February 8, 2022 - Douglas Myser

Book and tax income part two. With the need for more revenue, governments around the world, including the U.S. Government, have been looking at ways to raise additional revenue. One of the ways discussed is closing loopholes, another under discussion is taxing cryptocurrency, whose large profits over the last few years has caught the eyes of lawmakers. The problem with closing loopholes is that special interest groups come into play, spend large amounts of money to dissuade enough Congress people to vote no, and thats that. Book and tax income part two.

Several accounting groups have brought to the attention of Congress the need to close the gap between what is known as book and tax income. As in the real world they are coming closer together anyway. Business preferences are substantial and often exceed what companies can use in a given year. In 2018, the $51 billion in general business tax credits included $23 billion for research and experimentation, $12 billion for energy, and $9 billion for low income housing. About $100 billion in unused tax credits was carried forward from previous years. If Congress repealed bonus depreciation but allowed more generous write offs than economic depreciation, it would raise business taxes by about $45 billion over 10 years. A tax credit haircut could accompany two other changes that would help prevent corporate tax avoidance.

The first is the package of international reforms in the Build Back Better plan, The second would require public companies to disclose how much tax they actually pay in a given year. Without understanding what drives the differences between IRS book and tax income, it is hard to limit tax avoidance. With the book tax, Congress seems to be saying to corporations: We want you to benefit from the tax incentives we created to encourage certain economic activity, but not too much. If those are the goals, on easy and more direct solution is to make businesses reduce those preferences across the board.

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