Corporate tax hike on large multinational companies

On August 7, 2022, the Senate passed the Inflation Reduction Act of 2022 (“IRA”), designed to reduce inflation and provide investments in clean energy.  The bill has several key provisions, such as placing restrictions on carried interest, expanding access to health insurance premium tax credits, reforming prescription drug pricing, incentivizing a variety of green energy credits, increasing the superfund tax on certain fossil fuels, expanding funding for IRS enforcement, doubling the research credit for small businesses, and numerous other provisions.  The bill has yet to become law and will go onto the House.  The House is expected to take up the bill as early as August 12.  The biggest revenue raiser out of the entire bill is a new 15% corporate minimum tax, which will be the focus of this article.

15% Corporate Minimum Tax

The new 15% corporate minimum tax will be different from previous alternative minimum taxes in that it will be based on the adjusted financial statement income of the corporations rather than adjusted taxable income.  Congress designed it to go after large corporations which report record profits in their financials but end up paying very little in taxes due to claiming tax deductions.  For example, Congress has created various accelerated tax deductions to incentivize corporations to make certain investments.  These deductions reduce taxable income and thus tax liabilities. However, under the IRA, the benefit of these deductions would be limited for large corporations as they would end up paying tax based on their adjusted financial statement income.

The new tax would only apply to large corporations with a three-year average annual adjusted financial statement income more than $1 billion.  At first glance, this high threshold may appear like it would not capture that many taxpayers.  However, there are provisions to include any other related entities that are treated as a single employer under section 52.  Additionally, large multinational companies can count toward the threshold in some cases.  If the U.S. corporation has a three-year average of at least $100 million in adjusted financial statement income, then any related foreign companies may be included in determining whether the group exceeds the $1 billion threshold.

One key item to note is that the $1 billion and $100 million thresholds are based on adjusted financial statement income.  The current definition of adjusted financial statement income in the new section 56A(a) is financial statement “net income or loss of the taxpayer” with adjustments.  A key item to note is that there is no reference to gross income or revenue but only a reference to net income or loss.  This is expected to primarily target large corporations like Apple, Alphabet, Microsoft, Exxon Mobil, Chevron, and Meta (Facebook) to name a few.  If the IRA becomes law, it will impact taxpayers with taxable years beginning after December 31, 2022.

For additional information concerning this alert, please contact:

Melody C. Horton at (864) 502-8311.

The information contained herein is of a general nature and should not be construed as professional advice. The reader should also be cautioned that the alert may not be specific to the reader’s exact circumstances and needs and may require additional information.  You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change.