Determining AFS for Corporate AMT Calculation

The Inflation Reduction Act of 2022 imposes a new 15% corporate alternative minimum tax (CAMT) effective for tax years starting after December 31, 2022. The IRS has released several notices, including Notice 2024-10, published on December 15, 2023, clarifying guidance on topics relevant to the CAMT, including how to determine the applicable financial statements (AFS) for members of a tax consolidated group subject to the CAMT.

The CAMT is based on a corporation’s adjusted financial statement income (AFSI), which is the net income or loss calculated on the corporation’s AFS. Notice 2024-10 modifies guidance for determining the AFS for tax consolidated groups previously published in Notice 2023-64. Typically, the AFS is the corporation’s financial statement with the highest priority according to the following hierarchy in descending order of U.S. generally accepted accounting principles (GAAP) statements, international financial reporting standards (IFRS) statements, other governmental and regulatory statements, unaudited external statements, and a taxpayer’s federal income tax return or information return filed with the IRS. Notice 2023-64 instructs corporations with results reported on consolidated financial statements to use the consolidated financial statements as their AFS unless the corporation has a separate financial statement of equal or higher priority to the consolidated one, in which case the separate financial statement is the AFS.

Notice 2023-64 lists exceptions to a corporation in a tax-consolidated group using a separate financial statement over a consolidated one. Notice 2024-10 addresses one of these exceptions, which states if the consolidated financial statement includes the results for all members of a tax consolidated group, the corporation must use the consolidated statement as the AFS even if the separate financial statement is of equal or higher priority. The IRS explains it developed this exception under the premise that the consolidated financial statement for all members would not be a federal tax return. However, since releasing this guidance, the agency has learned of situations where not all members of a group are included in a consolidated statement that is not a federal income tax return. This situation could allow groups to use their federal income tax return as their AFS since no consolidated financial statement of equal or higher priority includes all group members. The IRS explains this was not the intention of the exception and provides clarifying guidance in Notice 2024-10 to avoid this outcome for corporations that otherwise have consolidated financial statements of higher priority than the federal income tax return.

Accordingly, members of tax consolidated groups should follow the modified guidance outlined in Notice 2024-10 for exceptions to the use of a separate AFS:

1. A corporation in a consolidated group has one consolidated AFS that includes the financial results of all members: the AFS is the consolidated financial statement regardless of whether the corporation has a separate financial statement of equal or higher priority or another consolidated financial statement that reports the results of some, but not all, members.
2. A corporation has more than one consolidated AFS with results for all members of the group: the consolidated financial statement with the highest priority should be used as the AFS regardless of whether the corporation has a separate AFS of equal or higher priority or another consolidated financial statement that reports the results of some, but not all, members.
3. A corporation has only one consolidated AFS that reports its results, but not the results of all members: the corporation should use the consolidated AFS regardless of whether it has a separate financial statement of equal or higher priority.
4. A corporation has more than one consolidated AFS that contains its results, but not the results of all members of the group: the corporation should use the consolidated AFS that has its results and the results of the most members with the highest priority regardless of whether the corporation has a separate financial statement of equal or higher priority or another consolidated financial statement that has the results of fewer members but is of higher priority.
5. A corporation is a member of a foreign-parented multinational group (FPMG): if the FPMG common parent prepares a consolidated AFS with the corporation’s results, it should use it as its AFS regardless of whether the corporation has a separate financial statement of equal or higher priority.

Additionally, if, after applying the above guidelines, the tax consolidated group finds that each member’s AFS is not the same as the consolidated AFS, the group should combine the results of the different AFSs to form one consolidated AFS with each member’s financial results only used once and any applicable AFS consolidation entries made.

The modifications made in Notice 2024-10 aim to prevent certain tax consolidated groups from using their consolidated federal income tax return as their AFS. Practitioners should consider how the updated guidance in this notice changes the AFS they may have previously identified for any clients.

Sources

• Additional Interim Guidance Regarding the Application of the Corporate Alternative
  Minimum Tax under Sections 55, 56A, and 59 of the Internal Revenue Code (irs.gov)
• IRS releases CAMT guidance for certain CFC distributions and additional rules for determining an AFS (pwc.com)