The Inflation Reduction Act, signed by President Joe Biden on Aug. 16, 2022, changed the way large corporations are taxed. The law imposed a minimum 15% tax on corporations that made $1 billion in average annual earnings over the past three years.
Corporations report income in two different ways: book income and taxable income. The 15% minimum tax applies to book income with some adjustments.
The minimum book tax's objective is to ensure that businesses pay taxes when making a profit. The tax took effect in 2023. The Joint Committee on Taxation estimated that about 150 corporations would be subject to the minimum tax each year, and that it will result in a gain of $222 billion over 10 years.
A Congressional Research Service report estimated that about half the tax revenue would be collected from manufacturing companies (with about 16% from chemical manufacturing) and about 11% each from information and holding companies.
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What is taxable income?
Corporations report taxable income to the IRS and other tax authorities, such as the IRS. Taxable income has a maximum tax of 21%. Corporations sometimes reduce their taxable income by deducting the cost of expenses such as investments, salaries, and charitable contributions from their gross income.
If a company’s deductions are greater than its taxable income, that results in a net operating loss. Businesses can carry over up to 80% of their net operating losses from previous years and use that to report lower taxable income for the current year.
What is book income?
Book income reports profitability over a period of time. This is reported in financial statements to shareholders and governed by generally accepted accounting principles (GAAP[1])[2]. Book income generally has fewer deductions and credits applied than taxable income.
Under the Inflation Reduction Act, when corporations have high amounts of tax credits and deductions that reduce taxes owed to less than 15% of book income, they are subject to an additional tax. The additional tax is the difference needed to reach the 15% minimum.
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[1] GAAP is a set of accounting standards, rules, and procedures that shape the financial reporting system.
[2] More information about financial statements can be found here: SEC.gov | Beginners' Guide to Financial Statement
