Breaking News
Investing Pro 0
NEW! Get Actionable Insights with InvestingPro+ Try 7 Days Free

Explainer-How could the new U.S. corporate minimum tax affect companies?

Economy Aug 11, 2022 11:06AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
2/2 © Reuters. FILE PHOTO: A general view of the U.S. Capitol after United States Vice President Kamala Harris, voted on the Senate floor to break the 50-50 tie to proceed to the Inflation Reduction Act on Capitol Hill in Washington, D.C., U.S. August 6, 2022. REUTERS/K 2/2
 
AAPL
-1.42%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
AMZN
-2.02%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
XOM
+3.49%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
NKE
+0.36%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 

By Rose Horowitch and David Lawder

WASHINGTON (Reuters) - The main revenue source in the U.S. Senate's newly passed tax, climate and drugs bill is a novel 15% corporate minimum tax aimed at stopping large, profitable companies from gaming the Internal Revenue Service code to slash their tax bills to zero.

The nonpartisan Joint Committee on Taxation estimates that the new tax will add around $222 billion to U.S. government coffers over the next 10 years, down from a previous projection of $313 billion after last-minute changes to the bill. It will apply to companies with more than $1 billion in "book income," the profits they report to shareholders before the effects of tax deductions and credits.

Here are some key details on how it would work:

What is the corporate minimum tax?

A wealth of deductions, credits and loopholes in the federal tax code has allowed some companies to report no income or negative income to the IRS while reporting strong profits to shareholders. Democratic President Joe Biden has repeatedly singled out Amazon.com Inc (NASDAQ:AMZN) for paying little to no federal income tax despite billions of dollars in profits.

If enacted, the tax will serve as a corporate version of the Alternative Minimum Tax for individuals, which prevents the wealthiest Americans from zeroing out their tax bills with investment losses and other deductions and credits.

The tax would likely apply to around 150 of the world's largest companies, according to a Joint Committee on Taxation analysis. These include large pharmaceutical companies and major corporations like Amazon, Apple Inc (NASDAQ:AAPL), Exxon Mobil Corp (NYSE:XOM) and Nike Inc (NYSE:NKE), according to several think tanks that support the new tax. Amazon declined to comment on a potential tax increase. Apple, Exxon Mobil and Nike did not respond to requests for comment.

Companies that meet this threshold must calculate their taxes under both the 21% income tax regime and the 15% corporate minimum tax regime -- and pay the higher bill.

The tax would take effect next year and affect companies that earned an average of $1 billion in book income for three consecutive years. It would also apply to foreign companies that earn $100 million of book income in the United States.

What are the exceptions for companies?

Some regular corporate income tax credits and deductions are still allowed under the minimum tax, including credits for foreign taxes paid. The carrying forward of prior-year losses to offset future income is also permitted, but only 80% can be applied to reducing taxable income. Credits for research and development expenses are also allowed, with 75% of the value applied to reducing corporate minimum tax.

At the urging of Democratic Senator Kyrsten Sinema, lawmakers added a provision to preserve deductions on capital investments such as machinery, vehicles and buildings. The exception would allow companies to more quickly offset these expenses against tax bills.

Under another last-minute change to the legislation urged by Sinema, companies controlled by private equity firms are not subject to the corporate minimum tax if they make less than $1 billion of book income, even if that investment firm's combined portfolio of companies exceeds the threshold. Some private equity firms may be able to shift assets among companies in their portfolios so that each earns less than the $1 billion threshold to avoid the minimum tax.

Book income is calculated based on the income companies report to shareholders, and the new tax may give companies an incentive to lower the book income they report, law firm Baker Hostetler said in a recent note. They pointed to a nonpartisan Congressional Research Service report showing evidence of how past efforts to levy taxes based on book income compelled corporate taxpayers to manage their earnings and adjust book income to reduce taxes.

Large companies also could try to lobby the nongovernmental Financial Accounting Standards Board for favorable changes to the rules for calculating book income.

Explainer-How could the new U.S. corporate minimum tax affect companies?
 

Related Articles

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Comments (1)
Ron Tippitt
Ron Tippitt Aug 10, 2022 5:36PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
This will simply get passed on in pricing, so if you think inflation is bad now, just you wait, and the new tax schedules for individuals go up anyway;  Starting w/ incomes over 30k per year........  there is no help here for the people.  It's a pass thru tax on top of a tax.
jason xx
jason xx Aug 10, 2022 5:36PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Ya sure everything will simply be passed so might as well just let companies pay no taxes then
Me comment
Me comment Aug 10, 2022 5:36PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
They raise prices they raise book income and more minimum tax is paid, companies won't do that it is a bad business model.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
or
Sign up with Email