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August 17, 2022

US Inflation Reduction Act includes 15% corporate minimum tax on book income

  • The new tax will require companies to compute two separate calculations for federal income tax purposes and pay the greater of the new minimum tax or their regular tax liability.

  • To determine whether the new tax applies, companies must first ascertain whether their "average annual adjusted financial statement income" (AFSI) exceeds $1 billion for any three consecutive years preceding the tax year.

  • Affected companies must make several adjustments to AFSI when determining the new tax.

  • The Act limits general business credits and AMT foreign tax credits for creditable foreign income taxes paid or accrued by controlled foreign corporations (CFCs).

  • Comprehensive modeling can help applicable corporations consider and plan for any potential increase in their federal income tax liability.

Executive summary

On 16 August 2022, United States (US) President Joe Biden signed into law the Inflation Reduction Act (the Act). For companies that report over US$1 billion1 in profits to shareholders, the Act includes a 15% corporate alternative minimum tax (CAMT) based on book income.

The CAMT was originally introduced in the House Ways and Means Committee's Build Back Better Act (BBBA) proposal in November 2021 (House BBBA). It was then modified by the Senate Finance Committee in its December 2021 BBBA proposal (Senate BBBA). As was its purpose in both House and Senate BBBA proposals, the CAMT is primarily a revenue raiser in the Act. The CAMT will apply to tax years beginning after 31 December 2022.

Detailed discussion

15% minimum tax and applicable corporations

An appliable corporation is liable for the CAMT to the extent that its "tentative minimum tax" exceeds its regular US federal income tax liability plus its liability for the base erosion anti-abuse tax (BEAT). An applicable corporation's tentative minimum tax is a 15% minimum tax on its AFSI to the extent it exceeds the CAMT foreign tax credit for the tax year. The CAMT applies to any corporation (other than an S corporation, regulated investment company, or real estate investment trust) whose average annual AFSI exceeds $1 billion for any three consecutive tax years preceding the tax year. When determining AFSI for the $1 billion qualification test, the Act generally treats AFSI of all persons considered a single employer with a corporation under Internal Revenue Code2 Sections 52(a) or (b) as AFSI of the corporation.

For a corporation that is a member of a foreign-parented multi-national group, the three-year average annual AFSI must be (1) over $1 billion from all members of the foreign-parented multi-national group, and (2) $100 million or more of income from only the US corporation(s), a US shareholder's pro rata share of CFC AFSI, effectively connected income and certain partnership income. A foreign-parented multi-national group means two or more entities if (i) at least one entity is a domestic corporation and another is a foreign corporation, (ii) the entities are included in the same applicable financial statement, and (iii) the common parent of those entities is a foreign corporation (or the entities are treated as having a common parent that is a foreign corporation).

Three-tax-year period

The three-tax-year period means any three consecutive tax years preceding the tax year in which the tax applies (beginning with three-tax-year periods in which the third year of the period ends after 31 December 2021). For example, the three-tax-year period for a calendar-year corporation possibly subject to the CAMT for 2023 includes calendar years ending 31 December 2020, 31 December 2021 and 31 December 2022. For corporations (or a predecessor) existing less than three tax years, the Act substitutes the number of years the corporation has existed for three. Any tax year less than 12 months must be annualized.


The CAMT does not apply to corporations that have either changed ownership or fallen below the AFSI threshold for a specified number of consecutive years (to be determined by the US Department of Treasury (the Treasury)), conditioned upon the Treasury also determining that it would be inappropriate to continue subjecting the corporation to the tax. The exception no longer applies if the corporation meets the three-year average AFSI test for any tax year beginning after the year for which the determination applies.

Adjusted financial statement income

The Act adds new Section 56A, which defines "adjusted financial statement income" of a corporation (taxpayer) as the taxpayer's net income or loss reported in the taxpayer's applicable financial statement — as defined in Section 451(b)(3) — with adjustments for certain items. If a taxpayer's financial results are reported on the applicable financial statement for a group of entities, the Act treats that consolidated financial statement as the taxpayer's applicable financial statement. Special rules apply for cooperatives, Alaska native corporations and mortgage servicing companies.

Although the Act requires Treasury to issue regulations and/or other guidance as necessary on adjustments to AFSI, new Section 56A requires the following general adjustments:

  • Taxpayers must make unspecified adjustments when the applicable financial statement covers a period other than the tax year.

