Treasury Should Reject Lobbying Efforts to Further Weaken Corporate Minimum Tax

Industry groups are lobbying the Treasury Department to create a special exemption from the corporate minimum tax — enacted to ensure that corporations pay at least a minimum tax rate on their profits — that would give some of the largest corporations another tax windfall on top of their large tax cuts from this year’s Republican megabill and the 2017 tax law’s permanent corporate rate cut.

Recent Treasury guidance has already weakened Biden Administration rules governing the corporate minimum tax, which was enacted in the 2022 Inflation Reduction Act (IRA); this new guidance effectively exempts significant income of cryptocurrency, private equity, and insurance companies from the tax. The weakened rules and the hollowing out of IRS enforcement (which will make it less likely that corporations pay what they legally owe) mean corporations are racking up large tax cuts that weren’t enacted by Congress. Granting the latest industry request on the corporate minimum tax, related to firms’ prior years’ research and experimentation (R&E) costs, would give billion-dollar corporations yet another tax cut.

The IRA requires some profitable corporations that otherwise may pay little or no corporate income tax in a given year to pay a minimum tax rate on the profits they report to shareholders, known as “book” income (or book profits). The tax applies only to corporations with book profits of more than $1 billion per year on average over three years. These corporations pay the greater of the regular corporate tax (21 percent of their taxable income) or the minimum tax (15 percent of their book income, with certain adjustments).

Corporations may be subject to the minimum tax if their book income is much higher than their taxable income. This can happen if they reduce their taxable income with certain large deductions or other tax breaks.

For some large corporations, the megabill’s corporate tax cuts create a new reason their book income may exceed their taxable income, potentially exposing them to the minimum tax. The megabill reversed a 2017 tax law provision that, starting in 2022, required businesses to deduct their R&E costs gradually over time (or “amortize” them) instead of immediately expensing them. Allowing R&E expensing going forward doesn’t itself create a potential corporate minimum tax liability because those expenses would be treated the same way under both tax and accounting rules. But the megabill adds an extra benefit: for R&E costs that corporations incurred while the 2017 provision was in effect (2022-2024), the megabill also allowed companies to accelerate their remaining deductions to this year.

For some corporations, taking these accelerated deductions could lower their taxable income enough to trigger the corporate minimum tax based on their book income. That’s exactly how the minimum tax was designed to operate, but it’s something that corporate lobbyists want Treasury to prevent by executive fiat.

Industry lobbyists are making two main arguments. First, they claim that Congress, in allowing the accelerated deductions, also wanted them to be fully exempt from the corporate minimum tax. Congress certainly could have excluded those deductions from the minimum tax — just as the megabill specifically exempted certain fossil fuel-related expenses — but the new law didn’t exempt the accelerated deductions. Treasury, in implementing the minimum tax, shouldn’t try to create deductions not stated in federal law.

Second, industry lobbyists argue that exempting the accelerated R&E deductions from the minimum tax would encourage investment and innovation. But providing a new tax break for business activity that has already occurred can’t encourage new investment; it’s just a large giveaway to corporations and their shareholders on top of other large tax cuts in recent years.

The centerpiece of the 2017 tax law was a deep, permanent cut in the corporate tax rate — from 35 percent to 21 percent — at a cost of $1.3 trillion over ten years. Congressional Republicans added the R&E amortization provision (and several other business tax increases) to the law to partly offset the cost of the rate cut. But the megabill reversed most of those business tax increases without revisiting the corporate rate cut — giving yet another windfall to corporate shareholders and adding around $700 billion to the bill’s cost.

Exempting accelerated R&E expenses from the minimum tax would have further increased the megabill’s price tag, potentially pressuring Republicans to offset the provision by shrinking other tax cuts or expanding the new law’s massive program cuts, which will take away health coverage and food assistance from millions of people.

If Treasury now grants the exemption itself through administrative action, this would amount to an unlegislated, unpaid-for tax cut — and likely a costly one. The minimum tax was initially estimated to raise $222 billion over ten years, but the actual revenue raised will likely be far lower due to special exemptions that have already been granted by the megabill and Trump Administration actions. Treasury should reject efforts to further weaken the tax by giving large, profitable corporations an extra windfall.