On August 12, 2022, the U.S. Congress passed the Inflation Reduction Act of 2022, which essentially changed how corporate income taxes are calculated. Not surprisingly, changes to the tax code raise new questions: who will be affected?
Last year, 130 countries signed an outline for tax reform. This outline in 2021 included the consideration of a global corporate minimum tax. However, this 2022 change in tax calculations is not related to the proposed Global Corporate Minimum tax, as the United States has not agreed to the proposal.
Who Will the New Corporate Minimum Tax Affect?
According to www.whitehouse.gov, the Inflation Reduction Act is to collect higher taxes from the largest, most profitable corporations. As a result, these companies will now be required to pay the greater of two different tax calculations:
- Traditional tax calculation – usually termed the “Taxable income.” According to the current tax code, the calculated tax is generally 21% of profits after deductions and credits. However, detailed knowledge of programs and loopholes in tax laws can significantly reduce this tax.
- New tax calculation – termed the “Book income.” The tax will be 15% of earnings reported to shareholders. Companies are generally audited and required to follow Generally Accepted Accounting Principles (GAAP) to meet investor and financier requirements.
Taxable Income Versus Book Income (Profit)
Profits are profits, right? So how can one company come up with different numbers for its Book Income and Taxable Income? Much of it boils down to the difference between how the IRS calculates Taxable Income and the Book Income reported to company owners and lenders.
Taxable Income is calculated on a Cash Accounting basis for IRS purposes. Cash accounting ignores uncollected revenues and unpaid expenses in the accounting period. Some companies can manipulate their bottom line with sales on credit and payment for inventory. Depreciation of capital expenses may also be calculated using a different time scale.
Book Income, the amount reported in the annual financial statements to investors and lenders, is usually required to be calculated on an Accrual accounting basis. Accrual accounting considers revenues owed to the company at the end of the tax period and the payment due for expenses. It also generally uses a different, often slower, schedule for calculating depreciation.
This new law will likely affect approximately the top 150 largest companies that pay federal taxes in the U.S. Those that have manipulated taxable income to nearly nothing while reporting substantial profits to shareholders will likely be the hardest hit.
If you want more details of how or whether the new laws will affect you and your company, the tax specialists at Myrick CPA can help you gather the information needed to make the best-informed decision and see your income and tax goals through to fruition. So contact Myrick CPA today to make a tax-planning appointment.