Loopholes in the tax code have been a subject a great debate. Those who believe that the rich keep getting richer often cite the fact that large companies are eligible for tax breaks that allow them to pay a much lower tax rate than smaller companies. (To learn more in The Most Controversial Tax Deductions.)
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The Corporate Tax Problem
The top marginal corporate tax rate in the United States is 35%, but existing tax laws lower that rate significantly, sometimes below what a small business pays. But the problem is much bigger. That 35% is much higher than countries around the world that have corporate tax rates in the mid 20% range. This causes investment dollars to go to other places besides purely American businesses.
The Obama Administration would like to close the corporate tax loopholes while possibly lowering the corporate tax rate to be more competitive with other nations. Here are six that he may have his eye on.
1. Deferral Rules
Let's assume that you have a lemonade stand and the lemonade is so good that you took it overseas. The profits you make remain in a bank overseas so you don't have to pay taxes on it in the United States because the money isn't on American soil. You do, however, take deductions on your corporate taxes related to the expenses of operating your overseas lemonade stands on your U.S. tax returns.
The Obama Administration doesn't mind if you claim the deductions but not until the taxable money comes back to the United States. It is estimated that this change could generate $200 billion through 2015. That amount of money could be put toward any number of initiatives from education to improving our technology infrastructure.
2. Foreign Tax Credit
Your lemonade stand made money in another country and because of that you have to pay taxes to that country. As it stands right now, you can claim a credit against the taxes you paid to that country. Closing that loophole may generate another $50 billion in savings over 10 years.
3. No More Subsidiaries
Instead of having one company name for your lemonade stands, under current corporate tax laws, you could set up a series of companies all over the world and shield your earnings from taxation. The Obama Administration would like to close this loophole and generate another $86.5 billion over 10 years.
4. Eliminate Drilling Costs
Maybe lemonade isn't your business of choice. Instead, you're in to what used to be called Black Gold. That's right, oil! If that's your business, your loopholes are vast. When you drill a well, you can deduct the costs of "exploration." That includes drilling costs, fuel, personnel, repairs, supplies and much more. If you were still selling lemonade, you could deduct these costs associated with setting up new stands while looking for good street corners with the highest returns, but you might recoup the costs over the life of your investment. Eliminating this loophole would save Americans $7.8 billion over 10 years. (Learn more in Accounting For Differences In Oil And Gas Accounting.)
5. Paid to Hunt
Sure, "exploration" costs in finding a new source of oil or gas takes a lot of research and that costs money, but the Obama Administration doesn't believe that your oil company should receive a tax deduction for it. After all, its part of the normal expenses of making a profit and other companies can't take similar deductions. If the Obama Administration gets its way, it will save taxpayers $1.1 billion over 10 years.
6. Tertiary Injectant Credit
Tertiary methods of extracting oil use chemicals and gases injected into the well which makes the well 5% to 15% more efficient. If you use these methods on your well, you receive a tax credit. In essence, the government is giving you a subsidy to encourage you to operate your business more efficiently and make more money. If you were still in the lemonade business, the government would not have given you the same credit if you used more efficient fertilizers to increase your lemon yield. Closing this loophole would generate $67 million in savings over 10 years.
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The Bottom Line
Do you think corporations pay too little in corporate taxes? If you do, you're not alone. The Washington Post reports that 70% of Americans believe just as you do and Washington is listening. In the 2011 State of the Union Address, President Obama reminded the country that he is serious about closing these loopholes. (Knowing the tax deductions you're entitled to can make or break your bank account. To learn more, see Tax Tips: Filing To Your Advantage.)