August 1, 2022
The Corporate Minimum Tax Proposal
The Inflation Reduction Act of 2022 (H.R. 5376) would
Credits Allowed
impose a minimum tax of 15% on the adjusted financial
Credits would be allowed for the minimum tax. Domestic
statement income of large corporations. Corporations would
credits under the general business tax (such as the R&D
pay the larger of the minimum tax or the regular tax. This
credit) would be allowed to offset up to 75% of the
tax would apply to taxable years beginning after December
combined regular and minimum tax. Foreign tax credits
31, 2022.
would be allowed based on the allowance for foreign taxes
paid in a corporation’s financial statement.
Coverage of Firms
The minimum tax would apply to corporations with $1
A credit for additional minimum tax could be carried over
billion or more in average annual earnings, calculated over
to future years to offset regular tax when that tax is higher.
a three-year period, in any of the previous three years. In
the case of U.S. corporations that have foreign parents, it
Revenue Effects
would apply only to income earned in the United States of
The corporate minimum tax is a major revenue raiser in the
$100 million or more, calculated over a three-year period
proposed legislation, projected to raise $313 billion over 10
(and apply when the international financial reporting group
years. It is the largest revenue raiser in the bill, where total
has income of $1 billion or more). It would apply to a new
revenue raised is approximately $450 billion.
corporation in existence for less than three years based on
the earnings in the years of existence.
Scope of Effects
Relatively few corporations would be affected by the tax.
The provision would exclude Subchapter S corporations
An analysis by the Joint Committee on Taxation estimated
(corporations with a limited number of shareholders that
that about 150 taxpayers would be subject to the minimum
elect to be taxed under the individual income tax). It would
tax each year. These results indicate that about 30% of the
also exclude regulated investment companies (RICs, such
Fortune 500 could be subject to the minimum tax. About
as mutual funds) and real estate investment trusts (REITs).
half the tax would be collected from manufacturing (with
These entities also pass through income to individual
about 16% from chemical manufacturing) and about 11%
investors to be taxed under the individual income tax.
each from information and holding companies.
Tax Based on Financial (Book) Income
Based on projections of $4,755 billion in corporate
The tax would be based on financial statement or book
revenues for FY2023-FY2032 by the Congressional Budget
income, with some adjustments. Firms that file consolidated
Office, the $313 billion revenue projection indicates an
tax returns would include income allocable to the firm from
increase in corporate tax revenues of 6.7%.
related firms, including controlled foreign corporations (and
any disregarded entities); for other related firms, dividends
Precedents and Other Examples of a
would be included. The provision would allow special
Minimum Tax on Financial Income
deductions for cooperatives and Alaska Native
A corporate alternative minimum tax was imposed in
Corporations. It would make adjustments to conform
various forms beginning in 1969, although it was repealed
financial accounting to tax accounting for certain defined
in 2017. During most of this period, the tax base was not
benefit pension plans. It would apply with respect to items
financial statement income but was the regular income tax
under the unrelated business income tax for tax-exempt
base with various preferences added back. A minimum tax
entities.
on financial statement or book income was included as part
of the corporate AMT preferences in 1986. It was intended
The additional tax would equal the amount of the minimum
to be temporary and applied for three years, 1987-1989.
tax in excess of the regular income tax plus the additional
tax from the Base Erosion and Anti-Abuse tax. Financial
Currently, the global minimum tax (GLoBE) proposed by
statement income would be increased by federal and foreign
the Organisation for Economic Development and Co-
income taxes to place income on a pretax basis.
operation (OECD) and the G-20 would be based on
financial statement income. See CRS Report R47174, The
Losses would be allowed in the same manner as with the
Pillar 2 Global Minimum Tax: Implications for U.S. Tax
regular tax. Under the regular income tax, losses are carried
Policy, by Jane G. Gravelle and Mark P. Keightley, for a
over to offset income in future years, with loss carryovers
discussion.
limited to 80% of taxable income. Losses would also be
carried over under the minimum tax, limited to 80% of
financial income.
