In Brief

Proposed guidance related to the corporate alternative minimum tax (CAMT) may create incremental reporting burdens for asset management and real estate funds.

What Happened?

On Sept. 12, 2024, the Treasury Department and the IRS issued proposed regulations implementing the CAMT. Enacted in 2022 as part of the Inflation Reduction Act, the CAMT imposes a 15 percent minimum tax on the adjusted financial statement income (AFSI) of an “applicable corporation.” The CAMT is effective for tax years beginning after Dec. 31, 2022.

Proposed regulations are not law until finalized. However, once finalized, certain provisions, including certain partnership reporting requirements, will apply to tax years ending after Sept. 13, 2024, even though final regulations may not be issued until 2025. Other provisions, including the partnership distributive share calculation provisions, will not be effective until publication of final regulations, which could occur in 2025. Comments on the proposed regulations were submitted on Jan. 15, 2025, as requested by the Treasury and IRS.

How Are the Proposed Regulations Relevant to Asset Management and Real Estate?

While only approximately 150 very large corporations are expected to be subject to the CAMT, asset management (AM) and real estate funds are significantly impacted by the statute and proposed regulations in two ways.

First, funds with direct or indirect investors such as insurance companies, sovereign wealth funds, banks, and other large corporations that are—or may become—applicable corporations will face expanded partnership reporting obligations. These disclosures are necessary to allow their direct and indirect investors who are applicable corporations to calculate the amount of their CAMT liability.

Second, corporate entities in a fund structure may be applicable corporations subject to CAMT if they meet one of the applicable corporation tests described below, and regardless, may have additional reporting requirements related to CAMT.

What Information Will Fund Investors Need?

In most circumstances, a corporate investor will be able to determine whether it is an applicable corporation (i.e., potentially subject to the CAMT) without requesting further information from the fund. To make the applicable corporation determination, a corporation would use its financial statement income (FSI) with respect to the fund (except in the unlikely event that the corporation and the fund are part of the same Section 52 controlled group). However, for purposes of determining its CAMT liability, an applicable corporation will need information to determine its “distributive share of AFSI” with respect to any partnership in which it is a partner and information to determine AFSI that results from transactions with the partnership (e.g., contributions and distributions) and with respect to partnership interests (e.g., sales or exchanges, dilution, and deconsolidation).

How Is AFSI Calculated?

AFSI is generally defined in Section 56A as net income or loss on a taxpayer’s applicable financial statement (AFS) for a tax year, with certain adjustments. The most prevalent adjustments for asset managers and their portfolio companies will include 1) for an investment in a partnership, replace FSI with respect to that investment with the fund’s distributive share of the partnership’s AFSI, 2) for an investment in a corporation—other than a CFC—replace FSI with respect to that investment with tax dividends and tax gains and losses with respect to the investment, 3) for CFCs, replace the fund’s FSI with respect to that investment with its pro rata share of the CFC’s AFSI, 4) replace book depreciation with tax depreciation for Section 168 property, 5) add back federal and foreign taxes included in FSI, and 6) if one side of a “hedging” transaction is not included in the FSI of that entity, then the other side must be excluded (e.g., if mark-to-market [MTM] gains and losses are not included in FSI in a portfolio, any mark-to-market gain or loss on a hedge or straddle of that position is also excluded in arriving at AFSI).

Example 1: Fund owns a corporate portfolio company

Fund is a partnership whose partners include X, a corporation. X notifies Fund that it needs CAMT information. Fund owns 100 percent of the shares of Y, a U.S. corporation that is not an applicable corporation and has less than $500M of annual AFSI. Fund’s FSI is $280x, which includes $100x of dividend income from Y, $200x of unrealized gains with respect to its investment in Y, and $20x of expenses. Fund recognizes a $100x tax dividend from Y and no other tax gains or losses with respect to Y.

Fund reports on X’s Schedule K-1 its modified FSI of $80x, which is calculated as follows:

Fund FSI                                                                   $280x

Disregard FSI with respect to Y                           ($300x)

Add tax dividends with respect to Y                    $100x

Fund’s modified FSI                                                $ 80x

Observation: There is no adjustment for FSI amounts with respect to stock compensation, Section 197 amortization for intangibles and goodwill (other than qualified wireless spectrum amortization), or mark-to-market amounts for real estate, financial products other than mortgage servicing rights, or other non-entity investments held directly by the entity calculating AFSI. Therefore, taxable income may not be a reasonable proxy for AFSI if information is not received from portfolio companies with these types of book-tax differences that are generally favorable for regular tax purposes. Note, however, that there is no adjustment to FSI for interest expense, start-up expenditures, or research and development costs, which have limitations or capitalization requirements for regular tax purposes and typically result in unfavorable book-tax differences for regular tax liability purposes. These expenditures in FSI may help reduce AFSI.

