Tax Law Changes: A closer look at corporate taxes
A few days ago, we kicked off our four-part series on tax law changes with a look at what’s in store — or at least what’s proposed — for your personal income taxes. Today, we shift financial gears to corporate taxes. (Future articles will look at the American Families Plan and estate and gift taxes.)
In recent years, corporations have generated an ever-smaller share of federal income tax revenue, placing the burden of funding various programs on individuals and personal income taxes. The new administration’s corporate tax plan aims to change that by increasing taxes for corporations and closing loopholes that allow corporations to avoid paying taxes.
As always, remember that the changes outlined in this article are only proposed changes and will not officially become part of the tax law until they are enacted by Congress.
Corporate Tax Rate Increase
- The new plan aims to raise the corporate tax rate. The House Ways and Means Committee has suggested the graduated scale below. The increase was initially suggested to pay for the Biden administration’s infrastructure plan and other proposals.
- 18% on the first $400,000 of income
- 21% on income between $400,000 and $5 million
- 26.5% on income above $5 million
The graduated rates would phase out for corporations making over $10 million.
- For those who may be curious, here’s some interesting background on the corporate tax rate. The first corporate tax rate was 1% in 1909 before being raised to 12% in 1918 for corporate income over $2,000. The highest corporate tax rate was 53% in 1968 (increases to corporate tax rates are often seen during periods of war). The rate was set at 35% in 1993 and remained at that rate until 2018 when it was decreased to 21% under the Tax Cuts and Jobs Act.
- In 2018, 91 of the Fortune 500 companies paid no corporate tax. This loophole would be closed with a proposed 15% minimum tax on corporations of over $100,000,000 in book profits (not the income reported to the IRS). Corporations would then pay either their regular corporate income tax or a 15% minimum tax, whichever is higher.
Minimize Foreign Investments
- The proposal will repeal the current exemption for the first 10% return on foreign investment and end the preferential tax rate of half the 21% (proposed at 26.5% domestic rate on the remainder of foreign profits.
- The goal is to close the loopholes and shelters that have allowed American corporations to move intangible assets and related profits abroad to controlled subsidiaries in countries with lower tax rates than the U.S. The Biden administration has encouraged other countries to follow suit with similar plans.
Corporate Tax Credits
- A proposed 10% “Made in America” tax credit will help businesses that invest in “revitalizing closed or nearly closed facilities, retooling or expanding facilities, and bringing production or service jobs back to the U.S. and creating U.S. jobs.”
- A New Markets Tax Credit (NMTC) program incentivizes community development and economic growth through tax credits that attract private investment to distressed communities.
- Other corporate tax credits being proposed include a Manufacturing Communities Tax Credit to reduce tax liability of businesses that experience workforce layoffs or a major government institution closure, credits to small businesses that adopt workplace retirement savings plans, and several renewable energy-related tax credits.
Erin Sunday is the Vice President, Investment & Trust Services Relationship Manager at F&M Trust.
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