Corporate Tax

Delaying US corporate tax hikes will not put their chunk off

“href =” https://www.law360.com/tax-authority/articles/1357377/# “> Alex M. Parker ·

Biden’s government hopes to gradually roll out planned tax increases to fund infrastructure improvements while minimizing the damage to recovery from the coronavirus pandemic. However, experts say that most economic effects cannot be delayed from corporate tax changes.

President Joe Biden has proposed raising the corporate tax rate from 21% to 28%, which is lower than the previous rate of 35%. (AP Photo / Evan Vucci)

Corporations need to incorporate expected tax changes into their financial reporting immediately, and for those that are publicly traded, their stock prices will react as soon as the news is released.

When making investment decisions, companies are likely to consider persistent, long-term tax rates rather than short-term fluctuations.

“A brief delay in any increase in the tax rate won’t do much to ease the incentive to invest today,” said George Callas, partner at Steptoe & Johnson LLP and former Republican tax advisor to the House of Representatives. “This is especially true for industries with a long investment horizon such as pharmaceuticals and aerospace.”

Speaking on CNBC on Feb. 18, Treasury Secretary Janet Yellen said not what types of tax increases the administration was considering but that they would be used to offset the ongoing cost of an infrastructure bill.

“It would be a package that would likely be proposed later this year that would include spending and investing over several years in infrastructure and education and training, things that would take a few years,” Yellen said. “And likely tax hikes to pay at least part of it would probably come slowly over time.”

The US Treasury Department and the White House did not respond to requests for further information.

During the 2020 presidential campaign, Joe Biden suggested many measures that would increase tax revenue, although he promised none would affect those earning less than $ 400,000 a year. This included an increase in the corporate tax rate from 21% to 28% as well as measures to streamline existing guidelines such as the Tax on global low intangible tax incomeand new 15% global alternative minimum tax based on financial data.

According to accounting experts, these measures would have a direct impact on a company’s financial statements, whether or not they were phased in over time.

According to the principles of financial reporting, companies must take into account potential long-term costs or revenue gains that are attributable to taxes when preparing up-to-date income statements. These often arise due to differences between how tax legislation measures taxable income and financial accounting measures profits, particularly in terms of timing.

If a business can claim accelerated deductions from expenses on a new investment, it will likely have a deferred tax liability as its taxable income will be higher in the years to come than the profits reported through the general ledger, which has a slower schedule for the apportionment of costs. Deductions that companies can only claim in future years also apply, such as B. Net operating losses, as deferred tax assets.

Just like with normal assets and liabilities, these numbers are included in the calculation of ongoing tax costs and ultimately corporate profits. However, future rate changes will also change these calculations.

“It will have an immediate impact on financial statements,” wrote Andrew Belnap, assistant professor of accounting at the University of Texas, in an email to Law360. “With every change in interest rates, deferred tax assets and liabilities are reassessed, which also affects the tax expense in the income statement.”

However, it will not necessarily be true that higher future taxes will result in decreased earnings. In some cases, deferred tax assets may increase due to a change over time. For example, depending on how the legislation is written, the value of a future deduction may increase as the corporate tax rate increases.

“One way this could be interesting right now is the fact that, given the pandemic, there are more companies than usual with net operating losses,” Belnap said. “These companies can transfer these and would actually see their income increase as the deferred tax asset increases.”

In other cases, the timing differences can influence a company’s decision-making, regardless of the immediate impact on the bottom line. Kyle Pomerleau, a resident of the American Enterprise Institute, a right-wing think tank, noted that companies may postpone investments knowing they can deduct more from spending in the future when the tax rate is higher.

“In this case, an immediate tax increase to 28% would be less detrimental to investment incentives than a delayed increase,” said Pomerleau. “As a consequence, delaying an increase in the business rate would likely delay some business investment. Businesses would see the disadvantage of running an asset while the rate is low.”

The impact of other changes on the outcome, such as Biden’s proposal to calculate GILTI tax by country, may be harder to predict.

If the legislation was passed and entered into force, the stock market would react immediately. This is not only due to changes in the income statement, but also to the expectation of new tax costs in the future.

“This should be done as soon as the law is likely to be passed. Once passed, the market should fully take into account that the company’s future cash flows will be lower,” said Jeffrey Hoopes, professor of tax and financial accounting at the University of North Carolina, wrote in an email to Law360.

In addition to the stock market, companies will also consider increased long-term tax costs while making decisions about new investments.

“If the investment becomes profitable, what matters is the tax rate,” said Callas of Steptoe & Johnson. “Delaying a higher rate by a few years doesn’t change the fact that the investment will look worse.”

The long-term prospects companies use when making investment decisions were a primary reason Republican lawmakers passed permanent changes to the corporate tax cut in the Tax Cut and Jobs Act of 2017 While much of the rest of the bill, including the tax benefits for individual taxpayers, expires. If a lower tax rate were temporary, the uncertainty would have been enough to dampen the investment benefits, even if Congress eventually extended the entire bill.

While many of Biden’s tax proposals were aimed at businesses, they also included changes in other tax areas. The Tax Policy Center, a liberal think tank, estimated that Biden’s overall package would generate $ 2.1 trillion in revenue over a 10-year period. Of that amount, $ 1.12 trillion would come from corporate tax changes and $ 758 billion from individual tax changes, such as tax changes. For example, an increase in the capital gains rate, a cap on individual deductions of $ 400,000, and an increase in the top earner rate.

Senator Ron Wyden, D-Ore., Chairman of the Senate Finance Committee and likely to play an important role in drafting tax legislation, also gave no indication of which tax increases were being considered.

“The Texas disaster underscored the urgent need to address the climate crisis and rebuild our infrastructure,” said Wyden in a statement released by his office, alluding to the state’s cold-related power outages this month.

“As part of the recovery package, my priorities will be to make these critical investments by making sure the rich and mega-corporations pay their fair share,” continued Wyden. “I’m working on a number of proposals that will be made public in the coming months.”

– Editing by Robert Rudinger and Neil Cohen.

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