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New Corporate Minimum Tax Could Ensnare Some Firms Over One-Time Moves

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A new corporate minimum tax is stoking concern among some companies that one-time activities, such as the sale of a business unit, will push them over the threshold for the levy even though the companies wouldn’t otherwise qualify. 

The 15% corporate minimum tax that went into effect at the beginning of this year applies to U.S.-based companies that report income to shareholders averaging at least $1 billion over three years. What’s more, once a company is subject to the levy, it remains that way even if profits decline unless certain conditions are met, such as a determination from the government that a company shouldn’t be subject to the minimum tax. 

Some business leaders and companies, such as

CenterPoint Energy Inc.

and

American Water Works Co.

, are raising the particular problem of so-called extraordinary items in which business segments were sold off and those transactions pushed average profits over the $1 billion mark even though the ongoing businesses aren’t above the threshold.

Companies above the $1 billion mark can petition for relief from the minimum tax, said

Rohit Kumar,

co-leader of the national tax office at accounting firm PricewaterhouseCoopers LLP, but what that process will look like, for now, remains an uncertainty. “There is sort of a ‘Hotel California’ aspect to this, that once you’re an applicable corporation, you’re forever an applicable corporation,” Mr. Kumar said. 

Signed into law last year with the climate, healthcare and tax law called the Inflation Reduction Act, the tax may create complications for buyers and sellers in merger and acquisition transactions, tax advisers say. 

The minimum tax requires companies that meet the $1 billion threshold to calculate their taxes with the existing 21% levy on corporate income as currently defined in the tax code and under a 15% rate based on their book, or financial-statement, income. The law stipulates companies pay the higher of the two calculations.

Democrats aimed the provision at large, profitable companies that face relatively low tax burdens. The Joint Committee on Taxation, which provides nonpartisan analysis of tax legislation for Congress, projects the tax will raise a total of about $222 billion over the course of a decade. 

The Internal Revenue Service and Treasury Department in late December and in February issued interim guidance on the application of the minimum tax. The earlier guidance addressed issues such as how a spinoff, split-off or carve-out transaction would affect whether a company meets the $1 billion threshold. Uncertainties remain, however, and companies, audit firms and others are watching closely for additional guidance, with some in recent weeks submitting comments urging the government to clarify how extraordinary events will affect the applicability of the tax. 

Commenters have asked the government to weigh in on many issues, including how foreign taxes as well as unrealized gains and losses are considered when determining if a company is subject to the tax. Some are also worried that an extraordinary event will bring them within the scope of the levy. 

American Water Works in December 2021 sold equity interests of certain subsidiaries for a total of around $1.275 billion,

Melissa Ciullo,

the company’s vice president of tax, said in a March 16 note requesting guidance on the applicability of the tax. That 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, she said. 

This, Ms. Ciullo said, is because there is currently no government guidance that allows the utility to exclude the gain from the sale when determining whether it meets the $1 billion threshold, even though the company was already assessed federal income tax tied to the event. 

“Absent further guidance, under the present statutory and administrative guidance, AWW could be unfairly classified as an applicable corporation sooner than when it would be based on its normal, recurring business operations solely due to the one-time, nonrecurring gain,” she said.  

Electric and natural-gas utility CenterPoint, meanwhile, sold two businesses during the three-year period used to determine the applicability of the minimum tax, from 2020 through 2022. These sales produced substantial book and tax gains—which CenterPoint paid regular corporate income tax on—that would likely subject the company to the minimum tax, CenterPoint said in a March 15 comment. 

CenterPoint Energy sold two businesses during the three-year determination period.



Photo:

Callaghan O’Hare/Bloomberg News

“While the three-year test may remove a company that realized an unusual earnings spike or suffered a big loss, CenterPoint’s experience shows that, in the absence of some additional adjustment, the three-year test is not an effective nor a fair measure to gauge whether a company should be subject to [the minimum tax],” the company said.  

The companies 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 Energy and American Water Works declined to comment beyond their responses to the government. 

The Treasury Department declined to comment on how it specifically plans to respond to the requests for additional guidance. Forthcoming proposed regulations to implement the tax will provide clarity, a Treasury official said. 

The IRS deferred to the Treasury Department when asked to comment on how the government plans to respond to requests for guidance on substantive issues such as extraordinary items.

Some business groups have suggested solutions. The Business Roundtable, in a March 20 comment, said the government could account for atypical income spikes by allowing a company to cut one year off the three-year average, so that two years are used to determine whether the threshold is met. Including a single transaction would be “distortive” if it doesn’t reflect the recurring financials for a company, the group of leaders from some of America’s largest companies said. 

Some companies argue that an extraordinary event isn’t a good proxy for the size of the company and shouldn’t be included in calculating whether a company meets the threshold, said

Mark Hoffenberg,

a principal in the Washington National Tax practice at accounting firm KPMG LLP. Moreover, companies that distribute cash from the sale of a business to shareholders contract in size, he said, which may make it appropriate to reduce financial-statement income for purposes of the threshold test. 

But the government hasn’t thus far indicated that they have an appetite for carving out extraordinary events, Mr. Hoffenberg said. “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.’”