The proposed regulations clarify and expand the AFSI rules beyond what is provided in the statute. Notably, the proposed regulations add the concepts of “CAMT earnings and profits” for certain U.S. corporations and “CAMT basis” for calculating gains and losses included in AFSI with respect to investments as described in more detail below.

How Does a Partnership Calculate a Partner’s Distributive Share of Partnership AFSI?

For CAMT liability purposes, a partner’s AFSI with respect to a partnership investment is its distributive share of the partnership’s AFSI. The statute provides no definition of distributive share for this purpose. The proposed regulations describe a multi-step calculation, illustrated below, that a partner must undertake to determine its AFSI. Because a partner’s distributive share of AFSI requires the partnership to determine its AFSI, in the case of tiered partnerships, each partnership in the chain of ownership that has an interest in another partnership must determine its AFSI, undertaking the same multi-step calculation, before partnerships above it in the ownership chain can determine their AFSI (i.e., a bottom-up approach).

A partnership generally calculates its AFSI using the same rules as other taxpayers. However, the proposed regulations introduced a “partnership modified FSI” amount to which a partner applies its distributive share percentage and separately stated amounts that are adjustments for a partner to include in its distributive share amount as discussed further below. Adjustments include AFSI amounts related to Section 743(b) adjustments to property depreciable under Section 168, qualified wireless spectrum, foreign corporations, and CFCs.

Observation: The bottom-up approach, as it relates to tiered partnership structures, appears consistent with subchapter K principles but it also places a significant administrative burden on taxpayers’ tax compliance functions. There appears to be one situation in which the proposed regulations do not require a full bottom-up approach: if a CAMT entity is invested in a lower-tier partnership that has its tax return as its AFS (i.e., because it does not have a financial statement used for external purposes), the CAMT entity uses its FSI with respect to the partnership (including mark-to-market).

Many funds own interests in partnerships (e.g., aggregators or special purpose vehicles) for which the partnership’s federal income tax return will be its AFS. While this simplifies reporting insofar as these partnerships do not need to request information from lower-tier partnerships, investors that account for their investments using a fair value method may be required to include amounts that differ significantly from what would be included if the partnership had a higher-priority AFS such as a GAAP financial statement. Taxpayers have commented on this change, which seems contrary to previous guidance under Notice 2023-64. That guidance provided that AFSI equaled taxable income (excluding foreign taxes) if the lower-tier partnership used its tax return as its AFS (because it did not have another qualifying financial statement).

What Guidance Was Provided by the Proposed Regulations for Calculating a Partner’s Distributive Share of Partnership AFSI?

The proposed regulations provide that since AFSI is based on income reported for AFS purposes rather than taxable income, a partner's distributive share of AFSI is based on "the share of the partnership's FSI that the CAMT entity reports on its AFS with respect to such investment rather than on the CAMT entity's allocations of partnership items for regular tax purposes." Accordingly, the proposed regulations require a partner to calculate its distributive share percentage with the numerator being the FSI with respect to the partnership investment and the denominator varying depending on the method the partner uses to account for its investment. Proposed rules define the denominator for four specified methods of accounting and then create a fifth catch-all provision that defines the denominator for all other methods. For a partner that uses the fair-value method to account for its investment on its AFS, the denominator is the total change in the fair value of the partnership during the tax year, as determined by the partner for purposes of determining the partner’s share of total change in its AFS. Alternatively, if a partner uses the equity method to account for its investment on its AFS, the denominator is the partnership’s total FSI, which is provided by the partnership to the partner on its K-1.

The proposed regulations outline six steps for each partner to determine its share of a partnership’s AFSI, which are illustrated in Example 2 below.

