Overview
Background
The Corporate Alternative Minimum Tax (CAMT) was passed as part of the Inflation Reduction Act of 2022, and is a 15% tax on certain corporations. The intent was to address situations where very large corporations report significant book income, but little taxable income. Therefore, the CAMT is based off of this book income, the "annual adjusted financial statement income," a new term created by the statute.
The first element to determine the impact of the CAMT is whether an entity is an "applicable corporation." The general rule is that a corporation is an applicable corporation if the average annual adjusted financial statement income of the corporation and other members of its controlled group is over $1 billion for a three-year period.
Exempt Organizations
Although many would assume that exempt organizations would be outside of this regime entirely, the statute does not provide a blanket exclusion. Rather, for exempt organizations subject to tax under section 511, adjusted financial statement income takes into account the income of an unrelated trade or business (as defined in section 513) or unrelated business taxable income derived from debt financed property (as defined in section 514).
The effect of this definition is that organizations that have more than $1 billion of unrelated business income could be subject to the tax. It is fair to say that no exempt organization has more than $1 billion of unrelated business taxable income, however, the definitions and citations in the statute are unclear as to whether all investment income would be considered unrelated business income under the CAMT. Therefore, organizations that have more than $1 billion in investment income, such as colleges, universities, or foundations with large endowment income, could be subject to the tax.
Clarification Possible
The main clarification that would ensure that all investment income is not considered unrelated business income and thus excluded from adjusted financial statement income is the application of section 512(b).
The unrelated business income statutory structure defines an unrelated trade or business in section 513 broadly as any trade or business the conduct of which is not substantially related to the exercise or performance of the organization's exempt purpose. Section 512(b) modifies this definition for the determination of unrelated business taxable income by essentially removing almost all passive income, such as dividends, interest, rents, royalties, and recognized capital gains and losses. Section 514 then adds back in the passive income from debt-financed property. The concern for exempt organizations is that the CAMT statute does not mention section 512 and its modifications. The ABA tax section comment letter to Treasury about the CAMT argues that 512 must apply or else the provision regarding debt financed income would be irrelevant i.e. there would be no need to include debt financed income specifically if all investment income was already included. However, the lack of clarity is difficult. In addition, the potential impact of mark-to-market accounting for investments also creates uncertainty.
Next Steps
At this point Treasury and IRS are working on proposed regulations that may include guidance for exempt organizations. Organizations that could be affected can provide additional comments before guidance is released or wait to provide comments once the proposed regulations are issued.