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Companies Seek Guidance on Corporate Minimum Tax Due to Extraordinary Transactions

S.J. Steinhardt
Published Date:
Mar 31, 2023


Some business leaders and companies are concerned that certain one-time business transactions would make them liable to pay the corporate alternative minimum tax that went into effect at the beginning of this year, The Wall Street Journal reported.

The corporate minimum tax, created by the Inflation Reduction Act of 2022, is a 15 percent minimum tax imposed on the adjusted financial statement income of large corporations for taxable years beginning in 2023. Taxpayers generally affected by the corporate minimum tax are corporations, including insurance companies, with an average annual adjusted financial statement income exceeding $1 billion.

The problem for some companies is that so-called extraordinary items—such as those in which business segments are sold off—could push average profits over the $1 billion mark, even though the ongoing businesses do not generate income above that threshold.

Companies above the $1 billion mark can petition for relief from the minimum tax, Rohit Kumar, co-leader of the national tax office at PwC, told the Journal. But, he said, “[t]here is sort of a ‘Hotel California’ aspect to this, that once you’re an applicable corporation, you’re forever an applicable corporation.”

The Treasury Department and the IRS issued interim guidance last month to determine the adjusted financial statement income as it relates to variable contracts and similar contracts, funds withheld reinsurance and modified coinsurance agreements, and the basis of certain assets held by certain previously tax-exempt entities that received a "fresh start" basis adjustment.

Some audit firms and others have submitted comments to the government, requesting clarification of how extraordinary events will affect the applicability of the tax, The Journal reported. 

Two companies, CenterPoint Energy and American Water Works, are asking the government to exclude extraordinary events such as nonrecurring, one-time sales of businesses when determining whether companies are subject to the minimum tax.

CenterPoint sold two businesses during the three-year period used to determine the applicability of the minimum tax, from 2020 through 2022, which produced substantial book and tax gains on which CenterPoint paid regular corporate income tax, but would likely subject the company to the minimum tax, it said in a March 15 comment. American Water Works sold equity interests of certain subsidiaries in December 2021 for a total of around $1.275 billion, which amounted to a pretax gain of $748 million, an “aberration” that significantly increased the company’s pretax book income for that year and could “unfairly” subject it to the minimum tax, Melissa Ciullo, the company’s vice president of tax, said in a March 16 note requesting guidance on the applicability of the tax.

In a March 20 comment, the Business Roundtable, the group of leaders from some of America’s largest companies, suggested that the government could allow a company to cut one year off the three-year average to account for atypical income spikes. In other words, two years would be used to determine whether the threshold is met.

Some companies argue that an extraordinary event is not a good proxy for the size of the company and should not be included in calculating whether a company meets the threshold,  Mark Hoffenberg, a principal in the Washington National Tax practice at KPMG, told the Journal.

“Informally, we’ve heard from government officials; they say, ‘Well yea, we understand there can be extraordinary events, but that’s why we have a three-year averaging rule,’” he said.

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