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Tax and Financial Statement Implications of Biden’s Build Back Better Framework – Executive Summary

Nov 10, 2021

As the prospect of a tax reform package being enacted in the fourth quarter becomes more likely, companies should begin to consider the impact certain of the tax provisions will have on their financial statements. Under ASC 740, changes in tax law are accounted for in the period of enactment. As it happened with the Tax Cuts & Jobs Act four years ago, companies may not have the benefit of time to properly account for the tax law changes. While the details of the provisions are uncertain at this time, a broad outline has emerged for companies to begin to consider.

Where Does the Bill Stand?

On October 28, President Biden announced a framework for a $1.75 trillion social spending package dubbed the “Build Back Better Act.”  Among other items, included within were tax provisions promising to “rebuild the backbone of the country – the middle class – so that this time everyone comes along.” The President is confident that this framework can pass in both the House and Senate. The House rules committee later released an updated proposal building off the President's framework.

Key Provisions Affecting Corporations

  1. 15% minimum tax on the corporate profits of large corporations—those with over $1 billion in profits
  2. Country-by-country global minimum tax of 15%, accompanied by a penalty rate for foreign corporations based in non-compliant countries
  3. Interest limitation provisions
  4. Revisions to the limitation on certain officer compensation
  5. Increased IRS enforcement

15% Minimum Tax on Large Corporations – Corporate Alternative Minimum Tax (“CAMT”)

One provision that has withstood multiple rounds of negotiations is a 15% minimum tax based on book income, applicable to companies earning more than $1 billion a year. All in all, this provision in its current form will only impact roughly 200 of the most profitable U.S. corporations. The difference between the regular reported tax liability plus any BEAT liability and the 15% tax on book income would constitute the minimum tax. There are still many areas of this proposal which need detailing, such as what would constitute book income and what credits would be available to offset the liability. Treasury has been tasked with issuing guidance in these areas.

The tax accounting complexities of a hybrid tax system are numerous.  The current proposed minimum tax will act as a marginal tax rate, by which companies must value their deferred tax assets and liabilities at the rate which they expect them to reverse. In addition, companies must reconsider the realizability of their deferred tax assets. Companies with traditional tax attributes such as net operating losses and other deferred tax assets (“DTA”) with effective tax rates below 15% may not be able to fully utilize certain tax attributes. Considering the effort involved with preparing calculations under the regular, CAMT and BEAT rules, taxpayers should consider quantifying now any impact the proposal could have on their taxes payable and deferred taxes.

15% Global Country-by-Country Minimum Tax

Consistent with the OECD proposal to alleviate base erosion, the plan outlines a global minimum tax rate of 15% by jurisdiction. More than 130 countries have agreed to the framework aimed to flatten tax competition globally. The proposal also includes a penalty rate for foreign corporations based in countries that have not signed on.

Under the global minimum tax regime, countries will be able to tax multinational corporations without having a physical presence or nexus in the country. This reallocation of tax base under a market approach will create sourcing issues for companies operating in various jurisdictions. Under the “top up” approach, jurisdictions are still able to set their rate locally, with any rate difference below the 15% being paid to the country where they are headquartered.

To achieve the targeted global rate, several changes could be enacted to the GILTI regime. First, the inclusion would be calculated on a country-by-country basis, whereas the losses in lower tax jurisdictions cannot offset the higher tax jurisdictions. Further, the IRC Sec. 250 deduction would be reduced to 28.5% and a 5% haircut applied to GILTI foreign tax credits. All in, the provisions produce a 15% GILTI effective tax rate and would require a tax rate in a foreign jurisdiction of roughly 16% to avoid residual U.S. tax on GILTI inclusions.

Companies must make an accounting policy election around the GILTI rules. The options are to treat GILTI income as a period cost or to incorporate future GILTI impacts into the deferred tax calculations. These proposals would make such significant changes to the GILTI regime that companies may take this opportunity to reevaluate this accounting policy. Further changes to the GILTI regime include a five-year carryforward period of unused credits, up to ten years after 2030. Companies should consider their ability to utilize these credits and forecast future GILTI basket income to determine whether a valuation allowance is appropriate. Companies should also consider the impacts the changes to the global tax regime would have on unborn foreign tax credits.

