Companies and their accounting teams must be aware of any changes before they file their taxes each year. In many cases, the motivation to do so is tax savings. However, complex regulations are another key core driving force as businesses try to reduce compliance concerns.
This article explores recent tax reforms and how they affect corporate accounting practices.
An Overview of Recent Tax Legislation Changes
Whether it is tax rates, deductions, or compliance requirements, staying informed about changes improves tax planning and ongoing financial success.
While business owners are responsible for the tax laws that apply to them, having a professional accountant can make all the difference. These professionals stay aware of corporate tax changes so that they advise clients and stakeholders — and, as a result, help them save money.
Examples of Recent Changes
Starting in 2021, Biden began making significant changes to U.S. tax law, including the following:
- The Inflation Reduction Act (IRA) of 2022 included a 15% minimum corporate tax rate, with the largest corporations paying 21%. This act also incentivizes businesses to implement renewables into their tax planning strategies.
- Regarding stock buybacks, the IRA imposes a 1% tax on a publicly traded U.S. corporation’s fair market value of stock repurchased stock. However, there are exceptions, such as those surrounding the purchase of REITs or those treated as dividends.
- As a more specific example, those in the oil and gas industry saw hazardous substance Superfund excise taxes reinstated. When it expired in 1995, the rate was 9.7 cents per barrel, but it is now 16.4 cents per barrel. There is also an oil spill tax rate of 9 cents per barrel.
Learn more about the changes made to ensure the wealthiest corporations pay more to plan accordingly.
Related: The Future of Accounting: Trends and Predictions
How Tax Changes Impact Financial Statements and Tax Planning
When tax laws and rates change, the implications can significantly affect financial statements and tax planning. So, it’s always best to consult a professional accountant. They can advise you on the best strategies, such as:
- The option to use the cash method of accounting (instead of the accrual method). This method can help corporations defer income and increase deductions. However, not all are eligible, and there are steps you must first take, such as filing Form 3115.
- Accelerating income into the current tax year — which is best for those expecting a higher tax rate the following year.
Understanding your options will help you adjust financial statement practices. Some critical elements to discuss with accountants include tax expenses, deferred taxes, tax loss carryforwards, and deferred tax liabilities and assets.
Financial Statements + Tax Laws
Having a strong handle on your financial statements concerning tax laws will ensure you:
- Stay on top of tax planning and compliance to maximize benefits while minimizing liabilities.
- Make the right business decisions concerning potential tax consequences. For example, how financing, investment, and operational decisions influence financial performance.
- Position your company attractively to investors, as tax accounting can impact how your company is evaluated in relation to profitability, financial health, and growth.
Tip: To manage the impact of tax planning more effectively, lean on expertise, remain informed, and consider ongoing tax implications when making business decisions. Tax laws constantly change, so you must remain compliant while adapting financial reporting practices.
Common Compliance Challenges for Businesses
Staying compliant following ongoing tax reforms can be challenging, especially if financial reports are not prioritized. If many changes are made in a single year, corporations must rely on up-to-date financial records and the expertise of professional accountants.
After all, the most common pitfalls in tax compliance are human error and a lack of information. For example, if an accountant is not given all the information they need to report corporate income accurately, deductions could be missed, and miscalculations could result.
Working with the same competent accountant year after year is beneficial to avoid compliance concerns. Keeping accurate records and ensuring ongoing communication are critical for this business relationship.
Real-Life Implications of Tax Reforms
One of the most highly debated tax reforms in recent decades was the 2017 Trump tax law, which is set to expire in 2025.
Many see this tax reform as an expensive law skewed toward the wealthy, and it did not deliver on its promises. One of the most pivotal changes was the slashed corporate tax rate, which dropped from 35% to 21%.
Data shows that:
- From 2018 to 2021, the 296 largest and most consistently profitable companies paid $240 billion less in taxes than before the Trump tax law.
- Companies like Disney, Meta, and Walmart saw the largest tax reductions.
- While profits for the largest companies rose by an average of 44% after the Trump tax law came into effect, their federal tax bills dropped by 16%.
These changes show how quickly laws can change and their impact, especially once they expire. Those who do not adapt could face significant tax bills and compliance penalties. In contrast, as changes prioritize less wealthy corporations, staying on top of all possible tax breaks is crucial to encourage sustained growth.
Read more: The Evolution of Accounting Standards: From Past to Present
Professional Accounts Help Drive Success
To ensure ongoing success, accountants must remain informed about tax law changes so their clients can successfully navigate complex regulations and optimize tax savings.
Are you an employer seeking skilled accountants? Perhaps you’re an accountant seeking job opportunities? In either case, MRINetwork can help. Contact us to discover more today!