What Are the Most Common Tax-Reduction Strategies Used by Large Corporations?
To reduce their tax payments, large corporations employ a complicated network of deductions and tax credits. Net operating losses, accelerated depreciation, tax credits, and profit shifting are some of the most frequent ways. Income is reported by publicly traded companies in two ways: book income and taxable income. Book income is the money they earn from their enterprises in profits, whereas taxable income is the money they pay in taxes on those gains.
Taking advantage of net operating loss is one of the most prevalent ways for major corporations to decrease their tax burden. When a company’s operational costs surpass its income in a particular tax year, the result is a net operating loss. This usually occurs when the firm has a poor profit margin or has suffered expenditures as a result of theft, a natural disaster, or another unanticipated occurrence.
If a corporation experiences a net operating loss in a particular year, the IRS enables it to deduct that amount from future tax returns to balance earnings in subsequent years. This is known as “loss carryforward,” and it is an excellent method to level out taxable income over time.
NOL carryforwards have limitations, and other states have varying requirements. These limitations were temporarily lifted by the CARES Act from 2018 to 2020, but they will be reinstated in 2021. They can be important tools for decreasing future tax liabilities, but it is essential to consult with a tax professional before taking any action.
The IRS permits firms to deduct the cost of business-related assets (such as machinery and equipment) quicker than their value declines for accounting and tax reasons. This is referred to as accelerated depreciation.
Accelerated depreciation saves money for management by lowering taxable income in earlier years and increasing tax savings later on. This is especially advantageous for new enterprises and those with high equipment purchases who seek to offset those costs with tax breaks.
Aside from helping businesses to save money, accelerated depreciation may also be employed by property owners wishing to cut setup expenses and their initial tax payment when they start their rental business. However, examine how much the accelerated depreciation would benefit you in the immediate term, as well as if it will affect future tax credits or depreciation recapture when you sell the property.
Tax credits are one of the most prevalent techniques used by major corporations to decrease their tax liability. These state subsidies allow businesses to deduct all or a portion of the costs associated with a certain type of activity on their income tax returns.
Investment tax credits, for example, decrease a company’s tax liability on funds spent on new buildings and equipment. Some states may provide tax breaks for recruiting disadvantaged people.
Credits are more useful to taxpayers than deductions since they reduce their tax burden dollar for dollar. This implies that a person with a $3,000 tax bill who qualifies for a tax credit can save $1,000.
Tax credits are classified as nonrefundable, refundable, or partially refundable. Nonrefundable credits can only reduce a taxpayer’s tax bill to zero and will not return any surplus value. Refundable credits, on the other hand, can reduce a taxpayer’s tax bill to a negative amount and return any residual value as a cash check.
Large corporations employ a tangle of tax incentives and deductions to reduce, and in some cases eliminate, their corporate income tax responsibilities. Accelerated depreciation, profit offshore, substantial deductions for valued employee stock options, and tax credits are among them.
Profit shifting, or transferring earnings from a high-tax nation to a low-tax one, is one of the most prevalent tactics used by major corporations to decrease their tax burden. This can be accomplished by registering intangible assets in tax havens, such as trademarks and copyrights, or by manipulating internal pricing.
“Earnings stripping” is another way of profit shifting. Companies move their earnings to a foreign affiliate by paying significant, tax-deductible payments to that affiliate, such as interest payments.
The 2017 tax reform included a series of international levies intended to reduce the incentive for multinational corporations to profit shift. Profit shifting has been slowed by measures such as the Global Intangible Low-Taxed Income (GILTI) minimum tax and the base erosion and anti-abuse tax (BEAT). Policymakers have the chance this year to approve critical measures that would strengthen these rules and prohibit profit shifting.
