The AMT's Strictly Financial "Disincentive" on Corporate Charitable Giving

Is it a  "disincentive" to withhold an unwarranted reward?  That question occurred to me as I read an interesting piece in Tax Notes yesterday.  Libin Zhang discusses the motivational effect of the 2022 Inflation Reduction Act on corporate charitable giving.  For AMT purposes, corporations do not get to deduct built-in-gain when donating appreciated property to charity.  Zhang focuses on a 2022 change to the Alternative Minimum Tax.  Here is a short excerpt:

Under the Inflation Reduction Act of 2022, large corporations are generally subject to a 15 percent corporate alternative minimum tax on their book income as determined for financial accounting purposes in 2023 and later. One difference between book income and taxable income is that the tax system encourages charitable giving to nonprofit organizations. Those incentives do not exist for book income tax purposes, which can significantly reduce the tax benefits of charitable contributions.

Corporations may need to reduce their noncash charitable contributions by up to 15 percent to have the same after-tax cost as under prior law. A smaller detriment applies to corporate cash charitable contributions. Corporations may also consider postponing their charitable contributions until a later year in which they are certain that the contributions provide full tax benefits under both the regular tax and corporate AMT regimes.

Charitable Contributions and the Disappearing Regular Tax Gain

When a taxpayer donates appreciated property to a charity, the regular tax system typically allows the taxpayer to claim a charitable deduction for the property’s fair market value, without recognizing any gain in the property. For example, if a corporation donates a capital asset worth $100 with a tax basis of $0, the corporation can claim a $100 charitable contribution deduction under section 170. None of the $100 of unrealized gain in the stock is recognized for regular tax purposes.

Generally accepted accounting principles and other financial accounting standards are less interested in encouraging charitable giving and are more focused on balancing the books. Charitable gifts are treated as expenses equal to the fair value of the assets given, but gain or loss is also recognized if the donated asset’s fair value differs from its carry amount. For example, if a corporation donates an asset worth $100 with a tax basis of $0, the corporation recognizes a $100 expense but also $100 of offsetting gain under GAAP. The corporation has a zero net deduction for corporate AMT purposes. The corporation may have up to $100 of additional corporate AMT income and $15 of additional corporate AMT liability, when compared with its regular taxable income that is benefiting from the $100 charitable contribution deduction.

Zhang concludes that the AMT strips away the tax reward for corporate charitable contributions.  It "disincentivizes" corporate charitable giving, particularly with respect to appreciated assets.  He gives a concise history, noting that Professor Michael Graetz advocated for the current approach before it was first adopted in the Tax Reform Act of 1986. The AMT was amended under the Clinton Administration to allow the AMT charitable contribution deduction, but then Professors David Gamage, Reuven S. Avi-Yonah, and Darien Shanske advocated for a return to the pre-1993 approach.  That's how we got to the IRA 2022 approach.  Professors always insist on correct theory in tax law.  It is theoretically incorrect to provide a deduction for untaxed appreciation.  But I bet the return to the 1986 approach was not so much motivated by proper theory as much as the need to pay for  some other  discretionary spending.    

I am not so sure "disincentive" is the right word anyway, unless the withdrawal of an unwarranted benefit -- deduction of untaxed appreciation -- is properly viewed as a disincentive.  Economically incentives and disincentives are measured strictly by dollars gained or lost.  By that measure, maybe the AMT is accurately described as a disincentive.  But it is a fallacy to think that tax policy is simple Milton Friedman-esque math.  If the denied tax benefit is offset by publicly shared gain -- e.g., reduced crime, better health care, lower drop-out rates, or increased green space -- an uncertain amount of which reduces aggregate corporate taxes,  the disincentive disappears.  Increased crime, poor health care, a poorly educated populace, and environmental harms increase corporate taxes, too. 

darryll k. jones