New corporate tax minimum ushers in confusion
WASHINGTON — At his State of the Union address this year, President Biden celebrated the fact that his new climate and tax law would no longer allow some of America’s largest corporations to pay zero in federal taxes.
“Because of the law I signed, billion-dollar companies have to pay a minimum of 15 percent,” Biden said, referring to the Inflation Reduction Act of 2022. “God love them.”
The new corporate minimum tax was one of the most significant changes to the US tax code in decades. Its logic rested on the idea that rich companies should not be able to find loopholes and other accounting maneuvers in order to pay lower tax rates than their workers.
But making the tax operational has become a mammoth challenge for the Biden administration, which has faced intense lobbying from industries that could be on the hook for billions of dollars in new taxes. Those groups have been flooding the Treasury Department with letters asking for lenient interpretations of the law and trying to create new loopholes before their tax bills come due next year. Republican lawmakers have been trying to repeal the law while Democrats such as Senator Elizabeth Warren of Massachusetts have been urging Treasury Secretary Janet Yellen to enforce it strictly.
The legislation, which passed with no Republican support, called for the corporate minimum tax to take effect in the 2023 tax year, meaning it will apply to corporate profits earned this year. But the tax was only loosely defined, and Treasury is still writing the rules that will determine how it is carried out.
The corporate minimum tax is entirely separate from the 15 percent “global minimum tax” that the Biden administration brokered with more than 140 nations in 2021. That agreement was aimed at stopping large multinational companies from seeking out tax havens and forcing them to pay more of their income to governments. While the deal is moving ahead in other nations, it continues to face obstacles in the United States.
While the corporate tax rate stands at 21 percent, many large companies pay far less than that to the federal government. For years, big companies such as FedEx, Duke Energy, and Nike have been able to take advantage of various deductions and tax strategies so that they effectively owe nothing in federal taxes. A 2021 report from the Institute on Taxation and Economic Policy found that 55 of the nation’s largest companies had paid no federal income tax the previous year.
An analysis by the Joint Committee on Taxation last year found that about 150 companies with tax rates below 15 percent would be subject to the new tax. Companies such as Amazon and Berkshire Hathaway, which have had effective tax rates in the single digits in recent years, could face the biggest increases in their tax liabilities, according to a summary of research about the impact of the tax published by the Congressional Research Service.
At the Berkshire Hathaway annual meeting in May, Warren Buffett, the company’s chief executive, acknowledged that there was uncertainty over the new tax but said he did not oppose it.
“We can figure out ways, once we know the rules, where we will pay the 15 percent tax,” Buffett said.
While the tax is aimed at some of the largest companies, smaller businesses have also expressed concern that they could be swept into the new tax regime if the regulations are not sufficiently clarified.