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Editorial 9 MIN READ

The American Jobs Plan corporate tax proposals, first read

A 28 percent corporate rate, a 21 percent GILTI floor, a 15 percent book minimum, and a fact sheet that is still not a bill

The Editors
Staff, Incorporator.org
9 min read Updated
Contents 5 sections
  1. What the plan actually proposes
  2. What the numbers actually imply
  3. Second-order effects to watch
  4. What remains unclear
  5. Sources

he American Jobs Plan that the White House released on March 31 proposes to raise the federal corporate income tax rate from 21 percent to 28 percent, nearly double the GILTI tax by roughly halving the section 250 deduction and applying the tax country by country, repeal the section 250 FDII deduction, impose a 15 percent minimum tax on the book income of the largest corporations, and tighten the interest-stripping rules at section 163(j). It is a fact sheet, not a bill, and the dollar estimates the White House attaches to each piece are its own, not the Joint Committee on Taxation's.

The plan is packaged as an infrastructure program. The tax title inside it is the counterpart proposal that the administration calls the "Made in America Tax Plan." Treasury has not yet published the detail document that will put statutory language around these numbers. What has been released is the President's fact sheet and a White House briefing, which together describe directions more than sections of the Internal Revenue Code. Read as such, it is closer in posture to the "Big Six" framework of September 2017 than to a chairman's mark.

What the plan actually proposes

The headline rate change is the corporate rate. The Tax Cuts and Jobs Act of 2017 set the federal corporate income tax at a flat 21 percent. The American Jobs Plan raises it to 28 percent. The number is below the pre-2018 top rate of 35 percent and above the 25 percent figure that then-candidate Biden floated in some early primary materials. The fact sheet offers no phase-in, no effective date, and no rate schedule; the implication is a flat rate change, beginning in a tax year the legislation would specify.

The international side is where the numeric detail is heaviest. The plan would raise the effective rate on Global Intangible Low-Taxed Income. Under current law, section 951A includes a U.S. shareholder's share of a controlled foreign corporation's GILTI in income, then section 250 allows a 50 percent deduction for domestic C corporations (reducing to 37.5 percent after 2025), producing a headline GILTI rate of 10.5 percent under a 21 percent corporate rate. The White House proposes to cut the section 250 deduction roughly in half, producing a GILTI rate of 21 percent once combined with the new 28 percent corporate rate. The administration has described this as "doubling" the GILTI rate, and in headline terms it is.

The plan also proposes to calculate GILTI on a country-by-country basis, rather than on the blended global basis the statute uses today. In practice, today's blended formula lets a multinational with operations in both a high-tax and a low-tax jurisdiction average them together, often zeroing out any residual U.S. tax. A country-by-country computation would compute the residual U.S. tax jurisdiction by jurisdiction, eliminating the blending. The plan further proposes to repeal the QBAI exemption, the 10 percent return on qualified business asset investment that is subtracted from tested income before GILTI is computed. These three changes compound. Each individually raises the effective GILTI burden; together they are the heart of the international package.

The plan would repeal the section 250 deduction for Foreign-Derived Intangible Income. FDII, the domestic-mirror incentive that TCJA created alongside GILTI, currently allows a 37.5 percent deduction on income derived from foreign-use sales and services from a U.S. platform, producing an effective rate below the general corporate rate. The fact sheet argues that FDII has not meaningfully pulled intellectual property back on shore and says the revenue would be redirected to "research and development incentives." No replacement mechanism is specified on the face of the fact sheet.

The plan proposes a 15 percent minimum tax on the book income of "very large corporations." The fact sheet describes the target as companies reporting more than $2 billion in book profits. Under a book minimum, a corporation would compute its tax liability two ways, once under the Internal Revenue Code and once by applying a 15 percent rate to the income on its audited financial statements, and pay the greater. The design questions, how financial income is defined, what book-tax differences are preserved, whether general business credits and net operating losses carry through, are not addressed in the fact sheet. These are the questions on which the score will turn.

The plan would tighten the interest-deduction limitation at section 163(j). TCJA rewrote 163(j) to cap a business's net interest deduction at 30 percent of adjusted taxable income. The CARES Act temporarily raised the cap to 50 percent for 2019 and 2020. The TCJA rule also currently uses an EBITDA-style base, moving to an EBIT-style base starting in tax year 2022. The American Jobs Plan proposes additional restrictions on interest deductions for multinationals, framed around earnings stripping; the fact sheet invokes the concept without specifying a mechanism.

Two other business-tax moves are named. The first is an expanded tax enforcement budget for the IRS, targeted at corporate audits. The second is a set of changes to the tax treatment of the fossil-fuel sector, described as removing existing preferences, including provisions for intangible drilling costs and percentage depletion. The aggregate revenue the White House attributes to the corporate tax changes is roughly $2 trillion over 15 years. That is a 15-year window, not a 10-year window, and it is the administration's number rather than JCT's.

What the numbers actually imply

A 28 percent rate, by itself, moves a dollar of domestic corporate income from 21 cents of federal tax to 28 cents. On publicly reported effective tax rates, which blend federal, foreign, and state, the move is smaller than 7 percentage points for most S&P 500 filers, because much of the measured effective rate already sits outside the federal corporate line. For a privately held C corporation that earns its income entirely in the United States and does not use meaningful deductions beyond the standard ones, the rate change is close to the full 7 points.

