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Biden's Proposed Minimum Book Tax Plans

President-elect Joe Biden intends to make significant changes to the tax code, some of these will likely change tax and accounting practices at their core. One of the biggest proposals Biden has made pertaining to the tax code is a new alternate minimum book tax on corporate earnings. This proposal is going to lead to significant changes in both tax and book accounting.

Nov 17th 2020
Pro Accountancy
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Because some details of Biden's tax code changes have not been finalized yet, this makes it difficult to predict the exact implications of the new alternative minimum tax.

However, the incoming administration has highlighted some of the most likely policy points of the new tax changes. This makes it easier to analyze their impact, so tax accountants can develop new processes that reflect the new proposal, if it does indeed go into effect. Accountants that need to understand these changes may want to consider getting a master’s degree in accounting to see how the policies will change.

One of the biggest questions that accountants are asking is what impact the proposed budget tax would have on accelerated depreciation write-offs. It will likely affect bonus depreciation to a greater degree. Some insights based on publicly available details of the new proposal are outlined below. As some elements of the proposed policy are still not set in stone, the following is not intended to serve as a finished appraisal of the proposal.

Overview of the Proposed Alternate Minimum Book Tax Rule

Under the new proposal, corporations would need to conduct two separate sets of tax documents. They would use existing tax rules to calculate the tax liability under the current tax code. However, they would also need to calculate a second tax liability, which would be equivalent to 15 percent of book income listed on the company’s income statement. This means that Biden does not intend to replace the existing tax rules.

The new book income tax is a separate set of rules that would be applied on top of the current tax code. Corporations subject to the alternate book tax would need to pay the higher of the two.

The alternate minimum book income tax would only apply to companies making over $100 million in net income. Other corporations would only need to continue to use existing rules.

What Impact Would New Rules Have on the Approach to Accelerated Depreciation?

The alternative minimum tax proposal does not specifically reference any changes to accelerated depreciation schedules. However, it is possible that the usage of accelerated depreciation schedules will change considerably in response to the proposed changes.

It is difficult to predict the exact impact without a final version of the bill that outlines details on other restrictions and allowances, such as the net loss carry forward rule. However, it is plausible that the following changes will influence the use of accelerated depreciation.

1. Accelerated depreciation could be utilized more aggressively to reduce book income below $100 million

Some firms might choose to use accelerated depreciation schedules to reduce book income below $100 million, so they don’t have to consider the alternative minimum tax. If a firm has $110 million in EBITDA in a given year, then it might take a closer look at newly purchased capital. Tax accountants might find that the company purchased $30 million in assets with an expected lifetime of five years.

Under a straight-line depreciation schedule, the company would only be allowed to deduct $6 million in depreciation expenses. This would still leave them liable for the alternative minimum book income tax. However, they might easily reduce their net income below $100 million in the first year by choosing an accelerated depreciation schedule instead.

The primary benefit of this strategy might be to minimize complexity, since accountants would not need to create two separate sets of tax documents. They might rationalize this decision by theorizing that the long-term tax differences between the two policies might be negligible. Such a claim could be tainted by their own biases in favor of reducing the workload associated with conducting two separate tax assessments, but large businesses might overlook this reality if they struggle to navigate the complexities of the new tax code.

2. In the absence of net loss carry forward allowances, companies might avoid using accelerated depreciation if it would result in net losses

Biden has said that the proposed rules will make allowances for foreign credits and net loss carry forward. However, some tax professionals are skeptical that these allowances will be retained in the final version of the bill, since they are by far the two biggest causes of discrepancies between income reported on financial statements and tax returns.

If net loss carry forward allowances aren’t included in the final version of the law, then companies will drastically change their approach to accelerated depreciation because they wouldn’t be able to carry it forward the next year. Instead, it would make more sense to choose a depreciation schedule that allows them to maintain a modest profit each year, since their long-term tax liability will be lower.

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