A group of accounting experts has urged Congress not to use book income as the basis for levying a 15% minimum corporate tax to help pay for President Biden’s “Build Back Better” legislation.
Sens. Elizabeth Warren, Angus King, and Senate Finance Committee Chairman Ron Wyden proposed the tax as an alternative to the Democrats’ original plan to raise the corporate income tax rate to at least 25% from the current 21%.
The 15% minimum tax would apply to companies that make $1 billion or more in book income — that is, the amount of income corporations publicly report on their financial statements to shareholders — for three consecutive years, which means roughly 200 corporations, according to the sponsors.
But in a letter to Wyden, more than 200 accounting professors said using financial accounting income, rather than taxable income, as the basis for the tax risks politicizing accounting rules, encouraging companies to distort their financial results, and unnecessarily complicates tax calculation.
“It would be cleaner and simpler to just fix the tax code if there are perceived problems with the tax system,” the letter said.
“Imposing tax according to adjusted financial statement income takes the definition of taxable income out of Congress’s hands and puts it into the hands of industry regulators and others.”
The American Institute of CPAs also urged lawmakers last week to reconsider their approach to a minimum corporate tax, saying that “Imposing tax according to adjusted financial statement income takes the definition of taxable income out of Congress’s hands and puts it into the hands of industry regulators and others.”
According to the new letter, the proposal would compromise the ability of the Financial Accounting Standards Board to “be free from lobbying and ideally arrive at the most appropriate financial accounting standards.”
Another risk is that “companies will alter their reporting and report lower financial accounting earnings than they would in the absence of this tax.” The letter cited academic research that examines previous experiences of including financial accounting in the tax base and increasing conformity of financial accounting and taxable incomes.
Such behavior by corporations “will lower the quality of financial accounting earnings, will lead to less information provided to the capital markets from financial accounting, and result in less efficient capital allocation,” it said.