Biden's Corporate AMT Proposal Could Hurt Tax Equity Market

Democratic presidential nominee Joe Biden's proposal to essentially apply an alternative minimum tax on large corporations with minimal tax exposure could end up discouraging investment in socially beneficial programs meant to boost low-income housing, infrastructure and carbon capture projects. 

That's because his proposal to apply a 15% alternative minimum tax on the book income of large corporations — those with earnings of at least $100 million — could discourage such companies from entering the tax equity market if, by doing so, they'd lower their taxable income enough to expose themselves to the AMT. 

The tax equity market has acted as a robust conduit to allow corporations, mainly financial institutions, to offset their tax exposure by investing in programs that promote low-income housing and carbon reduction, among other things. 

Those companies could calculate that by continuing to pursue such tax credits to reduce their tax liabilities, they would expose themselves to the corporate minimum tax outlined by the Biden campaign. As a result, they might rethink their investments, which could in turn dampen the tax equity market.

"It's just another layer of complexity, which is, well, do we really want to invest in low-income housing tax credits or something else?" John Gimigliano, principal-in-charge of the legislative and regulatory services group of the Washington national tax practice of KPMG LLP, told Law360. "Because if we do, it'll lower our tax liability — but if it just throws us into the AMT, is it really worth it?"

Biden's plan — which is similar to others proposed during the primary by other Democrats, including Sen. Elizabeth Warren, D-Mass. — would be applied globally to effectively target organizations involved in overseas profit-sharing. 

Under Biden's proposal, companies with book income of at least $100 million would pay the higher of either a 15% tax on their worldwide income — based on financial accounting information, while allowing for foreign tax credits and net operating losses — or their corporate tax rate based on their taxable income.

And while such a proposal could be effective in yielding more revenue from corporations that have successfully shielded their exposure historically, it would be unfortunate if, at the same time, less investment was directed toward tax credits, Sanjay Agarwal, international and corporate tax partner at Macias Gini & O'Connell LLP, told Law360. 

Companies that have looked to tax credits to limit their tax exposure may begin to reevaluate such decisions if, by doing so, they'd incur an alternative minimum tax, he said. 

"You don't want to disincentivize somebody from investing in low-income housing or even the opportunity zone program," he said. "Congress may want to look at those, or maybe even rework the rules, if people think that they're not being effective and people may be discouraged from investing in qualified opportunity zones or other areas."

The tax equity market, in which the rights to tax credits are swapped for equity investments in a company, has been a key driver of directing investments toward programs that are meant to benefit society, writ large. 

According to the tax advisory firm CohnReznick, about $16 billion in tax equity capital was invested in low-income housing projects during 2016, for example, and banks provided upward of 85% of that total. 

Biden's AMT proposal targets the gap between the earnings companies report to their investors with their financial statements and the income they report to the Internal Revenue Service for tax purposes, Thornton Matheson, senior fellow at the Urban-Brookings Tax Policy Center, told Law360.

"Corporate CEOs would be reluctant to understate their actual profits in their financial statements," Matheson said. "Everybody wants lower taxable income, but nobody wants lower financial profits."

There are other ways a Biden administration could narrow the gap between earnings reported on financial statements and those reported to the government, but that may not be desirable either. 

For instance, companies that buy assets can depreciate them over long stretches of time when they're reported to their investors, which has the effect of boosting their bottom lines. But when reporting income to the IRS, those same companies can use accelerated depreciation methods such as bonus depreciation to immediately deduct those assets, which has the effect of reducing their taxable income. 

Nixing bonus depreciation would have the effect of minimizing the gap between book income and taxable income, KPMG's Gimigliano said, but it's not altogether clear whether a Biden administration would be interested in repealing it from the tax code. It is a broadly popular provision of the tax code, with bipartisan support, and it gives businesses incentives to invest, which is valuable in the economic climate produced by the novel coronavirus pandemic, he said. 

"You might argue, is this really the time to repeal something like bonus depreciation, which is viewed as a sort of a pro-economic stimulus kind of provision?" Gimigliano said.

As Biden and others weigh such policies, it's important to keep in mind the potential unforeseen, adverse effects, Gimigliano said. 

"Congress often gives with one hand and then often takes back with the other," he said. That's a dynamic worth considering "if we have an AMT system that sort of undermines the policy objectives" of various tax credit programs, he said. 

The Biden campaign did not respond to a request for comment.

--Additional reporting by Alex Parker. Editing by Tim Ruel and Vincent Sherry.

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