The Corporate Minimum Tax Proposal

The Corporate Minimum Tax Proposal

Updated August 8, 2022
The Corporate Minimum Tax Proposal
The Inflation Reduction Act of 2022 (H.R. 5376), which
carried over under the minimum tax, limited to 80% of
passed by the Senate on August 7, 2022, would impose a
financial income.
minimum tax of 15% on the adjusted financial statement
income of large corporations. Corporations would pay the
Credits Allowed
larger of the minimum tax or the regular tax. This tax would
Credits would be allowed for the minimum tax. Domestic
apply to taxable years beginning after December 31, 2022.
credits under the general business tax (such as the R&D
credit) would be allowed to offset up to 75% of the
Coverage of Firms
combined regular and minimum tax. Foreign tax credits
The minimum tax would apply to corporations with $1
would be allowed based on the allowance for foreign taxes
billion or more in average annual earnings, calculated over
paid in a corporation’s financial statement. A credit for
a three-year period, in any of the previous three years. In
additional minimum tax could be carried over to future
the case of U.S. corporations that have foreign parents, it
years to offset regular tax when that tax is higher.
would apply only to income earned in the United States of
$100 million or more, calculated over a three-year period
Revenue Effects and Scope
(and apply when the international financial reporting group
The corporate minimum tax is a major revenue raiser in the
has income of $1 billion or more). It would apply to a new
proposed legislation. It was originally projected to raise
corporation in existence for less than three years based on
$313 billion over 10 years but that revenue gain is reduced
the earnings in the years of existence.
to $258 billion, according to news reports, by changes made
in allowing tax recovery for the depreciation and wireless
The provision would exclude Subchapter S corporations
spectrum provisions. It does not apparently reflect the
(corporations with a limited number of shareholders that
exemptions for portfolio companies of private equity firms,
elect to be taxed under the individual income tax). It would
which news reports indicate would reduce the yield by $35
also exclude regulated investment companies (RICs, such
billion.
as mutual funds) and real estate investment trusts (REITs).
These entities also pass through income to individual
Relatively few corporations would be affected by the tax.
investors to be taxed under the individual income tax.
An analysis by the Joint Committee on Taxation of the
Income from private equity firms would be covered, except
proposal before the recent adjustments estimated that about
portfolio companies owned by these firms.
150 taxpayers would be subject to the minimum tax each
year. These results indicate that about 30% of the Fortune
Tax Based on Financial (Book) Income
500 could be subject to the minimum tax. About half the tax
The tax would be based on financial statement or book
in that version would be collected from manufacturing
income, with some adjustments. Firms that file consolidated
(with about 16% from chemical manufacturing) and about
tax returns would include income allocable to the firm from
11% each from information and holding companies.
related firms, including controlled foreign corporations (and
any disregarded entities); for other related firms, dividends
Based on projections of $4,755 billion in corporate
would be included. The provision would allow special
revenues for FY2023-FY2032 by the Congressional Budget
deductions for cooperatives and Alaska Native
Office, the $223 billion revenue projection indicates an
Corporations. It would make adjustments to conform
increase in corporate tax revenues of 4.7%.
financial accounting to tax accounting for certain defined
benefit pension plans. It would apply with respect to items
Precedents and Other Examples of a
under the unrelated business income tax for tax-exempt
Minimum Tax on Financial Income
entities.
A corporate alternative minimum tax was imposed in
various forms beginning in 1969, although it was repealed
The additional tax would equal the amount of the minimum
in 2017. During most of this period, the tax base was not
tax in excess of the regular income tax plus the additional
financial statement income but was the regular income tax
tax from the Base Erosion and Anti-Abuse tax. Financial
base with various preferences added back. A minimum tax
statement income would be increased by federal and foreign
on financial statement or book income was included as part
income taxes to place income on a pretax basis.
of the corporate AMT preferences in 1986. It was intended
to be temporary and applied for three years, 1987-1989.
Losses would be allowed in the same manner as with the
regular tax. Under the regular income tax, losses are carried
Currently, the global minimum tax (GLoBE) proposed by
over to offset income in future years, with loss carryovers
the Organisation for Economic Development and Co-
limited to 80% of taxable income. Losses would also be
operation (OECD) and the G-20 would be based on
financial statement income. See CRS Report R47174, The
https://crsreports.congress.gov

