With the new alternate minimum book tax on corporate earnings, President Joe Biden seeks to make significant tax and accounting changes. This proposal will be a substantial shake-up for any company that uses these practices as they have not seen this type of regulation.’
The new tax proposal is expected to significantly impact how businesses and individuals file taxes. To prepare for these changes, it may be necessary for accountants who work with multiple clients every year in different industries or at various levels of complexity to get additional training so they can help their clients adjust accordingly.
Under the new proposal, corporations would have two sets of tax documents. One is calculated using existing rules, which may be similar or identical for both corporations and their customers in terms of liability calculation. The second tax liability would be equivalent to 15% of book income listed on the company’s income statement.
The alternate minimum book income tax is a new idea that would apply to companies making over $100 million in net profits. When the new book tax is used, it would be a separate set of rules from what we have now. Corporations subject to this alternate system would need pay, whichever amounted higher. Other corporations will continue using existing rules under this plan, so they don’t need to modify them.
The Proposal’s Affect on Accelerated Depreciation
With the passage of this bill, there will likely be many changes in how businesses operate and what they can expense. The usage of accelerated depreciation schedules could change considerably in response to this proposal. One change that could influence accelerated depreciation would allow for more flexibility with using up all or part of your net losses during any given year without having them carry forward into future tax years (something currently not allowed).
Some companies might have to consider accelerated depreciation schedules so that their book income doesn’t exceed $100 million and avoid the alternative minimum tax. By choosing an accelerated depreciation schedule, the company can deduct $6 million in expenses and avoid paying alternative minimum book income tax.
The primary benefit of this strategy might be to minimize complexity since accountants would not need two sets of tax documents.
While the proposed rules will make allowances for foreign credits and net loss carryforward, some tax professionals are skeptical that these breaks won’t be retained in the bill’s final version since they account for discrepancies between income reported on financial statements versus returns.
The effect of not allowing net loss carryforward allowances in the final version of this law would be that companies choose different depreciation schedules for their assets. When it makes more sense to maintain a modest profit each year, accelerated depreciation isn’t as crucial because long-term taxes will decrease after taking into account what was planned initially without having used up all available credits from previous years.