT tax credit” is generally the corporation’s proportionate share of foreign taxes paid or accrued by any “controlled foreign corporation” (or CFC) of that corporation, in the extent to which such foreign taxes are reported on such CFC’s AFS (capped using a 15% rate to reflect the company’s AMT rate), more the company’s foreign tax credits (as reported on the company’s AFS).
5 Excise tax may also be imposed on share redemptions by certain foreign companies (including certain expatriate listed companies).
6 The Act expressly grants the Treasury the power to enact regulations governing the application of excise tax to preferred shares. Excise tax may also be imposed on share redemptions by certain foreign companies (including certain expatriate listed companies).
Copyright © 2022, Sheppard Mullin Richter & Hampton LLP.National Law Review, Volume XII, Number 234