Proposed Corporate Tax Rules Exempt Income from Benefit Plans
TL/DR –
The Inflation Reduction Act of 2022 imposed a 15% corporate minimum tax on taxpayers with more than $1 billion in adjusted financial statement income (AFSI), but it exempts tax-qualified pension and other post-retirement funds. The AFSI calculation disregards costs associated with “covered benefit plans”, is reduced by the tax deductions allowed with respect to such plans, and is increased by income included in the corporation’s gross income under other tax provisions. On September 13, 2022, the Treasury and IRS issued proposed regulations clarifying the scope of the 15% minimum tax and the required calculations, and it appears that the minimum tax would likely not be payable on account of unrelated business taxable income associated with exempt trusts and organizations.
The 2022 Inflation Reduction Act has implemented a 15% minimum corporate tax on “adjusted financial statement income” (AFSI) for taxpayers with over $1 billion of AFSI, effective post-December 31, 2022. The Act has an exemption for a covered benefit plan to avoid including pension and post-retirement fund assets and income in corporate tax calculations.
Understanding the AFSI Calculation
The AFSI calculation under Code section 56A:
- Excludes costs related to a “covered benefit plan,” encompassing 401(a) defined benefit plans and qualified foreign plans (as per Code sec. 404A(e))
- Subtracts allowed tax deductions for such covered benefit plans
- Adds income included in the corporation’s gross income under any other tax provisions
Tax professionals eager for clarity on the new minimum tax got their answers on September 13, with Treasury and IRS issuing detailed proposed regulations on the 15% tax and required calculations.
Exemption for Tax-Favored Benefit Plans
The proposed regulations offer that a taxpayer’s AFSI computation should:
- Exclude any income, cost, or expense related to any covered benefit plan
- Increase by any income associated with a covered benefit plan; an example is a reversion from a qualified plan upon its termination, which is taxable and subject to excise tax under Code section 4980
- Subtract allowable deductions, such as for pension plan contributions under section 404(a)
The term “covered benefit plan” includes defined benefit plans, qualified foreign plans (Code sec. 404A(e)), and other defined benefit plans providing post-employment benefits.
Key principles also clarify treatment of post-employment welfare plans and trusts for Puerto Rican retirement plans.
Treatment of UBTI and Tax-Exempt Entities
The proposed regulations adjust the AFSI for the income of tax-exempt entities, including qualified plan trusts:
- For an unrelated trade or business (Code section 513) of such organization, taking into account modifications under Code section 512(b)
- For income derived from “debt-financed property” (section 514)
The minimum tax is unlikely to apply to UBTI associated with such exempt trusts and organizations, given the $1 billion income threshold.
Next Steps
The proposed rules, effective for tax years ending after September 13, 2024, can be relied upon for the 2023 tax year for taxpayers and their controlled group. Public comments on the proposed rules must be submitted by December 12, 2024, with a public hearing slated for January 16, 2025.
Affected taxpayers and tax advisors should consider this guidance when calculating their AFSI for minimum tax purposes, despite the complexity of complying with the new corporate tax regime.
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