Example 2: Fund owns a partnership portfolio company

Fund is a partnership whose partners include X, a corporation. X notifies Fund by January 30 that it needs CAMT information. Fund owns an interest in LTP, a partnership portfolio company, and notifies LTP within 14 days of receiving the request from X that it needs CAMT information. Fund accounts for its investment in LTP on its AFS using the fair value method. Fund’s FSI on its AFS is $380x, which includes $400x of unrealized gains with respect to its investment in LTP and $20x of expenses. Fund calculated its $400x of unrealized gains on LTP based on its valuation of LTP increasing in total by $500x.

LTP’s AFS is audited financials it issues to a bank. LTP’s FSI on its AFS is $100x, which includes $120x of net income before depreciation and $20x of book depreciation with respect to Section 168 property. LTP’s tax depreciation on the Section 168 property is $40x. In addition, there is $10x of Section 743(b) tax depreciation on Section 168 property with respect to Fund’s purchase of its interest in LTP. LTP reports on Fund’s Schedule K-1 the following CAMT information:

LTP modified FSI of $80x (FSI of $100x + book depreciation of $20x – tax depreciation of $40x)

Adjustment for Section 743(b) depreciation of Section 168 property of $10x

LTP total FSI of $100x

Fund calculates its distributive share of LTP’s AFSI as follows:

Fund reports to X on its K-1 the following:

Observation: Based on the proposed regulations, a fund is not responsible for calculating the distributive share amount for the partner requesting the information. However, if the fund has investments in lower-tier partnerships, the fund is required to calculate its distributive share percentage for each partnership investment. To compute the distributive share percentage, fund tax teams need to obtain from the fund accounting team the total change in fair value that determined the fund’s unrealized gains or losses with respect to each partnership investment.

What Amount is Included in AFSI with Respect to Gains and Losses Related to Partnership Investments?

As noted above, for purposes of determining its AFSI, a partner also must include FSI gains and losses with respect to partnership interests (e.g., gains and losses resulting from sales or exchanges, dilution, and deconsolidation). The proposed regulations provide that FSI gains and losses are adjusted by taking into account the partner's “CAMT basis” in a partnership interest.

A partner’s CAMT basis in its partnership investment is equal to its AFS basis in the partnership investment as of the first day of the partnership's first tax year ending after Dec. 31, 2019, during which the partner held its interest. This CAMT basis is then:

• Increased by a partner's distributive share of AFSI
• Reduced by its share of negative AFSI
• Adjusted (up or down) to take into account contributions and distributions of property (discussed below)
• Further increased or decreased (but not below zero) for additional CAMT or regular tax adjustments

Example 3: Fund disposes of partnership portfolio company

Fund is a partnership whose partners include X, a corporation. X notifies Fund by January 30 it needs CAMT information. Fund contributed $1000x of cash to acquire an interest in LTP, a partnership portfolio company, on January 1, 2020. Fund received no distributions and made no further contributions. Fund’s distributive share of AFSI amount from LTP was a loss of $100 each tax year from 2020 through 2023. As a result, Fund’s CAMT basis as of December 31, 2023, was $600x. Fund sells its interest in LTP for $1500x on January 1, 2024. Fund’s AFSI with respect to the sale of the LTP interest is $900x ($1500x of proceeds less $600x of CAMT basis).

Observation: The determination of CAMT basis in partnership interests—which will require five years of adjustments (through the end of 2024)—will be a significant undertaking for many taxpayers and their advisors. If a fund acquired a partnership interest prior to 2020, it must start with its basis in the lower-tier partnership and then roll forward for contributions, distributions, and distributive share amounts for each year beginning in 2020. To prepare for CAMT calculations with respect to tax years ending in 2024, partnerships with sales of partnership interests that expect to receive CAMT information requests should consider starting the calculation work as soon as practicable, since information for tax years between 2020 and 2023 may not be readily available.

Aaron Lebovics is a partner in PwC’s New York City Asset and Wealth Management Tax practice where he specializes in providing comprehensive tax consulting and compliance services to a diverse range of asset management clients, including hedge funds, private equity funds, fund of funds, and investment advisors. Aaron's expertise encompasses the complexities of partnership taxation and the evolving regulatory landscape affecting the financial services industry. Aaron holds a Master of Science in accounting from Fairleigh Dickinson University. His commitment to excellence and deep understanding of the asset management industry make him a trusted advisor to both emerging and established investment firms.