The GILTI math is less legible from the fact sheet and more load-bearing in practice. Under current law, the statutory GILTI framework combines a 21 percent corporate rate with a 50 percent section 250 deduction and an 80 percent foreign tax credit haircut. The resulting effective rate is 10.5 percent, with foreign taxes fully neutralizing GILTI at jurisdictional effective rates of roughly 13.125 percent. The plan's proposed changes, a 28 percent rate, a roughly 25 percent section 250 deduction, country-by-country computation, and repeal of the QBAI exemption, together produce a headline effective GILTI rate of about 21 percent, with the break-even foreign rate moving up accordingly. For multinationals with low-tax foreign earnings, that is a meaningful increase in residual U.S. tax, particularly once blending is removed. For multinationals whose foreign earnings already sit in higher-tax jurisdictions, the bite is narrower.

The 15 percent book minimum is the provision with the least public detail and the most design space. A version of a book-income tax existed in the corporate AMT before TCJA repealed the corporate AMT, and the 2017 version had a number of carry-throughs (for NOLs, for general business credits, for specified foreign tax credits) that substantially softened its bite. Whether the 2021 proposal preserves those carry-throughs will decide whether the tax binds on 50 companies or 500, and whether it raises a headline number or a real one. The fact sheet does not say.

Second-order effects to watch

The immediate question for a founder with a C corporation is whether any of this should change a 2021 planning decision. In most cases the answer is no. The legislation does not yet exist. The corporate rate applicable to 2020 returns is 21 percent. The rate applicable to 2021 returns will be 21 percent unless Congress enacts retroactive legislation, which is not implied by the fact sheet. A rate change enacted this summer would most plausibly take effect for tax years beginning in 2022, or be phased in; the Big Six precedent suggests that both chambers' tax-writing committees will take several weeks to markup, and the Senate's reconciliation process adds further constraints.

The repeal of FDII is the provision most likely to move deal structure before it moves policy. A U.S. parent that has routed intellectual property to the United States in reliance on FDII will be watching for both the repeal timing and the replacement "R&D incentive" design. If the replacement is an expanded section 174 treatment or an enhanced research credit, the effect on a software-and-services C corporation may be close to neutral. If the replacement does not materialize, the effective rate on foreign-derived income snaps to the general corporate rate. The distance between those two outcomes is several points on a consolidated effective rate.

The country-by-country GILTI change is, in operational terms, a reporting change as much as a rate change. A multinational that has been managing GILTI on a global-blending basis will need to reconfigure its provision, its compliance, and likely its transfer-pricing posture. The Treasury Form 8992 schedule already has jurisdictional data sitting on it; the burden of computing on that basis is less than the shift in numbers it will produce.

The 15 percent book minimum, if enacted with meaningful bite, will move audit-committee conversations about non-GAAP adjustments, stock-based compensation expense (and the book-tax difference on it), and the treatment of deferred tax assets. A narrow version, one that preserves NOLs and credits, will function as a headline provision and a moderate revenue raiser. A broad version, one that closely tracks GAAP, will function as a separate tax system and will reshape quarterly reporting.

What remains unclear

Nearly every operative detail. The effective date of the rate change is unspecified. The phase-in, if any, is unspecified. The exact section 250 deduction percentage under the revised GILTI regime is unspecified. The country-by-country computation's interaction with existing foreign tax credit baskets is unspecified. The QBAI repeal's effective date is unspecified. The 15 percent book minimum's treatment of NOLs, of general business credits, of foreign tax credits, and of stock-based compensation is unspecified. The section 163(j) tightening mechanism is unspecified. The replacement for FDII's R&D incentive is unspecified. The fossil-fuel preferences slated for repeal are listed conceptually, not by Code section.

The fact sheet also does not address several provisions that affect closely-held C corporations and pass-throughs. Section 199A, the pass-through deduction, is not mentioned; it is not a corporate provision. Section 1202, the qualified small business stock exclusion, is not mentioned. The step-up in basis at death, the carried-interest rule at section 1061, and the estate tax are not mentioned. All of these sit on the individual side of the tax system, and the American Jobs Plan's tax title is limited to the corporate and international pieces. A separate individual-side package is expected to follow.

The administrative runway is not yet visible either. The budget resolution that would enable a reconciliation vehicle for this package has not been filed. The JCT has not scored the plan. The Senate parliamentarian has not been asked to rule on the Byrd-rule compatibility of a 15-year revenue estimate. Until those steps occur, the AJP is a statement of legislative priority rather than a bill on a clock.

The useful posture for a reader with a C corporation, a multinational structure, or a contemplated Delaware flip is to treat the plan as a directional bet. The direction is higher corporate rates, a stronger international backstop, and a book-income floor. The magnitude is in the White House's numbers and not yet in JCT's. For planning decisions that turn on next quarter, the existing Code still governs. For decisions that turn on 2022 and beyond, the drafting that follows in the next several weeks will matter more than the fact sheet that preceded it.

Sources

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