  • For a consolidated group, AFSI includes items from the group's applicable financial statement that are properly allocated to members of the group.

  • For a corporation not included on a consolidated return with the taxpayer (e.g., an unconsolidated subsidiary), the taxpayer includes in AFSI only dividends received from the corporation and other amounts required to be included in gross income or deductible as a loss (other than amounts included under Sections 951 and 951A).

  • For a taxpayer (i.e., a partner) in a partnership, AFSI includes only the taxpayer's distributive share of AFSI of the partnership.

  • For a US shareholder of a CFC, AFSI includes the shareholder's pro rata share of items taken into account in computing the net income or loss on the CFC's applicable financial statement, with adjustments similar to those applicable in computing the taxpayer's AFSI. Any negative adjustment for a CFC (or aggregate negative adjustment for multiple CFCs) must be carried forward to the next succeeding tax year.

  • AFSI for a foreign corporation is determined under the principles of Section 882 (regarding effectively connected income).

  • For a taxpayer with a disregarded entity, AFSI includes the disregarded entity's financial statement income to the extent it is not otherwise included on the taxpayer's applicable financial statement.

  • The taxpayer must adjust AFSI to disregard federal income taxes, or income, war profits, or excess profits taxes (within the meaning of Section 901) imposed by a foreign country or possession of the United States. No adjustment is required for income, war profits, or excess profits taxes imposed by a foreign country or possession of the United States if the taxpayer chooses not to claim foreign tax credits for the tax year.

  • AFSI is adjusted to disregard tax refunds attributable to elections made under Section 48D(d) and Section 6417.

  • For taxpayers with "covered benefit plans," AFSI is adjusted for:

    • Single employer qualified defined benefit pension plans

    • Qualified foreign plans under Section 404A

    • Other defined benefit plans providing post-employment benefits

AFSI is determined by:

  • Disregarding any income, cost or expense that is connected with the covered benefit plan and otherwise included in the taxpayer's applicable financial statement

  • Increasing AFSI for any income that is connected with the covered benefit plan and included in gross income under federal income tax principles

  • Decreasing AFSI for any deductions that are connected with the covered benefit plan and allowed under federal income tax principles

  • A tax-exempt entity's AFSI includes only the AFSI of its unrelated trade or business, or AFSI from debt-financed property to the extent that income qualifies as unrelated business taxable income.

  • AFSI is reduced by (i) tax depreciation deductions allowed under Section 168 and (ii) tax amortization deductions allowed under Section 197 only for qualified wireless spectrum.

  • Qualified wireless spectrum is defined as wireless spectrum that is used in the trade or business of a wireless telecommunications carrier, and was acquired after 31 December 2007 and before the date of enactment.

  • AFSI does not include book depreciation and amortization (so the reduction to AFSI equals the tax depreciation and amortization noted previously).

Note: The adjustments for defined benefit pensions and partnership distributive shares apply only to a corporation that is subject to the CAMT and determining its AFSI to compute the CAMT amount. In contrast, when applying the AFSI three-tax-year qualification test, AFSI is determined without regard to these adjustments (i.e., AFSI is based on defined benefit pension amounts included in book income and partnership income that must be aggregated under Section 52).

Deduction for financial statement net operating loss

The Act allows taxpayers to deduct financial statement net operating losses (NOLs) from AFSI. The deduction equals the lesser of:

  • The aggregate amount of financial statement NOL carryovers to the tax year
  • 80% of AFSI "computed without regard to the deduction allowable under" new Section 56A(d)

"Financial statement net operating loss" means the net loss on the corporation's applicable financial statement for tax years ending after December 31, 2019. The Act contemplates a taxpayer may carry forward a financial statement NOL indefinitely.

CAMT foreign tax credit

The CAMT foreign tax credit may reduce the CAMT (if the taxpayer chooses to credit foreign taxes for regular US federal income tax purposes). The CAMT foreign tax credit equals the sum of:

  • The taxpayer's pro rata share of applicable foreign taxes paid or accrued by CFCs (for which the taxpayer is a US Shareholder) and included in the CFCs' applicable financial statements (or, if less, 15% of the amount determined under Section 56A(c)(3))
  • The applicable foreign taxes paid or accrued by the taxpayer and taken into account in the taxpayer's applicable financial statement

In other words, creditable foreign income taxes paid or accrued by CFCs are limited to 15% of the taxpayer's pro rata share of its CFCs' income; creditable foreign income taxes paid or accrued by domestic corporations are not.

