Corporate Alternative Minimum Tax

The Build Back Better Act resurrects the corporate alternative minimum tax (AMT) which was eliminated by the Tax Cuts and Jobs Act, although it returns in a slightly altered form. Proposed to be effective for tax years beginning after 2022, the new corporate AMT would equal 15 percent of the corporation’s adjusted financial statement income for the tax year, reduced by a corporate AMT foreign tax credit. The tax would only apply to corporations with average annual adjusted financial statement income in excess of $1 billion for the three prior tax years.

A corporation’s adjusted financial statement income is the amount of net income or loss the corporation reports on its applicable financial statement, for purposes of determining when to include income for tax purposes.

Business Interest Expense

The bill proposes a limitation on the net interest expense that is allowed as a deduction by a specified domestic corporation. A specified domestic corporation is a domestic corporation that is part of a multinational group that prepares consolidated financial statements and has average interest expense of $12 million annually over the prior three years. The deduction for such a corporation’s net interest expense (or the excess of interest expense over interest income) is limited to 110 percent of the group’s net interest expense. The limitation would apply to tax years beginning after 2022.

FDII Deductions

Under current law, a domestic corporation receives a deduction of 37.5% of its foreign-derived intangible income (FDII) and a 50% deduction for its global intangible low-taxed income. These are scheduled to be reduced to 21.875% and 37.5%, respectively, for tax years beginning after 2025. Under the bill, these reductions would be accelerated to apply to tax years beginning after 2021, and reduced instead to 24.8% and 28.5%, respectively.

Compliance and IRS Enforcement

A significant strategy in coming up with ways to pay for a large legislative package is by improving IRS service to close the so-called tax gap. The tax gap is the difference between what should be collected by the IRS and what is actually collected by the IRS. In many cases, the lack of resources by the IRS to enforce the nation’s tax laws can be leveraged by taxpayers to lower their tax bills, and it is believed that a small investment in IRS resources can lead to an outsized increase in revenue.

The bill looks to close the tax gap by allocating an increased amount to the IRS to improve enforcement. The bill also would apply backup withholding rules to third party settlements. Finally, the bill proposes to allow the IRS more freedom in assessing certain penalties.

Source:  CCH Tax Briefings 11/19/21