Brief Introduction about 2022 U.S. Corporate Tax Law Change
As 2022 begins, many new tax laws affecting large and medium-sized companies are taking effect. This article will focus on three corporate tax laws that will come into effect in 2022 and have a considerable impact on the operations of large and medium-sized companies. The three are revised base erosion and anti-abuse tax rates for corporations, lowering the 1099-K reporting value, and repealing the deduction for U.S. corporations?foreign-derived intangible income.
- Revised base erosion and anti-abuse tax rates for corporations
To prevent U.S. and foreign corporations from evading tax obligations by shifting profits out of the U.S., the 2017 U.S. tax reform enacted the base erosion and anti-abuse tax. The base erosion and anti-abuse tax applies to corporations with an average annual gross receipt of at least $500 million for the preceding three tax years. The base erosion and anti-abuse tax rate is 10% from tax year 2017 to tax year 2022. Beginning in the 2023 tax year, changes in base erosion and anti-abuse tax rates for U.S. and foreign corporations are shown in the following chart.
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U.S. and foreign corporation taxable year start dates
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Base Erosion and Anti-Abuse tax rate
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after December 31, 2022, and before January 1, 2024
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12.5%
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after December 31, 2023, and before January 1, 2025
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15%
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after December 31, 2024
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18%
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- Lowering the 1099-K reporting value
The reported values on Form 1099-K have changed as follows:
1).
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Before 2022, when the company has received payment through a third-party service platform, and the payment amount is greater than $20,000 and the transaction volume exceeds 200, the third-party platform must provide the company with a 1099-K form. Companies must report income from a 1099-K to the IRS.
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2).
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Beginning in 2022, when a company receives payment through a third-party service platform, and the payment amount is greater than $600 and there is any transaction volume, the third-party platform must provide the company with a 1099-K form. Companies must report income from a 1099-K to the IRS.
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3).
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Third-party platforms, mainly include PayPal, Venmo, eBay, Uber, Stripe, etc.
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4).
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Form 1099-k stands for "Payment Card and Third-Party Network Transactions". This form is primarily used to report the company’s revenue through third-party trading platforms.
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According to the survey, about 80 percent of gig economy or self-employed individuals earning less than $20,000 a year do not receive a 1099-K. This has resulted in many gigs economy and self-employed individuals misreporting or underreporting their income. In response, the IRS ultimately decided to reduce the reported value of the 1099-K to address such issues. The gig economy is a labor market term. Primarily refers to contractors and freelancers getting paid for completing short-term tasks, rather than full-time or part-time jobs.
- Repealing the deduction for U.S. corporations?foreign-derived intangible income
Before the start of the 2022 tax year, U.S. corporations can deduct their foreign-derived intangible income. For companies whose tax year begins after December 31, 2017, the allowable deduction amount is 37.5% of the company’s foreign-derived intangible income. For companies whose tax year begins after December 31, 2025, the allowable deduction amount is 21.875% of the company’s foreign-derived intangible income. Intangible income from overseas refers to the portion of intangible income of US companies that originates from serving overseas markets and is generally determined by formulas. Beginning in the 2022 tax year, U.S. companies will not be able to deduct their foreign-derived intangible income.
To justify the repeal of the foreign-derived intangible income deduction for U.S. companies, the U.S. government offers the following three reasons:
1).
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This income deduction does not encourage U.S. companies to conduct domestic research and development. After the income deduction is repealed, the resulting income will be used to encourage research and development activities by U.S. companies.
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2).
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This income deduction prefers multinational corporations over U.S. domestic corporations. Also, this income deduction provides tax benefits only to companies with high export sales, not companies that sell primarily domestically.
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3).
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This income deduction reversely encourages U.S. companies to move certain economic activities outside the United States.
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Reference:
https://rules.house.gov/sites/democrats.rules.house.gov/files/Section_by_Section_BBB_RCP117-18_.pdf
https://home.treasury.gov/system/files/131/General-Explanations-FY2022.pdf
https://www.irs.gov/businesses/understanding-your-form-1099-k
https://blog.tax1099.com/major-changes-to-1099-k-reporting/
https://pro.bloombergtax.com/brief/base-erosion-and-anti-abuse-tax-beat/#:~:text=The%20base%20erosion%20and%20anti,erosion%20payments%E2%80%9D%20to%20foreign%20related
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