Annet Thomas-Pett, CPA, is a managing director in PwC's National Real Estate Tax Practice based in New York. She has over 17 years of experience working with real estate advisors, private equity real estate fund sponsors, both public and private REITs, and high-net worth individuals. She has extensive real estate experience and is considered a technical expert in federal taxation particularly in the real estate area. She has worked on a variety of real estate transactions over her career including REIT due diligence and tax opinions, REIT M&A transactions, FIRPTA planning and structuring, section 1031 exchanges, and global private equity real estate fund and deal structuring. She has also published a number of articles on real estate topics in Taxes – The Tax Magazine, the Journal of Passthrough Entities, and Real Estate Taxation. She is also the vice chair of the Real Estate Tax Committee of the American Bar Association. She also regularly speaks at real estate tax conferences sponsored by a number of organizations including the American Bar Association, the Los Angeles County Bar Association, and NAREIT. Annet received a Bachelor of Science in accounting and a Master of Science in taxation graduating summa cum laude from St. John’s University. Annet is a certified public accountant in New York.

Charwin Embuscado, CPA,  is a Partner in PwC's Asset and Wealth Management Group in New York. She provides tax compliance and consulting services to hedge funds, private equity funds, fund of funds, and their sponsors. She specializes in various fund structures, taxation of financial products, and reporting requirements to the taxing authorities and investors. Charwin earned her Bachelor of Science in accountancy from Baruch College. She is a licensed Certified Public Accountant in New York and a member of the AICPA.

Jason Black, CPA, is a partner in the Federal Tax Services group of PwC’s Washington National Tax Services (“WNTS”) practice.  He assists clients on general federal tax issues, and specializes in the area of tax accounting, including all aspects of accounting methods, the timing of income and deductions, depreciation and amortization, leasing, capitalization issues, the anti-churning rules, long-term contracts, transaction costs, and the corporate alternative minimum tax.  In connection with this, Jason assists clients in their requests for accounting method changes with the Internal Revenue Service National Office, and represents clients before the IRS on such issues. Prior to joining WNTS, Jason worked in PwC’s Private Company Services practice and had extensive experience working with both public and private companies. Jason earned both his Bachelor of Science in accountancy and Master of Accountancy from the University of Florida.  He is a licensed Certified Public Accountant in the District of Columbia and North Carolina and a member of AICPA.

Jennifer Wyatt, CPA, is a tax partner who specializes in partnership transactions and post-deal reporting as part of PwC’s National Tax Services Mergers and Acquisitions (M&A) group.  She has over 20 years of experience serving as a trusted business advisor to clients on numerous transactions and their annual reporting process.  Jennifer’s broad experiences as a general tax advisor and deep experiences as an M&A partnership specialist provide her with the unique ability to connect the dots from the deal to the post-deal regular operations for both privately held and public companies in an Up-C structure that may include tax provisions, tax reporting and compliance, tax accounting method considerations, equity compensation planning, debt restructurings, etc. She harnesses her extensive knowledge and experience from serving large asset managers, private equity firms and their portfolio companies, publicly-traded multi-national companies to provide advice and tailored guidance to her clients.   Jennifer received a Master of Science in accountancy focused in tax from the University of Illinois at Urbana-Champaign and a Bachelor of Business Administration specializing in accounting from Saint Mary's College at Notre Dame.  Jennifer is a Certified Public Accountant and has been published in Tax Notes.  Jennifer has presented partnership topics at Practicing Law Institute (PLI)’s Tax Planning for Domestic & Foreign Partnerships, LLCs, Joint Ventures & Other Strategic Alliances, Tax Executives Institute (TEI), and the American Bar Association (ABA).  She is also a member of the AICPA and Illinois Certified Public Accountants. 

Michael Hauswirth, JD, is a principal in PwC’s Washington National Tax Services Mergers and Acquisitions (M&A) group, where he focuses on complex partnership tax matters. Based in Washington, D.C., Mike advises clients on a wide range of transactional issues, including structuring, implementation, and post-deal integration, with a particular emphasis on partnership taxation. Before joining PwC in 2013, Mike spent five years serving in tax policy roles on Capitol Hill. He worked as Legislation Counsel with the Joint Committee on Taxation and later as Tax Counsel to the Democratic staff of the House Committee on Ways and Means. His government experience gives him valuable insight into the intersection of tax law, policy, and practice. Michael earned a Juris Doctor from Harvard Law School. He also holds a Master of Arts in German studies from Duke University. His undergraduate studies were completed at Northwestern University, where he received a Bachelor of Arts in history and German language and literature.