Explainer: How might the new U.S. minimum corporate tax affect businesses?

WASHINGTON, Aug 10 (Reuters) – The main revenue source of the Tax, Climate and Drugs Bill recently passed by the U.S. Senate is a new 15% minimum corporate tax aimed at preventing profitable big business to play around with the Internal Revenue Service code to reduce their taxes. zero bills.

The nonpartisan Joint Committee on Taxation estimates the new tax will add about $222 billion to U.S. government coffers over the next 10 years, up 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 revenue,” the profits they report to shareholders before the effects of deductions and tax credits.

Here are some key details on how it would work:

What is the minimum corporate tax?

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

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

The tax would likely apply to about 150 of the world’s largest companies, according to an analysis by the Joint Committee on Taxation. These include big pharma and large corporations like Amazon (AMZN.O), Apple Inc (AAPL.O), Exxon Mobil Corp (XOM.N) and Nike Inc (NKE.N), according to multiple industry groups. thinking that support the new tax. Amazon declined to comment on a possible tax increase. Apple, Exxon Mobil and Nike did not respond to requests for comment.

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

The tax would take effect next year and would affect companies that have averaged $1 billion in accounting revenue for three consecutive years. This would also apply to foreign companies that earn $100 million in accounting revenue in the United States.

What are the exceptions for businesses?

Certain ordinary corporate income tax credits and deductions are still allowed under the minimum tax, including credits for foreign taxes paid. Carrying forward losses from the previous year to offset future income is also allowed, but only 80% can be applied to reduce taxable income. Credits for research and development expenses are also allowed, with 75% of the value being applied to the reduction of the minimum corporate tax.

At the request 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 businesses to deduct these expenses more quickly from tax bills.

Under another last-minute change to the law Sinema advocates, companies controlled by private equity firms are not subject to minimum corporate tax if they make less than $1 billion in revenue. accountants, even if the combined portfolio of companies of that investment company exceeds the threshold. . Some private equity firms may be able to transfer assets between companies in their portfolios so that each earns less than the $1 billion threshold to avoid minimum tax.

Book income is calculated based on the income companies report to shareholders, and the new tax could incentivize companies to reduce the book income they report, law firm Baker Hostetler said in a recent memo. They pointed to a nonpartisan report from the Congressional Research Service showing evidence of how past efforts to levy taxes based on accounting income have forced corporate taxpayers to manage their income and adjust accounting income to reduce taxes. .

Big companies could also try to lobby the non-governmental Financial Accounting Standards Board for favorable changes to the rules for calculating accounting income.

Reporting by Rose Horowitch and David Lawder; edited by Jonathan Oatis

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