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Inflation Reduction Act

Inflation Reduction Act Inches Into FASB Waters Over Book Income Tax

Denise Lugo  Editor, Accounting and Compliance Alert

Denise Lugo  Editor, Accounting and Compliance Alert

The FASB, the nation’s main accounting rulemaker, could have congressional lobbyists nipping at its heels over a minimum tax rule in the Inflation Reduction Act that would be based on book income—and the accounting profession is up in arms about it.

This would be the first corporate minimum tax based on U.S. GAAP book income standards since the 1980s.

“This is an interesting policy in that it has a piece of financial accounting in it which the tax lawyers and the tax economists know relatively little about,” Jeffrey Hoopes, associate professor, at the Accounting University of North Carolina, said on Aug. 12, 2022.

“If financial accounting income is included in the tax base, when the FASB is trying to decide on rules that might change financial accounting components that have taxable income, there are implications for companies and they are going to be lobbying the FASB to try to get certain outcomes,” he said. “That’s not a position we want to be in. We want the FASB just to be as independent as possible, and this puts a little bit more pressure on the FASB.”

The accounting profession is unanimous in its concerns over the rule, sending a letter to congress last year with about 300 academic signatures, which included former FASB board members, Hoopes added.

Others agree.

“What is concerning at this point is that tying the new minimum tax to financial statement income creates incentives for companies to report lower book income, which may be at odds with the overall purpose of financial statements (and the goal of the FASB) to be a source of information that is useful to current and potential investors and creditors,” Mary Cowx, Assistant Professor at the W. P. Carey School of Accountancy at Arizona State University, said on Aug. 12.

The Inflation Reduction Act of 2022, a $700 billion three-pronged bill on healthcare, climate, and tax, would require companies that report over $1 billion in book income to pay a 15 percent minimum tax rate on that book income, which they may already be satisfying. But for those with over $1 billion in earnings that may have taken certain credits or deductions that lower their tax rate below 15 percent of their book income, they may be subject to additional tax liability.

The tax in question starts with adjusted financial statement income, tax professionals said. And financial statement net operating losses can be carried forward and reduce financial statement income for purposes of the tax. In addition, minimum tax liability can be reduced by general business credits. Moreover, companies are able to use accelerated depreciation (under the internal revenue code) in calculating financial statement income for the minimum tax.

“FASB doesn’t literally have to do anything in response to the bill, but things they do will have an impact,” Kyle Pomerleau, a senior fellow at the American Enterprise Institute (AEI), said on Aug. 12.

The legislation, however, signals that congress is effectively outsourcing a portion of the tax base to FASB, he said. “Changes they make to financial accounting rules will have a direct impact on federal revenue collections; congress may take more interest in FASB’s work because of this and may lobby for or against certain changes.”

FASB Says Outside of Mission

Under the oversight of the Financial Accounting Foundation (FAF), a trustee body, the FASB’s seven board members develop Generally Accepted Accounting Principles (GAAP) for public and private companies and not-for-profit organizations in the U.S.

The board currently has projects to disaggregate expense information on the income statement, and separately to bolster income tax disclosures in targeted areas. Both are early-staged projects and it is not yet clear how/if they would play into this new issue.

In response to a Thomson Reuters query, the FAF flatly said tax and public policy matters are outside the board’s mission and should be left to congress and other regulatory agencies.

“The FAF and FASB remain focused on our mission to create high-quality financial accounting and reporting standards that provide information that is useful to investors and others who use financial reports,” a FAF spokesperson said via email on Aug. 12.

“We are committed to the rigorous, inclusive, transparent, independent, and thoughtful process that has served our capital markets well for nearly fifty years. Matters of public policy, including tax policy, are outside our mission and are appropriately addressed by Congress, the Administration and regulatory agencies,” the spokesperson said. “We continue to serve as a resource for policymakers, stakeholders and others who have questions about financial accounting standards or the independent standard-setting process.”

Came from BBB?

The topic of FASB and the potential for political interference is nothing new, also raising its head last year in relation Build Back Better (BBB). (See Proposed Tax Rule in BBB House Bill Could Potentially Push FASB into Political Charters, Some Say in the Nov. 1, 2021, edition of Accounting & Compliance Alert.)

There have been changes to the book minimum tax (BMT) proposal that was included in BBB which never became law, Andrew Lautz, Director of Federal Policy at National Taxpayers Union, explained on Aug. 12.

Between the passage in the House of BBB and its eventual failure because the Senate never voted on it, and the more recent introduction of the Inflation Reduction Act, Democrats have made significant changes to the book minimum tax, but there is still a book minimum tax in the Inflation Reduction Act.

“The Senate made two major changes to BMT in the final days to earn Sen. Sinema‘s vote,” Lautz said, namely: 1) allowing adjustments from financial statement income for accelerated depreciation, which reduces the revenues lawmakers expect the BMT to yield to the federal government; and 2) removing a provision that would apply the BMT to companies with less than $1B in book income but that are controlled by a company with over $1B in income (i.e., private equity firms with controlling stakes in smaller companies).

These changes have reduced the BMT’s 10-year revenue yield from around $315 billion to around $225 billion, according to the nonpartisan Joint Committee on Taxation (JCT).

“Even though it doesn’t directly involve FASB, it does have implications for FASB because it is asking major companies to pay a tax based on financial statement income which is based on GAAP standards set by FASB,” said Lautz.

But “less revenue means lower stakes for FASB’s involvement.”

 

This article originally appeared in the August 15, 2022 edition of Accounting & Compliance Alert, available on Checkpoint.

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