Business Tax as Two Puzzle Pieces

Two senators have introduced legislation proposing a 7% tax on book profits for corporations earning $100 million or more. It’s part of a massive reconciliation package being discussed in Congress, according to Bloomberg.

The Whitlock Co. explains what will happen if the federal government taxes your large business more.

What Companies Are Affected

The legislation, if it becomes law, would affect around 1,300 of the largest companies in the United States, such as Amazon, Google, Microsoft, FedEx, Nike, and more. Sens. Elizabeth Warren of Massachusetts and Angus King of Maine introduced this tax to pay for a spending package.

Small businesses would not be affected by this tax, but there are other concerns.

Amazon reported $21.3 billion in profits in 2020, while Microsoft reported $61.2 billion, according to Business Insider.

Money to Raise

The 7% tax would raise around $700 billion over the next 10 years. President Biden proposed an even larger tax, 15% on book profits, for companies that earn $2 billion in book profits or more to raise around $148 billion in the next decade.

What the Country Gets

Although not finalized, the people of the United States may see infrastructure improvements, improved roads, and perhaps free community college. The costs of the reconciliation budget bill may exceed $3.5 trillion.

How These Companies Are Taxed

Book profits are the profits reported to investors through quarterly and annual reporting. These are profits reported through generally accepted accounting practices (GAAP), meaning it’s the revenue minus the expenses of the company.

Why Now?

A report released in April 2021 by the Institute on Taxation and Economic Policy (ITEP), a nonpartisan nonprofit organization, shows 55 corporations that paid no federal taxes on 2020 profits. The report also says these companies collectively would have owed $8.5 billion in taxes on their profits. Instead, they received $3.5 billion in tax rebates.

ITEP used publicly available data through annual financial reports found on Fortune 500 or S&P 500 lists. 

What Will This Do for Companies?

What will happen with these companies’ finances? What about the economy as a whole?

In terms of investors, they may see fewer dividends than before. Companies may choose to invest more of the profits rather than give more dividends to stockholders. Those decisions are up to the companies’ respective boards of directors, of course.

Small business owners should still watch out. CNBC notes that one aspect of the bill would eliminate the current rate on long-term capital gains for individuals with taxable income in excess of $1 million. That means the tax rate would go to the top ordinary rate of 39.6 percent, nearly double that of the current 23.8 percent for C-corporations.

For the economy, adding new taxes now could hinder growth. Companies may have less liquidity for investments, capital improvements, and hiring more staff. The capital improvements would help provide jobs for contractors, manufacturers, and construction workers. Hiring more staff because of increased profits would allow companies to expand their revenue at a future date.

Related Post: Deferred Tax Assets and NOL Carryforwards

Contact The Whitlock Co. Today for Help

Do you still have questions about your company’s economic future? Need help with some solid business planning? 
The CPAs and business advisors at The Whitlock Co. can help your business navigate the uncertainty of taxes in the coming years. Contact us for more information.