What They Mean for Businesses This Year

As we move further into 2024, businesses across the United States are bracing for significant changes in the tax landscape. The government has proposed a series of corporate tax increases aimed at raising revenue to fund various public initiatives, including infrastructure improvements, healthcare, and education. While these proposed increases are still being debated, they have already sparked concern among business owners and corporate leaders.

In this article, we’ll explore the potential corporate tax increases, their implications for businesses, and what companies can do to prepare for these changes. Whether you’re a small business owner or the CEO of a large corporation, understanding the potential impact of these tax changes is crucial for your strategic planning.

 

 Understanding the Proposed Corporate Tax Increases

The current administration has made it clear that one of its primary goals is to increase the corporate tax rate. Currently, the federal corporate tax rate stands at 21%, a figure set by the Tax Cuts and Jobs Act (TCJA) of 2017. The proposed changes could see this rate increase to as much as 28%, though some lawmakers are pushing for a more moderate increase to 25%.

In addition to the headline rate increase, there are several other proposed changes that could affect corporations:

1. Global Minimum Tax: The proposal includes a significant overhaul of the Global Intangible Low-Taxed Income (GILTI) regime. This would involve increasing the GILTI rate and reducing the deductions currently available, which could raise the effective tax rate on foreign income.

2. Minimum Book Income Tax: A new minimum tax on corporate book income is also on the table. This would ensure that companies with substantial book profits but low taxable income pay a minimum amount of tax, regardless of deductions or credits.

3. Increased Taxes on Capital Gains: Although primarily targeted at individual investors, the proposed increase in capital gains taxes could also affect corporations, especially those that rely heavily on stock-based compensation or have significant investments in capital assets.

4. Limitations on Deductions: The proposals include various limitations on deductions that businesses can claim, including restrictions on the deduction for interest expenses and changes to the treatment of research and development (R&D) expenses.

5. Increased IRS Enforcement: Alongside these tax increases, there is a proposed increase in funding for the Internal Revenue Service (IRS) to boost enforcement efforts. This could lead to more audits and greater scrutiny of corporate tax returns.

 

The Rationale Behind the Increases

The administration argues that these corporate tax increases are necessary to address income inequality, ensure that large corporations pay their fair share, and generate revenue for essential public services. The revenue raised from these tax changes is earmarked for ambitious plans to improve infrastructure, expand healthcare coverage, and combat climate change.

Proponents of the tax increases also point to the need to address the budget deficit and national debt, which have ballooned in recent years due to increased government spending, including pandemic-related stimulus measures.

 

 Potential Impact on Businesses

The proposed corporate tax increases could have wide-ranging effects on businesses of all sizes. Here are some of the potential impacts:

1. Reduced Profit Margins: An increase in the corporate tax rate would directly reduce after-tax profits for many companies. This could lead to lower dividends for shareholders, reduced reinvestment in the business, and potentially even layoffs if companies seek to cut costs.

2. Increased Cost of Capital: Higher taxes on capital gains and limitations on interest deductions could increase the cost of capital for businesses. This could make it more expensive for companies to finance new projects, expand operations, or invest in research and development.

3. Shift in Corporate Behavior: To mitigate the impact of higher taxes, some companies may change their behavior. This could include moving operations or profits overseas to lower-tax jurisdictions, increasing the use of tax shelters, or restructuring their businesses to take advantage of remaining deductions and credits.

4. Competitive Disadvantage: U.S. companies could find themselves at a competitive disadvantage compared to foreign competitors if the U.S. corporate tax rate becomes significantly higher than that of other major economies. This could lead to a decrease in foreign investment in the U.S. and a potential loss of market share for U.S. firms abroad.

5. Impact on Small Businesses: While the proposed tax increases primarily target large corporations, small businesses that operate as C-corporations could also be affected. These businesses may have less flexibility to absorb the impact of higher taxes, which could lead to financial strain or even closure in extreme cases.

6. Increased Compliance Costs: The increased IRS enforcement and more complex tax regulations could lead to higher compliance costs for businesses. Companies may need to invest more in tax planning and accounting services to ensure they remain compliant and minimize their tax liabilities.

 

 What Businesses Can Do to Prepare

With the potential for significant changes to the corporate tax landscape, it’s essential for businesses to start preparing now. Here are some steps companies can take to mitigate the impact of these proposed tax increases:

1. Review Tax Strategies: Businesses should review their current tax strategies to identify any potential vulnerabilities. This could include analyzing their use of deductions, credits, and tax shelters to ensure they are maximizing their tax efficiency.

2. Consider Restructuring: Depending on the final form of the tax changes, it may be advantageous for some companies to restructure their operations. This could involve changing the legal structure of the business, moving operations to lower-tax jurisdictions, or reorganizing the company to take advantage of remaining deductions and credits.

3. Increase Investment in Tax Planning: With the potential for increased IRS enforcement, businesses should consider investing more in tax planning and compliance. This could include hiring additional tax professionals, implementing more sophisticated tax software, or working with external advisors to ensure they are prepared for any changes.

4. Engage in Advocacy: Businesses can also engage in advocacy efforts to influence the final form of the tax changes. This could involve working with industry groups, lobbying lawmakers, or participating in public comment periods to ensure that their concerns are heard.

5. Plan for Contingencies: Finally, businesses should develop contingency plans to address potential challenges. This could include building up cash reserves to cushion the impact of higher taxes, exploring alternative financing options, or diversifying their revenue streams to reduce their reliance on taxable income.

 

Final Thoughts

The proposed corporate tax increases represent a significant potential shift in the tax landscape for U.S. businesses. While the final details of these changes are still being debated, it’s clear that they could have a substantial impact on companies of all sizes. By understanding the potential implications of these tax increases and taking proactive steps to prepare, businesses can position themselves to navigate this new environment successfully.

At The Law Office of Pietro Canestrelli, we are dedicated to helping businesses understand and comply with complex tax regulations. If you have questions about how these proposed corporate tax increases could affect your business, or if you need assistance with tax planning and compliance, our team of experienced tax attorneys is here to help. Contact us today to schedule a consultation and learn more about how we can support your business in these challenging times.