President Biden Proposes Corporate Tax Changes Alongside Infrastructure Plan Details
On March 31, 2021, President Joe Biden released details of the American Jobs Plan, a $2 trillion proposal to rebuild the nation’s infrastructure and economy. The announcement also included a tax proposal called the Made in America Tax Plan, which is designed to fund the American Jobs Plan by increasing the corporate tax rate and making other changes to the corporate tax code.
At this time, there are no formal legislative actions or bills related to this proposal, and it’s likely that the components of this proposal will change during the legislative process. However, the proposed changes could have a significant impact on corporations. Here’s a closer look at the proposed tax changes in the Made in America Tax Plan.
Corporate Tax Provisions
Corporate Tax Rate
Passed into law under former President Donald Trump in 2017, the Tax Cuts and Jobs Act (TCJA) lowered the corporate tax rate from 35% to 21%. The Made in America Tax Plan does not repeal the TCJA but does propose increasing the corporate tax rate from 21% to 28%. The TCJA made the corporate rate a flat rate (unlike the graduated rates used by individuals and by corporations pre-TCJA), and this does not appear to be changing under the proposed tax plan. When comparing rates, it’s important to compare the 28% flat rate to the 35% graduated rates to see the true impact.
Corporate Minimum Tax
The new tax plan proposes a 15% minimum tax on C corporation book income. This minimum tax is intended to apply only to large corporations, but there is no guidance relating to the definition of a “large corporation.” If enacted, this will represent a dramatic new paradigm in determining the federal income tax liability of C corporations.
President Biden’s tax plan also includes an investment in IRS enforcement. This increased IRS funding is intended to raise the annual percentage of audits on corporations. Additionally, a broader enforcement initiative focusing on corporations and high-income individuals will be unveiled in the future.
International Tax Provisions
Global Minimum Tax
The TCJA instituted a global minimum tax on the earnings of controlled foreign corporations. However, it allowed for a deduction equal to 10% of certain foreign assets as well as a tax rate that is 50% of the corporate tax rate. The Made in America Tax Plan would eliminate the deduction for 10% of certain foreign assets and would increase the minimum tax to 21%. It would also calculate the global minimum tax on a country-by-country basis, preventing corporations from taking the net of low-taxed and high-taxed income together to maximize the efficiency of foreign tax credit calculations.
The proposed tax plan focuses on encouraging other countries to adopt a minimum tax in order to eliminate tax havens, and it proposes disallowing deductions to foreign corporations located in places that do not establish this minimum tax. This would allow for a level playing field without foreign countries gaining a competitive edge by lowering or eliminating corporate tax rates.
The tax changes proposed in the plan would eliminate or limit the ability for a U.S. corporation to acquire or merge with a foreign corporation in order to avoid U.S. taxes by claiming to be a foreign company. This process is commonly known as an inversion and allows companies to shift profits to countries with lower or no tax rates.
Another proposed change would deny deductions and expenses to companies as a result of sending jobs overseas. Instead, companies would receive a tax credit for supporting the movement of jobs from foreign locations back to the U.S.
Elimination of the Foreign Derived Intangible Income Deduction
The proposed tax plan would eliminate the foreign derived intangible income (FDII) deduction for C corporations that have revenue from sales of goods exported from the U.S. or services provided outside the U.S. The revenue derived from this elimination would be focused on expanding research and development investment incentives within the U.S.
What This Means for Taxpayers
It’s important to note that the Made in America Tax Plan does not include any provisions focused on pass-through entities or individuals. There are likely to be significant changes to both the American Jobs Plan and the Made in America Tax Plan once introduced in Congress. We’ll continue to monitor the situation and will provide updates. Please reach out to your KSM advisor with any questions or complete this form.
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