Tax Notes editors Robert Goulder and Joseph J. Thorndike examine the new alternative minimum tax and its likely effect on American businesses, all in five minutes.
This transcript has been edited for length and clarity.
Joseph J. Thorndike: The Inflation Reduction Act (PL 117-169) was enacted last month, and taxpayers are still adjusting to the changes it brought. This includes the new alternative minimum tax, or AMT.
This is not the much-discussed and maligned individual AMT that some of you may be familiar with. This is a business AMT, and it is unique because it is based on the concept of accounting income rather than taxable income.
I am Joe Thorndike with Tax Notes, here with my colleague Bob Goulder. We’re going to explain what Congress did here and why it did it, all in five minutes.
Bob, the subject of AMTs has always been a little strange. They require taxpayers to determine their tax liability under two sets of rules and pay the higher amount. Hardly a recipe for efficiency or simplicity.
Now, I understand that one of the purposes of the Inflation Reduction Act was to extract more revenue from the corporate sector, but why not just raise the guideline rate? Or if the existing deductions are too generous, why not just reduce them?
In other words, why not just fix what’s wrong with income tax rather than building a secondary parallel structure, which is essentially what AMT is, isn’t it ?
Robert Gould: Well, I hear you, Joe, and you’re right. There is no doubt that any type of AMT adds a lot of complexity to the system. As you mentioned, there are certainly more direct ways to generate income.
So why did they do it? Why did Congress include its corporate AMT in that big package it passed last month?
I would say the reason has more to do with dollars and cents. It’s about this problem of conflicting accounts. We live in a world today where a large multinational can report huge profits on its financial statements, but at the same time it can report little or no taxable income to the IRS.
Which give? I mean, it’s frustrating for a lot of people.
By the way, the answer is that corporations are allowed to have essentially two sets of books: one for reporting profits to Wall Street and another for reporting income to the IRS. This AMT company is really geared towards this grievance.
Joseph J. Thorndike: OK. So you’re telling me the big difference with this corporate AMT is that it relies on financial accounting calculations as a starting point to determine this alternative tax base, and the data contained in the financial statements will have more legitimacy, or so the thought goes, because the rules governing accounting income are less susceptible to outside influence.
Is this status really sustainable in the long term? Even if it is sustainable, is betting on this status really a good idea?
Robert Gould: Well, I have my doubts, Joe, and here’s why.
Ask yourself who is in charge of the rules that govern income tax? Well, it’s Congress.
What do we know? Pressure groups regularly influence them.
Who sets the rules for what happens in a financial statement? Not Congress. It’s a group called FASB, the Financial Accounting Standards Board. They are not used to being pressured or swayed by people trying to save taxes.
Two concerns come to mind here. First, just because US companies aren’t currently lobbying the FASB doesn’t mean they won’t start tomorrow. This sense of sanctity that we have for the numbers that go into book revenue, it could be very fleeting. The halo effect might simply disappear.
Second, we have to ask ourselves what is lost once we use book income as the basis for determining tax liability.
All over the world you have investors deciding where to invest their money. They look at these financial statements and they rely on the numbers they see.
What if they find out that these numbers are manipulated in order to save taxes, which I think is going to happen? Well, they’re going to lose faith in the system. They’re going to lose faith in the numbers they see on those financial statements. It could influence the way investment decisions are made globally, and probably not in a way we like.
Basically, it’s just an endless way of saying, “We need to think about the externalities and the non-tax consequences of what this is going to have on the financial sector. What you have with a corporate AMT is granted experience and attempts to tax capital income in a new way through the path of least resistance.
I’m not sure it will work. Only time will tell.
Joseph J. Thorndike: OK. Well, thanks Bob. There you have it: the essential policies behind the new corporate AMT, as included in the Inflation Reduction Act of 2022.