The USA’s 15% Minimum Corporate Tax Rate: Here’s How It Works

The US is a pretty interesting place to live. After all, where in the world would you find a country that calls itself the land of the free while making it its mission to tax everything? You’ll find many taxes in the USA – federal income taxes, state taxes, and local taxes. The rates are high, the tax code is complicated, and the compliance is absolute. Let’s briefly discuss the Inflation Reduction Act and how it will affect US citizens and companies now that the House and the Senate have passed it.

The Inflation Reduction Act

The Inflation Reduction Act aims to reduce deficits, fight inflation, battle climate change, and improve healthcare benefits. Although considerable, the 15% minimum corporate tax isn’t the only note-worthy aspect of the new bill. Some notable points from the bill, including the minimum tax hike, are mentioned below:

Biggest Climate Bill in US History

The Inflation Reduction Act is the biggest climate bill ever passed in US history, with a $369 billion investment in the energy and climate change division. The new climate change policies are expected to cut carbon emissions by 40% by 2030.

Healthcare Reforms

The bill will reduce health insurance costs with an investment of $69 billion to extend the Affordable Care Act for three years. Moreover, under the new law, Medicare can negotiate prescription drug prices with drug companies. The new Healthcare reforms are expected to raise $265 billion in revenue over the next decade.The new climate change policies are expected to cut carbon emissions by 40% by 2030.

15% Minimum Corporate Tax

According to the new bill, corporations that report an annual income of $1 billion in their financial statements will be subjected to a 15 percent corporate minimum tax rate and a 1% fee on stock buybacks. The Biden administration has also strengthened the IRS through this bill to conduct frequent audits on large corporations.

The tax reforms and IRS tax enforcement in the bill are expected to reduce the federal deficit by over $300 billion over the next decade. Now that you know about the new bill’s main features, let’s talk about the 15% corporate minimum tax and how it will affect large corporations in the US.

The USA’s 15% Minimum Corporate Tax

The USA’s new minimum tax rate has confused some people for several reasons. First, why would the US need a 15% minimum tax on corporations if the headline corporate income tax rate is already 21%? Second, is this tax related to the global minimum tax rate that 136 countries agreed to last year?

The answer to the first question is a bit technical, and we will discuss it shortly. The answer to the second question is simply no. The global corporate minimum tax and the USA’s new minimum tax are two completely different taxes serving distinct purposes. Let’s discuss the new tax reforms in detail.

How Would the Minimum Corporate Tax Work?

Now that the bill with the new tax reforms has passed, the large corporations in the US with at least $1 billion in income will also have to consider their book income before calculating their annual tax liability.

Headline Tax Rate: The headline tax rate for US corporations is still 21% and is imposed on the corporate profits minus allowable deductions like wages, depreciation, interest, etc. The 21% corporate tax applies to the income companies report to the IRS for tax purposes.

Corporate Tax per Book Income: Book income refers to the income that companies publicly report to their shareholders on their financial statements. The 15% minimum tax applies to the corporations’ book income. After calculation, the corporations will have to pay whichever tax is higher.

How Would the Minimum Corporate Tax Work?

If companies were already paying a higher corporate tax at 21%, what was the need for another corporate tax rate? The minimum tax serves two primary purposes: – It allows the government to raise corporations’ taxes without increasing corporate tax rates. – It aims to eliminate tax loopholes exploited by many large corporations.