The Corporate Minimum Tax Proposal
Pillar 2 Global Minimum Tax: Implications for U.S. Tax
Timing Differences
Policy, by Jane G. Gravelle and Mark P. Keightley, for a
Some of the differences between book and tax income arise
discussion.
from timing. One factor that can cause timing differences is
interest deductions, which are currently subject to limits.
Provisions That Affect Book-Tax
Net interest deductions are limited to 30% of adjusted
Differences
income (which is income before taxes and interest). Any
A variety of rules that differentiate between financial
unused interest deductions are carried forward. Financial
statement and taxable income could contribute to
income allows full deduction of interest costs, and interest
imposition of tax under the minimum tax proposal. Some of
deductions that give rise to a minimum tax could also be
these provisions, such as net operating losses and timing
lost.
differences arising from depreciation, interest, and bad
debts, are addressed in the proposal as discussed below.
Firms may also recognize bad debt earlier on financial
statements than they do for tax purposes, which has been
Other provisions have a permanent effect on financial
identified by researchers as potentially contributing to
statement versus taxable income. One provision is the
book-tax differences over the business cycle.
exclusion of foreign source income under the current global
intangible low-taxed income (GILTI). GILTI excludes a
While provisions affected by timing defer rather than
deemed return on tangible assets from income as well as a
forgive taxes, ongoing expenditures that lead to these
fraction of the remaining income (currently 50%, scheduled
differences create ongoing differences between book and
to fall to 37.5% after 2025). This exclusion of foreign
tax income.
source income is made artificially larger if firms engage in
profit shifting to locate profits in low-tax foreign
To address these timing issues, minimum taxes paid can be
jurisdictions.
carried forward to years when taxable income is larger than
financial income and offset regular tax liability.
There are also deductions for foreign derived intangible
income (FDII) designed to make holding intangible assets
Defined Benefit Pension Plans
in the United States more attractive given the benefits of
The proposal also addresses an issue with defined benefit
GILTI. Another provision is the treatment of executive
pension plans, which are treated differently for financial
stock options, which are recognized for book purposes
purposes. For instance, under mark-to-market accounting,
when granted but generally deducted on exercise (and in
firms report gains and losses in pension assets that are not
larger amounts) for tax purposes. Another permanent
included in regular corporate income for tax purposes. The
difference is from tax-exempt interest on state and local
proposal would adjust financial income to remove income
government bonds.
or expense associated with defined benefit pension plans.
Specific Issues Addressed in the Proposal General Issues
The objective of a minimum tax is to ensure that firms pay
While using financial income can more broadly capture
some tax when they are making a profit. Several issues
profits than taxable income, researchers have expressed
arise surrounding a minimum tax based on financial
some concerns that financial accounting is outside the
statement income, which are addressed in the proposal.
control of the Internal Revenue Service and that firms may
manipulate financial income to reduce tax liability.
Net Operating Losses
Researchers found some evidence that manipulation
One of the most important differences between financial
occurred during the 1980s. Financial accounting is
and taxable income is the treatment of losses. The tax
governed by generally accepted accounting principles
system bounds income at zero, and firms that experience
(GAAP) governed by the Financial Accounting Standards
losses carry the losses forward to offset taxable income in
Board (FASB). The Securities and Exchange Commission
the future. The offset is limited to 80% of taxable income.
recognizes FASB as setting the standards for publicly
In the case of financial income, firms report current losses
traded companies. While companies may want to minimize
and profits. The minimum tax proposal adjusts for this
income for tax purposes, companies may simultaneously be
treatment by carrying forward financial losses to offset
reluctant to adopt practices that reduce reported profits to
against future financial income in a manner similar to the
shareholders.
income tax system. The proposal also limits the loss offset
to 80% of taxable income as measured by the financial
The proposed corporate minimum tax contains a cliff in that
income base.
it applies to firms that earn an average of $1 billion or more
in profits over a three-year period. This treatment may
Depreciation and Spectrum Rights
appear unfair to firms near the $1 billion measure and could
Financial income is adjusted to allow the treatment of
also produce incentives to reduce reported profits by firms
depreciation and spectrum auction licenses for tax purposes.
just above that level, although this effect is moderated
Depreciation deductions are normally taken earlier for tax
somewhat by the averaging provision.
than for book purposes. Financial income generally does
not allow the recovery of the cost of spectrum licenses,
For additional discussion of minimum taxes on business
which are recovered over 15 years for tax purposes.
income, see CRS Report R46887, Minimum Taxes on
Business Income: Background and Policy Options, by
Molly F. Sherlock and Jane G. Gravelle.
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The Corporate Minimum Tax Proposal

IF12179
Jane G. Gravelle, Senior Specialist in Economic Policy

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