Interest Deduction Limitations

In an expansion of the TCJA provisions of four years ago, the House proposal based on the President’s framework includes an IRC Sec. 163(n) interest limitation, in which a corporation’s interest deduction would be limited to its proportionate share of an international reporting group’s interest expense. Under the proposal, companies interest deduction would be limited to the more restrictive limitation under either IRC Sec. 163(j) or IRC Sec. 163(n). Additionally, carryforwards of interest could expire after five years, as opposed to the previous indefinite period.

Under the current interest limitation of IRC Sec. 163(j), companies were granted an indefinite carryforward period, creating a tax attribute with a high likelihood of realizability. Companies with deferred tax liabilities attributable to indefinite-lived intangibles, such as goodwill, could consider the future reversal of such deferred tax liabilities (“DTL”) as a source of income to utilize the interest carryforward deferred tax asset.  Companies should consider the potential impact of an increase in taxable income from an interest limitation on their existing DTAs and consider whether a DTA created from the limitation itself would be realizable. Companies should also consider whether they have the available information to calculate interest expense at the consolidated level.[1]

Revisions to the Limitations on Officer Compensation

Often scrutinized for excessiveness, executive compensation has grown exponentially over the past decades. This topic has seen numerous revisions from a tax perspective since 2017. As part of the Tax Cuts and Jobs Act, the limitation was expanded to include performance-based compensation; the CEO, CFO and three top paid officers; as well as employees subject to the limitation maintaining the status as a covered person in perpetuity. Under the American Rescue Plan, the definition of a covered employee expanded to include an additional five employees.

The current proposed Build Back Better framework would address certain tax planning strategies to avoid the limitation. As such, the rules would be modified to expand the aggregation concept, and thus the application of the $1M limitation, to entities beneath a partnership in a public structure. Further, payments made through pass-through entities would also become subject to the limitation. The plan would also clarify the application of the rules even after a covered employee is terminated. As a permanent book tax difference, the disallowance of executive compensation would impact the effective tax rate of companies. Further, companies should consider the impact the provisions will have on their deferred tax assets related to equity compensation and whether the reversal will be subject to the limitation. Companies should consider scheduling out their executive compensation to determine potential years of limitation. The expansion of the covered person definition under the American Rescue Plan is set to become effective in 2027. Companies should continue to model the impact of both provisions on their compensation packages.

Increased IRS Enforcement

The largest source of revenue in the plan consists of an $80 billion investment to the Internal Revenue Service, which the White House believes will result in $400 billion of additional revenue. Over the last decade, audit rates fell over 20% for large corporations. Less than 20% of taxpayers with assets in excess of $1 billion are currently audited. According to the congressional budget office, the audit rate for higher income taxpayers would return to the rates of a decade ago under the current proposal.

Increased audits will result in compliance costs for companies under examination and additional scrutiny on their tax positions. Under FIN 48, the assumption is that all tax positions will be examined, and all relevant information will be available to taxing authorities. However, in practice, companies have become accustomed to certain positions rarely coming under examination. With increased enforcement, companies should assess the appropriateness of their current uncertain tax positions and the need for additional ones. 

Additional proposals in the House version of the bill include an increase to the BEAT rate up to 18% in 2025 and beyond, a surcharge on corporate stock buybacks, delaying the mandatory capitalization of R&D expenditures until 2026 and more. Companies should consider the impact these provisions could have on their financial statements as the bill makes its way towards the Senate.

After the TCJA was passed so late in the year, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), providing some relief for companies that may not have had sufficient time to account for the tax changes. The bulletin allowed for one year to finalize the accounting for the impacts of that act. There are no assurances a similarly generous measurement period, or any extension at all, will be granted this time around. For that reason, companies should begin considering the following:

  1. What provisions could materially impact their financial statements
  2. What disclosures will be needed for 2021
  3. Modeling impacts of the foreign provisions
  4. Modeling impacts on valuation allowances from changes in the interest limitation rules

[1] Murray Solomon, one of the authors of this alert, recently wrote an article published in the Tax Adviser (link below) that addressed the implications of TCJA and the final regulations issued under IRC Sec. 163(j) on valuation allowance assessment when there are indefinite-lived intangibles (i.e., naked credits) in the entity’s deferred inventory.

Naked credits and the interest expense limitation (


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