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Editorial 7 MIN READ

The 15 percent corporate book minimum tax, after Manchin

Build Back Better carried a 15 percent tax on the book income of billion-dollar C-corps, a West Virginia senator ended that bill three weeks ago, and the tax is now orphaned but not dead

The Editors
Staff, Incorporator.org
7 min read Updated
Contents 6 sections
  1. How the draft provision worked
  2. Why the design matters for private-equity portfolio companies
  3. A brief history of the corporate minimum tax
  4. What else was in the subtitle
  5. What a January 2022 planner does
  6. Sources

hree weeks ago, on December 19, Senator Joe Manchin told Bret Baier on Fox News Sunday that he could not vote for the Build Back Better Act. The bill the House had passed 220 to 213 on November 19 contained a 15 percent minimum tax on the book income of corporations reporting more than $1 billion of financial statement income on a three-year average. That provision is now stalled with the rest of the package, but it is the offset Democrats are least likely to abandon, and an incorporator with billion-dollar-scale clients should know what the draft text actually did and what is likely to resurface.

What follows is a read of the November 19 text of H.R. 5376, not a prediction about a bill that may or may not come back under another name. The numbers and citations here describe the proposal as it stood on the day the House voted.

How the draft provision worked

Subtitle G, Part 1 of the House-passed H.R. 5376 inserted a new section 56A into the Internal Revenue Code, defining "adjusted financial statement income" (AFSI), and amended section 55 to impose a 15 percent tax on a corporation's AFSI in excess of the corporate alternative minimum tax foreign tax credit. The tax applied only to an "applicable corporation," defined as a corporation (other than an S corporation, a regulated investment company, or a REIT) whose average annual AFSI for the three preceding taxable years exceeded $1 billion. The Joint Committee on Taxation estimated about 200 companies would meet that threshold in a given year.

AFSI begins with the net income a corporation reports on its applicable financial statement, usually the Form 10-K it files with the Securities and Exchange Commission. The House text then layered on adjustments so that AFSI was not simply GAAP net income. Tax depreciation under section 168 replaced book depreciation, so accelerated cost recovery and bonus depreciation continued to flow through the minimum tax base. A financial-statement net operating loss, defined as book loss for years ending after December 31, 2019, could be carried forward and used to offset up to 80 percent of AFSI in a future year. General business credits and the research credit remained available against the minimum tax up to a cap. Consolidated groups were aggregated at the parent; for foreign-parented multinationals, the $1 billion threshold was tested on U.S.-effectively-connected income plus the AFSI of U.S. subsidiaries.

The provision was written to apply to taxable years beginning after December 31, 2022. That is the effective-date anchor a planner would have worked against if the Senate had passed the House text. The Joint Committee on Taxation scored the provision at roughly $319 billion of revenue over the ten-year budget window.

Why the design matters for private-equity portfolio companies

The aggregation rules are the piece that reaches into the middle-market. Under a conventional reading, a private-equity fund that holds a controlling interest in several portfolio companies, none of which individually clears $1 billion of book income, would not pull those portfolio companies into the minimum tax. The House text aggregated under sections 52(a) and 52(b), which are ownership tests that look through to a common parent; it did not aggregate at the fund level. That preserved the intuition most tax lawyers brought into the markup: this is a tax on the Fortune 200, not on the companies in your cap table.

The design choice to measure against a financial statement is what makes the tax bite where the 21 percent rate, standing alone, does not. A company using bonus depreciation, R&D amortization treatment before the section 174 change, accelerated pension contributions, or significant stock-option deductions can book a large GAAP profit while reporting a much smaller taxable income. The book minimum tax sets a floor that does not care about those gaps. Because tax depreciation was preserved as an AFSI adjustment, capital-intensive industries were partially relieved; because stock-option deductions were not, the technology sector took the largest share of the projected liability.

A brief history of the corporate minimum tax

This is the third act for a corporate minimum tax that uses financial statements. The first was the Tax Reform Act of 1986, which included a book-income preference as a temporary bridge and which Congress replaced in 1990 with an Adjusted Current Earnings calculation. The corporate AMT then sat at 20 percent on AMTI, with its own depreciation and preference adjustments, for the better part of three decades. The Tax Cuts and Jobs Act of 2017 repealed the corporate AMT effective for taxable years beginning after December 31, 2017, and made the accumulated minimum-tax credit partially refundable on a four-year schedule.

The Build Back Better version, had it passed, would have revived an AMT on the corporate side four years after its repeal, with the base anchored to the 10-K rather than a parallel tax system. That is the policy shift an incorporator should register: not a return to the old regime, but a new regime that leans on SEC disclosure to do what the tax code alone has not. The academic literature that preceded the proposal, the Warren-King-Wyden Corporate Profits Minimum Tax framework released on October 26, treated the 10-K as a cleaner measure of economic profit than taxable income. The counterargument, which the Financial Accounting Standards Board made indirectly through its comment letters and which several tax-section bar associations made directly, is that GAAP is written for investors, not tax administrators, and hitching a tax rate to it creates pressure on accounting standard-setters.

What else was in the subtitle

Two provisions traveled with the book minimum tax in the House-passed text and would likely travel with it again. The first is a one percent excise tax on repurchases of corporate stock by publicly traded domestic corporations, which would sit at a new section 4501 and was scored at roughly $124 billion. The second is a 15 percent country-by- country minimum on GILTI, which raises the section 250 haircut and aligns U.S. law more closely with the OECD Pillar Two framework. The buyback excise is the provision most likely to migrate intact into a slimmed-down bill; it was Senator Wyden's proposal originally, and it does not have the political constituency against it that the state and local tax deduction and the child-tax-credit extension do.

For an incorporator advising a C-corp that is likely to list, the buyback excise is the detail worth flagging now. The rate is small. The reporting burden is not. Treasury would need to write regulations on netting stock issuances against repurchases, on the treatment of employee stock plans, and on the inbound-merger rules that the House text already began to address. Any of those could swing the effective rate meaningfully.

What a January 2022 planner does

Three things. First, read the November 19 text rather than the summary sheets; the statutory structure is the thing that will carry forward even if the revenue numbers change. Second, watch for the provision to detach from Build Back Better and travel into a smaller revenue package. Manchin has not said he opposes the corporate minimum tax; he has said he opposes the overall size and the way the social-spending provisions were phased. The book minimum tax polls well and raises real money, which are the two conditions for survival in a reconciliation bill. Third, if you advise any C-corp that reports publicly and is anywhere near $1 billion of book income, start pulling the three-year AFSI estimate now. The computation is not trivial, and a first-time-applicability cliff tends to make clients overpay their first-quarter estimates in the year a new tax takes effect.

The Senate is out until January 24. Majority Leader Schumer has said he will hold a vote on Build Back Better anyway. The vote, if it happens, will fail on Manchin's announced position; what matters next is whether Democrats regroup around a subset that the West Virginia senator will sign. If they do, the 15 percent book minimum tax is the single likeliest survivor from Subtitle H, and the text to read is the one that passed the House three weeks before Christmas.

Sources

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