When Democrats created a new corporate tax regime two years ago, their goal was seemingly simple: rein in the ability of large companies to pay little or no federal income tax.
Now, with the Treasury Department and Internal Revenue Service releasing hundreds of pages of proposed rules for the tax on Thursday, it has become clear that achieving that goal will be exceedingly complex. Not only has it taken years to figure out how to administer it, but the tax has also laid bare a central challenge for policymakers trying to overhaul corporate taxation in the United States: what looks like a “loophole” to one is a reasonable economic incentive to another.
The corporate alternative minimum tax, which was signed into law as part of the 2022 Inflation Reduction Act, applies to roughly 100 companies with more than $1 billion in profits.
The theory behind the tax is that these companies often report large profits to shareholders, driving up their stock price. Yet those same companies can owe little to no federal taxes because of deductions and credits that allow them to winnow down their tax bills.
To try and address that discrepancy, the new tax requires companies to pay at least 15 percent of the adjusted profits they report to shareholders. But the new minimum rule still provides for several prized tax breaks that should allow companies to pay less than the 15 percent floor. Those include the ability to use tax credits, quickly write off the cost of business assets and count losses against tax bills in future years.
“The bill was predicated on what our legislators call loopholes in our tax laws and solving this problem, and then we add in all these adjustments that are essentially the same thing we already had,” Jeff Hoopes, an accounting and public policy professor at the University of North Carolina, said. “A lot of companies will still pay less than 15 percent.”
The result is what some accounting and tax experts see as a disjointed mash-up of accounting and tax standards. Large enough companies will have to calculate how much they owe under the rules for the minimum tax, then compare it with how much they owe under the regular corporate income tax, and pay whichever amount is greater. Taxes paid under the minimum system can be used to offset future tax bills.
The Treasury Department estimated that the tax would collect roughly $250 billion in revenue over the next 10 years, and several large companies, including Fox and private-equity giant Blackstone, have said in statements to investors that the tax will affect them. A Biden administration official said large technology companies and private-equity firms would likely have to pay more under the tax.
Wally Adeyemo, the deputy Treasury secretary, said the tax would “ensure that these companies are not able to use these armies of accountants and lawyers to avoid taxation going forward.”
Many accountants and lawyers have been working on how to comply with and shape the rules governing the new tax. Companies will have the opportunity to provide feedback on the proposed rules before they are finalized, likely kicking off months more of lobbying. Treasury officials said that the tax’s rules released on Thursday do not give companies new, significant tax breaks beyond those Congress already allowed for the minimum regime.
Danielle Rolfes, who leads the Washington national tax practice at KPMG, said the tax had created large compliance burdens for companies, who have spent the past two years waiting for clarity about how the rules will apply.
Harmonizing tax and accounting rules for corporate mergers, for example, or payments among firms within a conglomerate, is very complicated, Ms. Rolfes said.
“Maybe it sounded simple to policymakers to impose a tax based on financial statement income. It turns out to not be simple to do that at all, to actually be incredibly complicated to write a whole new definition of taxable income,” she said.
The minimum tax was Democrats’ fallback plan after other ideas for raising taxes, like lifting the standard corporate rate to 28 percent from 21 percent, were killed by Senator Kyrsten Sinema of Arizona, then a Democrat, during extensive legislative negotiations in 2021.
Since then, President Biden has called for raising the rate of the minimum tax to 21 percent, and Vice President Kamala Harris has broadly endorsed Mr. Biden’s tax plans. But she has called for more moderate tax increases on capital gains for rich Americans, and it is unclear if, as the Democratic presidential candidate, she plans to further alter Mr. Biden’s ideas.
Former President Donald J. Trump, her Republican rival, has called for slashing corporate tax rates, which he did when he was in office, if he wins again in November. Republicans in Congress have introduced legislation to repeal the corporate minimum tax.
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