The Biden Administration has released its FY 2022 budget, which includes ambitious new spending and corresponding tax increases to pay for it. While most of the proposals focus on individual and international tax, there are some significant general tax increases proposed in the budget.
Increased corporate tax rate
The Administration proposes to increase the income tax rate for C corporations from 21% to 28%, effective for taxable years beginning after December 31, 2021. For corporations not on a taxable year, the rate increase would be pro-rated.
Mazars’ Insight
Although the proposal for a 7-point increase was included in the budget released on May 28, there are already indications that the proposed increase may not proceed, at least in full. For one, Senator Manchin, a key Democratic vote needed for passage of any revenue raising measure that would proceed on a partisan basis through the reconciliation process, has publicly announced his opposition to a rate higher than 25%. Second, in negotiations over a bipartisan infrastructure deal, Biden has announced his willingness to drop the proposed corporate rate increase to achieve a bipartisan deal.
Minimum tax on book earnings
Included in the Biden budget is a proposal for a 15% minimum tax on worldwide book income for corporations with such income in excess of $2 billion, effective for taxable years beginning after December 31, 2021.
Taxpayers with income in excess of $2 billion would be required to calculate their book tentative minimum tax (BTMT), equal to 15% of worldwide pre-tax book income (after subtraction of book net operating loss deductions), less general business credits (the proposal specifically mentions R&D, clean energy and housing tax credits) and foreign tax credits. The book income tax is defined as the excess, if any, of BTMT over regular tax. Taxpayers could claim a book tax credit (generated by a positive book tax liability) against regular tax in future years, but would not be able to use the book tax credit to reduce their tax liability below BTMT in that year.
According to the Green Book, the proposal would reduce the significant disparity between the income reported by large corporations on their federal income tax returns and the profits reported in financial statements. The budget describes the proposal as a targeted approach that will ensure that the “most aggressive corporate tax avoiders bear meaningful federal income tax liabilities.” It also describes the proposal as a backstop to the proposed international tax changes.
Mazars’ Insight
The minimum book tax proposal is consistent with the proposals made by Biden during his campaign, but the Administration has already taken steps to lessen its bite. In contrast to the campaign proposal to apply this tax on companies with $100 million or more in profits, the budget proposal would apply to a much smaller group of companies and would allow the book tax to be offset by business tax credits and adjusted for NOLs.
In the bipartisan infrastructure negotiations, the parties seem to be focusing on a book tax instead of the statutory corporate rate increase. But its not entirely clear whether the focus of the bipartisan negotiations is the budget proposal for a minimum book tax or a reference to global negotiations under way at the OECD for a 15% global minimum tax.
Onshoring and offshoring proposals
The budget includes two separate proposals to encourage businesses to locate jobs and business activity in the U.S. and to disincentivize offshoring, effective for expenses paid or incurred after the date of enactment.
To encourage onshoring, the budget proposes a new general business credit equal to 10% of eligible expenses paid or incurred in connection with onshoring a U.S. trade or business. Onshoring is defined for this purpose to mean reducing or eliminating a trade or business (or line of business) currently conducted outside the U.S. and starting up, expanding, or otherwise moving the same trade or business to a U.S location, if an increase in U.S. jobs results.
Taxpayers could claim the credit regardless of whether the expenses are incurred either by a domestic company or its foreign affiliate. The proposal also says that the U.S. Treasury will reimburse U.S. territories for credits provided to their taxpayers under the plan if they have adopted the Code or if they separately enact the proposal.
The offshoring proposal would disallow deductions for expenses paid or incurred in connection with offshoring a U.S. trade or business. Offshoring is defined for this purpose to mean reducing or eliminating a trade or business (or line of business) currently conducted in the U.S. and starting up, expanding, or otherwise moving the same trade or business to a non-U.S location, to the extent that a loss of U.S. jobs results. Under the proposal, the denial of deduction would also apply in determining the income of a controlled foreign corporation for purposes of determining inclusions of GILTI or subpart F income.
For both the onshoring and offshoring proposals, expenses are defined as limited solely to those associated with the relocation of the trade or business, not including capital expenditures or costs for severance pay and other assistance to displaced workers.
The proposal would provide the Treasury with the authority to implement regulations, including rules to determine covered expenses and treatment of independent contractors.
Mazars’ Insight
Similar items around onshoring and offshoring had been included in the Biden campaign tax proposals. The idea has also been proposed by prior administrations (Obama budgets had included a proposal for a new general business credit of 20% of eligible expenses paid or incurred in connection with insourcing a U.S. trade or business) and by members of Congress. For example, a 2013 bill (S. 337, the Bring Jobs Home Act) introduced by Democratic Finance Committee member Debbie Stabenow, provided a 20% credit for insourcing expenses.
Many implementation questions remain over how the onshoring incentives and offshoring penalties would work in practice.
Please contact your Mazars professional for additional information.
This alert was produced in conjunction with Ivins, Phillips & Barker, Chtd.
Published on June 9, 2021
The information provided here is for general guidance only, and does not constitute the provision of tax advice, accounting services, investment advice, legal advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal or other competent advisers.
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