Corporate Alternative Minimum Tax Is Gone – The BEAT Goes On
The Tax Cut and Jobs Act of 2017 ended the corporate (but not the individual) Alternative Minimum Tax. Tax simplification, however, this act is not. While eliminating the corporate AMT, the act introduces a new corporate minimum tax: the Base Erosion Anti-Abuse Tax or the BEAT.
The BEAT applies to corporations with average annual gross receipts in excess of $500 million and whose “Base Erosion Percentage” is greater than 3% (2% for a bank or registered securities dealer). The bill also introduces a myriad of new terms and definitions (see below).
- The Base Erosion Anti-Abuse tax is 10% of the corporate taxpayers “Modified Taxable Income” over an amount equal to its regular tax liability reduced by credits allowed under Chapter 1 (but not reduced below zero) over the sum of the General Business Credits (Section 38 Credits) allocable to the Research Credit plus “applicable Section 38 Credits.”
- The BEAT is 1% higher for banks and registered securities dealers. The BEAT will increase by 2.5% (to 12.5% and 13.5%) in 2025.
- The BEAT applies to base erosion payments paid or accrued in taxable years beginning after December 31, 2017.
What can you do to prepare for the BEAT?
- Confirm your three-year Average Gross Receipts are greater than $500 million and calculate your Base Erosion Percentage.
- Review all payments to foreign related parties and the U.S. tax thereon then calculate the Base Erosion Tax Benefit based upon the U.S. tax on said payments.
- Determine if your Modified Taxable Income will result in the BEAT.
| Base Erosion Tax Benefits
||The tax deduction received for a “Base Erosion Payment”. The payment is included in proportion to the actual rate of US tax imposed on the payment to 30% (e.g., if the actual tax on the payment is 15% per treaty, then 50% of the payment would constitute a Base Erosion Tax Benefit).
| Base Erosion Payment
- Any amount paid or accrued by a corporation to a foreign related party for which a deduction is allowable,
- Any deduction allowed for depreciation or amortization with respect to an amount paid or accrued in connection with amounts paid or accrued to acquire depreciable or amortizable property from a foreign related party;
- Any premium or other consideration paid or accrued by a corporate taxpayer to a foreign related party for any reinsurance payments taken into account under Section 803(a)(1)(B) [Life Insurance: return premiums and premiums and other consideration arising out of indemnity reinsurance] or 832(b)(4)(A) [Insurance Company Taxable Income: Premiums earned on insurance contacts during the taxable year]
- Any amount that constitutes a reduction in gross receipts of the corporate taxpayer paid or accrued by the taxpayer with respect to
- A Surrogate Foreign Corporation, as defined in Section 7874(a)(2) which is a related party, but only if such person first became a surrogate foreign corporation after November 9, 2017, and
- A foreign person that is a member of the same expanded affiliated group as a surrogate foreign corporation
- Not included are:
- Amounts that constitute reductions in gross receipts including payments for cost of goods sold (except with respect to surrogate foreign corporations as noted above)
- Amounts paid or accrued for services (if such services meet eligibility requirements of the services cost method under Treasury Regulation 1.482-9 without regard to the requirement that services do not contribute significantly to fundamental risks of business success or failure and only if payments are made for services that have no markup component
- Qualified derivative payments, if certain requirements are met.
| Applicable Section 38 Credits
- The Low Income Housing Credit
- The Renewable Electricity Production Credit
- The Investment Credit, but only to the extent properly allocable to the energy credit
| Surrogate Foreign Corporation
||A foreign entity completes the direct or indirect acquisition of substantially all of the properties held directly or indirectly by a domestic corporation of substantially all of the properties constituting a trade or business of a domestic partnership if after the acquisition 60% of the ownership (stock or partnership interest) are held by former shareholders or partners and the expanded affiliated group does not have substantial business activities in the foreign country where the foreign entity is created or organized.