Taxpayers whose pro rata share of creditable foreign income taxes paid or accrued by CFCs exceeds 15% of their pro rata share of the CFCs' income may carry the excess forward for five years.

General business credits

The Act limits general business credits to 75% of the taxpayer's net income tax that exceeds $25,000 (with no limit against the first $25,000). Net income tax is the sum of the taxpayer's regular US federal income tax liability (including BEAT under Section 59A) and the tax imposed by Section 55 (including the CAMT).

Credit for prior-year minimum tax liability

The Act adjusts the rules in Section 53 to provide a minimum tax credit for applicable corporations. Under modified Section 53, the net minimum tax (i.e., the tax imposed by Section 55) for all prior tax years beginning after 2022 can generally be carried forward and utilized as a credit against the taxpayer's regular tax liability, including any BEAT liability.

Treasury to issue regulations

The Act directs Treasury to issue regulations and other guidance for the purpose of carrying out various provisions, including:

  • Section 59(k) (defining applicable corporation), including guidance on a simplified method for determining whether a corporation is an applicable corporation and guidance clarifying the rules for a corporation that experiences a change in ownership
  • Section 56A(c) (determining AFSI) to provide additional required adjustments
  • Section 59(l) (regarding the corporate AMT foreign tax credit)

Senate colloquies3

On 6 August 2022, several US senators engaged in colloquies with Senator Wyden, the Chairman of the Senate Finance Committee, on the Senate floor to formally discuss several aspects of the CAMT. In a colloquy with Senator Menendez, Senator Wyden confirmed that regulations addressing potential issues with foreign income taxes in nonconforming foreign tax years would be in line with the legislative text and the Senate's intent for companies to be able to appropriately utilize foreign tax credits in the CAMT. In a colloquy with Senator Cardin, Senator Wyden clarified that, the Treasury may issue regulations under the CAMT to address potential issues with the ordering of the calculation of the credit under Section 53 and BEAT under Section 59A. In another colloquy with Senator Cardin, Senator Wyden clarified that "other comprehensive income" is not included in financial statement income for CAMT purposes.


The ACT will require applicable corporations to compute two separate calculations for federal income tax purposes and pay the greater of the CAMT or their regular tax liability (regular tax liability plus BEAT liability). Companies should assess their structures to identify applicable corporations, taking into account the special rules for common employer groups and foreign-parented multi-national groups. Comprehensive modeling can help applicable corporations consider and plan for any potential increase in their federal income tax liability. Modeling is especially critical post-TCJA given the many complicated and interrelated foreign and domestic tax provisions that can affect a corporation's tax liability, including the CAMT, BEAT,163(j), FDII, GILTI and BEPS Pillar 2.

Treasury will be instructed to issue guidance to resolve issues not addressed in the Act's text (e.g., preventing the duplication or omission of income or loss when applying the AFSI qualification test or determining AFSI for computing the CAMT, etc.). Pending guidance, companies will have to take positions and file returns based solely on the statute as enacted.


For additional information with respect to this Alert, please contact the following:

Ernst & Young LLP (United States), National Tax – Accounting Periods, Methods, and Credits

Ernst & Young LLP (United States), International Tax and Transaction Services



  1. Currency references in this Alert are to the US$.

  2. All “Section” references are to the Internal Revenue Code of 1986, and the regulations promulgated thereunder.

  3. Generally, a colloquy is a formal scripted conversation between members of Congress that can become part of the congressional record. Colloquies can be used for various purposes, including to draw attention to or clarify the intent of a particular issue or provision in a bill. The impact of a colloquy on federal agencies, including the Treasury, and their power to make policy decisions is not always clear.


The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting or tax advice or opinion provided by Ernst & Young LLP to the reader. The reader also is cautioned that this material may not be applicable to, or suitable for, the reader's specific circumstances or needs, and may require consideration of non-tax and other tax factors if any action is to be contemplated. The reader should contact his or her Ernst & Young LLP or other tax professional prior to taking any action based upon this information. Ernst & Young LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.


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