The U.S. Treasury Department released its report on Biden’s corporate tax plan, and one of the more notable changes is the 15% minimum corporate book tax. In 2019 the proposed threshold was for firms at $100 million in net income. However, that scope has changed to firms with a net income of $2 billion and above.
One hundred eighty firms will meet that threshold, while 45 will owe tax liability the treasury estimates. This is a significant change from the 1,100 firms listed in the U.S. that meet the $100 million net income base.
That’s not the only change Biden has proposed in his corporate tax plan. The Administration said businesses that paid above the 15% tax could apply for credit on previous years. Corporations will also be able to use general business credits like R&D tax credits or clean energy. Foreign tax credits also apply, which was part of the original proposal.
Those business tax credits come in handy because they allow corporations to report on book income without owing tax liability. Since these credits can be applied to the minimum tax, it lessens the impact of the taxes on those businesses by a lot. Firms can report shareholder profits and not pay taxes on that income when they implement credits like R&D.
The whole purpose behind most of these tax credits is to encourage businesses to invest in “preferred activity.” When a firm calculates its book income, they depreciate investments over time, which can take years. The tax code specifies that several assets can be deducted from taxable income during the year they are made. The difference in timing is meant to encourage investing and guarantee that income is taxed correctly. To ensure that the investment is not punished, the minimum book tax should offer a credit for any tax inflicted on book income because of a timing problem. So Far, the administration has not made any comment regarding this question.
Another issue is if the administration will stray from book income which is not as clearly defined as the corporate income tax base. The rules outlining book income allow corporations to completely deduct the worth of executive compensation on book income, but the tax code has limitations.
We'll have to wait and see what verdict is reached.