Companies facing new book tax and stock redemption tax

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The Cut Inflation Act that Congress passed on Friday includes a new minimum tax of 15% on book income for corporations that earn more than $1 billion in revenue, as well as a 1% tax on share buybacks, and these provisions may affect tax planning. used by larger companies and their accounting firms.

The new “accounting tax” applies to income recorded in the company’s financial statements, as opposed to income that is typically recorded for tax purposes and reported to the Internal Revenue Service.

The new tax is not the same as the 15% global minimum tax that Treasury Secretary Janet Yellen negotiated with other countries involved in the Organization for Economic Co-operation and Development. This agreement is still blocked in the Senate (see the story). The book tax may hit some industries harder than others.

“I think this will be more pronounced for specific industries and business models, business models that are capital-intensive and where the tax code incentivizes accelerated depreciation expense,” said Wes Bricker, vice president and co-leader of US Trust Solutions at The Big Four Company PricewaterhouseCoopers. “This happens whenever your accounting minimum tax is higher than your tax code tax. This happens because when you add a large investment project that is consumed or amortized over a long period in your report of investor, you could amortize it over 30 years. For taxes, you could accelerate the amortization over, say, seven years. In this case, you spread the same cost over a much shorter period of time, so your expenses to calculate taxable income are much higher, your taxable income is much lower, and your tax is much lower. For the book, your tax is lower because it is spread over a longer period. Therefore , your net income is higher. That’s the disparity that lawmakers focused on, where they said, “Let’s use the numbers from the book, because that better reflects economic realities. Let’s apply a 15% tax on book revenue.

“When you do that, it really represents a second look at all the tax policies that were based on encouraging investment in capital projects,” he continued. “That’s the rationale for fiscal policy to accelerate depreciation. You get more renewal and more investment in the economy and that drives growth, so that can have a dampening effect over time.”

Sen. Kyrsten Sinema, D-Arizona, insisted on creating an exemption for accelerating capital cost allowances as a condition of agreeing to support the legislation, so companies such as manufacturers can still take advantage of the depreciation accelerated the bonus to buy equipment, for example, and it will be exempt from minimum corporate tax (see the story).

Bricker thinks the law could be further refined depending on the outcome, and accounting standard setters may also need to get involved. “It will be interesting to see if a subsequent Congress removes this shock absorber because we would like to see more capital investment,” he said. “But there is another aspect to this: what is the role of general purpose financial statements? At present, they are mainly designed for investors, contractual counterparties like suppliers, employees or other suppliers of capital like a lessor. It’s usually designed for business purposes. But there are places where the government, as a policy maker, is also a consumer of general purpose financial statements. That’s regulatory capital. [area] where the government, as a user of general purpose financial statements, has staked a claim. They said, “We’re going to be a user of general purpose financial statements. Now this has implications because the [Financial Accounting Foundation] is reviewing its oversight role, standard setters are reviewing their role. Even corporate preparers, when selecting accounting policies and applying those accounting policies, do so with an eye on the fairness of reporting, which really reinforces financial reporting as the gold standard.”

Another compromise Sinema insisted on before giving his crucial 50th vote in the Senate was to preserve the carried interest tax break that allows hedge fund managers and partners of private equity firms to be taxed at the rate lower capital gains tax rate of 20%, rather than the ordinary tax rate of up to 37% on their share of a fund’s profits. To help offset the potential revenue lost by preserving this and the accelerated capital cost allowance, another new tax will be a 1% excise tax on share buybacks. This could have the effect of inducing some companies to offer more dividends to shareholders, instead of using excess profits on buyouts to boost share prices and options for executives.

“It’s hard to say, but I anticipate that applying a tax will change the overall incentives,” Bricker said. “Share buybacks are generally considered a return of capital to the remaining shareholders. There are many other ways to return capital. You can dispose of a segment of the business. You can pay a dividend. dividend with debt. You can recapitalize the entity. I think that changes the assessment of individual alternatives on how to return capital to investors. Ideally, we want companies to invest the capital they have for productive purposes , and if they do not have productive goals, return We want this assessment to be done in a way that optimizes the allocation of capital in our system.”

Bricker was previously chief accountant at the Securities and Exchange Commission before joining PwC. “I come to this from my experience as a regulator,” he said. “It’s the fairness and efficiency of our markets. If there’s too much capital trapped in a business that they can’t deploy, it better be returned so it can be invested. in another business and another project. I tend to favor the allocation and reallocation of capital between business models, which reinforces the obligation of each of us to build trust in the quality information provided, which allows the board, management and investors to make decisions about the optimal allocation of capital in a way that truly produces a return that exceeds the cost of that capital? fundamentally the decision.An excise tax certainly changes the balance of these scenarios.

Ultimately, corporations will have to decide which tax strategies they should pursue for themselves and their investors. “The company is going to have to make a decision,” said Kevin Matthews, CPA and accounting professor at George Mason University School of Business, who also has his own tax practice. “Do we want to do dividends or do we want to do share buybacks in order to get money for investors? That will be a data point that will lead them to decide if they want to do it in a way or the other. But I don’t think 1% is going to cause such a decision factor to say, ‘Because of 1%, we definitely won’t.’ It’s just one factor among many.”

He is more concerned about the corporate minimum tax on accounting income. “We finally got rid of the [Alternative Minimum Tax] on the corporate side and now it looks like they’re bringing it back,” Matthews said. “But the biggest problem I’ve seen with it is that it’s based on financial income. Financial income, of course, operates under different rules than taxable income. I was looking at some of the changes they are asking us to make. For depreciation, you must use IRS rules. For goodwill intangibles, you must use IRS rules. There are a lot of things they put in these modifications to make the adjustments. I just think it’s going to take a lot of extra compliance to figure it out. Now the good news is that you need to have over $1 billion in revenue for three years. Let’s be honest, if you’re making a billion dollars in revenue, you’re probably able to afford to hire someone to do the math.”

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