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The Corporate Minimum Tax Proposal
Provisions That Affect Book-Tax
(which is income before taxes and interest). Any unused
Differences
interest deductions are carried forward. Financial income
A variety of rules that differentiate between financial
allows full deduction of interest costs, and interest
statement and taxable income could contribute to
deductions that give rise to a minimum tax could also be
imposition of tax under the minimum tax proposal. Some of
lost.
these provisions, such as net operating losses and timing
differences arising from depreciation, interest, and bad
Firms may also recognize bad debt earlier on financial
debts, are addressed in the proposal as discussed below.
statements than they do for tax purposes, which has been
identified by researchers as potentially contributing to
Other provisions have a permanent effect on financial
book-tax differences over the business cycle.
statement versus taxable income. One provision is the
exclusion of foreign source income under the current global
While provisions affected by timing defer rather than
intangible low-taxed income (GILTI). GILTI excludes a
forgive taxes, ongoing expenditures that lead to these
deemed return on tangible assets from income as well as a
differences create ongoing differences between book and
fraction of the remaining income (currently 50%, scheduled
tax income.
to fall to 37.5% after 2025). This exclusion of foreign
source income is made artificially larger if firms engage in
To address these timing issues, minimum taxes paid can be
profit shifting to locate profits in low-tax foreign
carried forward to years when taxable income is larger than
jurisdictions.
financial income and offset regular tax liability.
There are also deductions for foreign derived intangible
Defined Benefit Pension Plans
income (FDII) designed to make holding intangible assets
The proposal also addresses an issue with defined benefit
in the United States more attractive given the benefits of
pension plans, which are treated differently for financial
GILTI. Another provision is the treatment of executive
purposes. For instance, under mark-to-market accounting,
stock options, which are recognized for book purposes
firms report gains and losses in pension assets that are not
when granted but generally deducted on exercise (and in
included in regular corporate income for tax purposes. The
larger amounts) for tax purposes. Another permanent
proposal would adjust financial income to remove income
difference is from tax-exempt interest on state and local
or expense associated with defined benefit pension plans.
government bonds.
General Issues
Specific Issues Addressed in the Proposal While using financial income can more broadly capture
The objective of a minimum tax is to ensure that firms pay
profits than taxable income, researchers have expressed
some tax when they are making a profit. Several issues
some concerns that financial accounting is outside the
arise surrounding a minimum tax based on financial
control of the Internal Revenue Service and that firms may
statement income, which are addressed in the proposal.
manipulate financial income to reduce tax liability.
Researchers found some evidence that manipulation
Net Operating Losses
occurred during the 1980s. Financial accounting is
One of the most important differences between financial
governed by generally accepted accounting principles
and taxable income is the treatment of losses. The tax
(GAAP) governed by the Financial Accounting Standards
system bounds income at zero, and firms that experience
Board (FASB). The Securities and Exchange Commission
losses carry the losses forward to offset taxable income in
recognizes FASB as setting the standards for publicly
the future. The offset is limited to 80% of taxable income.
traded companies. While companies may want to minimize
In the case of financial income, firms report current losses
income for tax purposes, companies may simultaneously be
and profits. The minimum tax proposal adjusts for this
reluctant to adopt practices that reduce reported profits to
treatment by carrying forward financial losses to offset
shareholders.
against future financial income in a manner similar to the
income tax system. The proposal also limits the loss offset
The proposed corporate minimum tax contains a cliff in that
to 80% of taxable income as measured by the financial
it applies to firms that earn an average of $1 billion or more
income base.
in profits over a three-year period. This treatment may
appear unfair to firms near the $1 billion measure and could
Timing Differences
also produce incentives to reduce reported profits by firms
Some of the differences between book and tax income arise
just above that level, although this effect is moderated
from timing. For example, depreciation deductions,
somewhat by the averaging provision.
particularly for equipment investments, are generally taken
earlier for tax purposes than for financial statement
For additional discussion of minimum taxes on business
purposes. If this effect is not recognized, deductions could
income, see CRS Report R46887, Minimum Taxes on
effectively be lost if the minimum tax applies because
Business Income: Background and Policy Options, by
depreciation deductions are lower for financial purposes
Molly F. Sherlock and Jane G. Gravelle.
than for tax purposes.
Jane G. Gravelle, Senior Specialist in Economic Policy
Another factor that can cause timing differences is interest
deductions, which are currently subject to limits. Net
IF12179
interest deductions are limited to 30% of adjusted income
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The Corporate Minimum Tax Proposal


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https://crsreports.congress.gov | IF12179 · VERSION 1 · NEW

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