Economist John Maynard Keynes said that avoiding taxes was “…the only intellectual pursuit that carries any reward.” But in the case of book income vs. tax income, all rewarding things must come to an end. A minimum corporate tax in the US has been proposed that would be based on the book income of large corporations, not just on taxable income.
The difference between the two types of income can be significant because companies have two diametrically opposed goals when reporting profits:
- Report high profits to shareholders (book income) to highlight the success of their management teams and strategies.
- Report lower profits to the IRS (tax income) to minimize their taxes.
As an example, current tax policy allows accelerated “bonus” depreciation of assets, which lowers taxable income by increasing expenses in a given period. But a company that uses accelerated depreciation for tax reporting would not use it to report earnings to shareholders because it would lower its book income. Over a several-year timeline, however, differences between the two approaches mostly disappear.
State-level taxes are often a mirror of federal tax policy – could a book-income tax also be coming soon to a state near you? Or for that matter, to a country near you? The G20 have endorsed a minimum global corporate tax of 15% beginning in 2023.
But perhaps companies should look at the bright side. US firms have been successfully avoiding taxes through the intellectual pursuit of lower taxable income since the corporate Alternative Minimum Tax was repealed in 2017…