Write to Jennifer Williams-Alvarez at [email protected]

Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8


A new corporate minimum tax is stoking concern among some companies that one-time activities, such as the sale of a business unit, will push them over the threshold for the levy even though the companies wouldn’t otherwise qualify. 

The 15% corporate minimum tax that went into effect at the beginning of this year applies to U.S.-based companies that report income to shareholders averaging at least $1 billion over three years. What’s more, once a company is subject to the levy, it remains that way even if profits decline unless certain conditions are met, such as a determination from the government that a company shouldn’t be subject to the minimum tax. 

Some business leaders and companies, such as

CenterPoint Energy Inc.

and

American Water Works Co.

, are raising the particular problem of so-called extraordinary items in which business segments were sold off and those transactions pushed average profits over the $1 billion mark even though the ongoing businesses aren’t above the threshold.

Companies above the $1 billion mark can petition for relief from the minimum tax, said

Rohit Kumar,

co-leader of the national tax office at accounting firm PricewaterhouseCoopers LLP, but what that process will look like, for now, remains an uncertainty. “There is sort of a ‘Hotel California’ aspect to this, that once you’re an applicable corporation, you’re forever an applicable corporation,” Mr. Kumar said. 

Signed into law last year with the climate, healthcare and tax law called the Inflation Reduction Act, the tax may create complications for buyers and sellers in merger and acquisition transactions, tax advisers say. 

The minimum tax requires companies that meet the $1 billion threshold to calculate their taxes with the existing 21% levy on corporate income as currently defined in the tax code and under a 15% rate based on their book, or financial-statement, income. The law stipulates companies pay the higher of the two calculations.

Democrats aimed the provision at large, profitable companies that face relatively low tax burdens. The Joint Committee on Taxation, which provides nonpartisan analysis of tax legislation for Congress, projects the tax will raise a total of about $222 billion over the course of a decade. 

The Internal Revenue Service and Treasury Department in late December and in February issued interim guidance on the application of the minimum tax. The earlier guidance addressed issues such as how a spinoff, split-off or carve-out transaction would affect whether a company meets the $1 billion threshold. Uncertainties remain, however, and companies, audit firms and others are watching closely for additional guidance, with some in recent weeks submitting comments urging the government to clarify how extraordinary events will affect the applicability of the tax. 

Commenters have asked the government to weigh in on many issues, including how foreign taxes as well as unrealized gains and losses are considered when determining if a company is subject to the tax. Some are also worried that an extraordinary event will bring them within the scope of the levy. 

American Water Works in December 2021 sold equity interests of certain subsidiaries for a total of around $1.275 billion,

Melissa Ciullo,

the company’s vice president of tax, said in a March 16 note requesting guidance on the applicability of the tax. That 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, she said. 

This, Ms. Ciullo said, is because there is currently no government guidance that allows the utility to exclude the gain from the sale when determining whether it meets the $1 billion threshold, even though the company was already assessed federal income tax tied to the event. 

“Absent further guidance, under the present statutory and administrative guidance, AWW could be unfairly classified as an applicable corporation sooner than when it would be based on its normal, recurring business operations solely due to the one-time, nonrecurring gain,” she said.  

Electric and natural-gas utility CenterPoint, meanwhile, sold two businesses during the three-year period used to determine the applicability of the minimum tax, from 2020 through 2022. These sales produced substantial book and tax gains—which CenterPoint paid regular corporate income tax on—that would likely subject the company to the minimum tax, CenterPoint said in a March 15 comment. 

CenterPoint Energy sold two businesses during the three-year determination period.



Photo:

Callaghan O’Hare/Bloomberg News

“While the three-year test may remove a company that realized an unusual earnings spike or suffered a big loss, CenterPoint’s experience shows that, in the absence of some additional adjustment, the three-year test is not an effective nor a fair measure to gauge whether a company should be subject to [the minimum tax],” the company said.  

The companies 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 Energy and American Water Works declined to comment beyond their responses to the government. 

The Treasury Department declined to comment on how it specifically plans to respond to the requests for additional guidance. Forthcoming proposed regulations to implement the tax will provide clarity, a Treasury official said. 

The IRS deferred to the Treasury Department when asked to comment on how the government plans to respond to requests for guidance on substantive issues such as extraordinary items.

Some business groups have suggested solutions. The Business Roundtable, in a March 20 comment, said the government could account for atypical income spikes by allowing a company to cut one year off the three-year average, so that two years are used to determine whether the threshold is met. Including a single transaction would be “distortive” if it doesn’t reflect the recurring financials for a company, the group of leaders from some of America’s largest companies said. 

Some companies argue that an extraordinary event isn’t a good proxy for the size of the company and shouldn’t be included in calculating whether a company meets the threshold, said

Mark Hoffenberg,

a principal in the Washington National Tax practice at accounting firm KPMG LLP. Moreover, companies that distribute cash from the sale of a business to shareholders contract in size, he said, which may make it appropriate to reduce financial-statement income for purposes of the threshold test. 

But the government hasn’t thus far indicated that they have an appetite for carving out extraordinary events, Mr. Hoffenberg said. “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.’”

Write to Jennifer Williams-Alvarez at [email protected]

Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

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