In order to pay as little in taxes as possible, large corporations can take advantage of a wide variety of deductions and tax credits. Profit shifting, tax credits, accelerated depreciation, and net operating losses are some of the most frequent strategies. There are two types of income disclosures made by publicly traded companies: book income and taxable income. Income tax is the amount of money owed as a result of earning money from a firm, whereas book income is the amount of money kept as profit.
Taking advantage of net operating loss is a frequent strategy used by multinational corporations to lower their tax burden. When a company's operational expenditures are higher than its revenue, it has a net operating loss. This is common when a company's profit margin is poor or when unexpected costs (such as those caused by theft, natural disasters, etc.) have to be incurred.
The Internal Revenue Service permits businesses to carry over net operating losses from one year to another in order to reduce their taxable income. Loss carryforward is a fantastic method to smooth out one's taxable income over time.
Some states have more lax regulations regarding NOL carryforwards than others. The CARES Act has temporarily lifted these limitations for the years 2018–2020, but beginning in 2021, they will once again be in effect. If you want to minimize your tax bill in the future, these strategies may help, but you should see a tax expert first.
To help companies offset the cost of investing in assets (such as machinery and equipment) at a quicker rate than their value depreciates, the Internal Revenue Service (IRS) provides for accelerated depreciation. Accelerated depreciation describes this situation.
Managers can save more cash thanks to accelerated depreciation because their taxable income will be lower in the first few years and will continue to decrease as time goes on. New enterprises and established ones alike who have recently invested in costly pieces of machinery might gain greatly from this.
Accelerated depreciation not only helps businesses save money but may also be utilized by property owners to decrease startup expenses and their first tax payment when starting a rental business. The benefits of accelerated depreciation in the short term should be weighed against any potential negative effects on tax credits or depreciation recapture upon the sale of the property.
Tax credits are frequently used by major corporations as a means of lowering their tax burden. Companies can deduct the full or partial cost of participating in a state-subsidized program from their taxable revenue thanks to these grants.
For instance, if a business invests in new infrastructure, it can deduct a portion of those expenditures from its taxable income. There are states that offer tax breaks to businesses that hire people from underrepresented groups for open positions.
It's common knowledge that credits are preferable to deductions since they reduce taxable income by the same amount for each. To put it another way, a taxpayer who owes $3,000 in taxes but is eligible for a $1,000 tax credit will pay just $2,000.
Nonrefundable tax credits are the exception to the rule, whereas refundable (and even partially refundable) tax credits are the norm. Credits that are not refundable may only be used to reduce a taxpayer's tax bill to zero and cannot be refunded in any other form. However, a taxpayer's tax due can be reduced to a negative amount by using refundable credits, and the difference can be paid back to them in the form of a cash refund.
To reduce or eliminate their corporate income tax obligations, many large corporations take advantage of a complex web of tax credits, deductions, and exemptions. Accelerated depreciation, profit shifting overseas, large write-offs for employees' stock options' appreciation, and tax credits are all examples.
Profit shifting, in which earnings are moved from a high-tax country to a low-tax one, is one of the most popular strategies used by multinational corporations to decrease their tax burden. Trademark and copyright registration in tax havens is one method, as is internal pricing manipulation.
"Earnings stripping" is another term for profit shifting. Profits are "shifted" to the overseas subsidiary by means of significant, tax-deductible payments, such as interest payments.
New foreign taxes were implemented in 2017 as part of tax reform legislation aimed at discouraging profit shifting by multinational corporations. The minimum tax on global intangible low-taxed income (GILTI) and the tax on erosion and abuse of tax privileges (BEAT) has helped slow profit shifting to some extent. This year, lawmakers have a golden chance to implement transformative revisions that will fortify these statutes and effectively discourage profit shifting.
