Inflation Reduction Act Book Minimum Tax: 5G Investment
As lawmakers debate the reauthorization of the Federal Communications Commission’s authority to run spectrum auctions, they should not overlook the taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities.
burden the InflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power.
Reduction Act’s (IRA) book minimum tax would place on future purchases of spectrum, nor the other barriers the tax system creates for the US in the race to lead wireless communication and innovation.
When Congress debated a minimum tax on book incomeBook income is the amount of income corporations publicly report on their financial statements to shareholders. This measure is useful for assessing the financial health of a business but often does not reflect economic reality and can result in a firm appearing profitable while paying little or no income tax.
in 2022 as part of the Inflation Reduction Act, it wrestled with the unintended consequence of taxing wireless spectrum investments. Without explicit provisions to address it, levying a minimum tax on book income would retroactively tax past spectrum purchases and raise the tax burden on future spectrum purchases. Congress exempted past spectrum purchases in the IRA’s book minimum tax, but the tax will still apply to new spectrum purchases.
In turn, the minimum book tax could distort the value of spectrum licenses going forward and potentially slow the build-out of 5G technology as the US races to compete with other countries—moving in the opposite direction of countries like China that are actively subsidizing 5G expansion.
Spectrum, or radio waves, enable wireless communication through modern technology, and the federal government allocates and licenses different parts for non-federal use, often through auction. Purchasing spectrum at auction is one form of investment.
Due to strong demand for 5G technologies, telecommunications companies have paid the federal government record sums for spectrum licenses—for example, about $80 billion in 2021. For tax purposes, however, the companies do not get an immediate deduction for spectrum expenses, instead amortizing the cost over 15 years according to the amortization rules for intangibles.
That means, for example, if a company purchased $45 billion worth of licenses, the company would deduct $3 billion a year over the next 15 years. Delaying deductions increases the cost of investments because a dollar in the future is less valuable than a dollar today, so companies cannot fully recover their investment costs in real terms.
The IRA’s 15 percent minimum tax on book income for corporations with profits over $1 billion worsens that problem. Spectrum licenses are one of the few purchases that receive no deduction for book income purposes—companies spend the cash, but when calculating their financial income, they do not factor in that expenditure because spectrum licenses are treated as indefinite-lived assets.
The different treatment of spectrum purchases creates a permanent difference between book income and taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income.
. For example, if in 2024 a company purchased $45 billion of licenses, they would receive a $3 billion tax deductionA tax deduction is a provision that reduces taxable income. A standard deduction is a single deduction at a fixed amount. Itemized deductions are popular among higher-income taxpayers who often have significant deductible expenses, such as state and local taxes paid, mortgage interest, and charitable contributions.
. That would reduce their taxable income by $3 billion, but no such deduction would be allowed under the book income calculation.
Assuming the company would be subject to the book minimum tax that year, it would be taxed on that $3 billion deduction, resulting in an increase in tax liability of $450 million.
In his Fiscal Year 2025 Budget, President Biden proposed increasing the book minimum tax from 15 percent to 21 percent. Under a 21 percent minimum tax, the potential tax liability that arises due to the disallowed deduction would increase to $630 million. A larger group of firms would also be exposed to the minimum tax as the minimum rate goes up, increasing the distortions when firms make decisions about the value and timing of investment.
Over time, that tax burden may be partially reduced because businesses receive prior year minimum tax credits that can be used against regular corporate tax liability; however, it would not be fully offset, and it would depend on whether and how the company moves in and out of the book minimum tax.
These higher tax costs of additional purchases add complexity to telecom companies’ decision-making processes and could decrease the amount that firms are willing to pay for new spectrum licenses—meaning that the government may gain some revenue from taxing the purchase within the book minimum tax but lose revenue due to lower prices and thus lower auction proceeds. It could also provide unfair advantages across firms depending on the timing of an auction and whether a firm is subject to the book minimum tax that year or expects to be over the next several years.
The book minimum tax will likely impact complementary investments, such as cell towers and other supporting infrastructure, because the rules for taxable income and book income differ across depreciationDepreciation is a measurement of the “useful life” of a business asset, such as machinery or a factory, to determine the multiyear period over which the cost of that asset can be deducted from taxable income. Instead of allowing businesses to deduct the cost of investments immediately (i.e., full expensing), depreciation requires deductions to be taken over time, reducing their value and discouraging investment.
deductions for other types of investments, like machinery and equipment.
Doubling down on the book minimum tax by raising the tax rate to 21 percent would compound an already complicated and uncertain tax environment for investment in telecommunications. It has taken nearly two years for the Treasury Department to issue regulations and guidance for impacted firms, reducing certainty about future returns and likely slowing investment.
Unfortunately, policymakers in the United States are not the only ones looking at taxing book income to raise revenue. The international tax agreement at the Organisation for Economic Co-operation and Development (OECD) now being implemented also largely relies on financial statements as a starting point for its tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates.
, raising similar concerns about permanent gaps and timing-related gaps between book and tax income.
On top of these penalties for investment, beginning in 2022, the Tax Cuts and Jobs Act (TCJA) limited business interest expense deductions from 30 percent of earnings before interest, taxes, depreciation, and amortization (EBITDA) to 30 percent of earnings before interest and taxes (EBIT). Depending on a firm’s financing structure, the change could result in a tighter limit on interest deductibility, penalizing companies that borrow to finance new investments, like building out 5G and future telecommunications networks.
Firms investing in spectrum also face other tax-related investment headwinds. Starting in 2022, the TCJA began requiring companies to amortize their R&D costs over five years, instead of deducting them immediately each year, and in 2023, 100 percent bonus depreciationBonus depreciation allows firms to deduct a larger portion of certain “short-lived” investments in new or improved technology, equipment, or buildings in the first year. Allowing businesses to write off more investments partially alleviates a bias in the tax code and incentivizes companies to invest more, which, in the long run, raises worker productivity, boosts wages, and creates more jobs.
for machinery and equipment investment began phasing out.
A higher tax burden for private infrastructure investments like wireless spectrum, 5G technology, and machinery and equipment makes an existing problem worse—especially against the backdrop of outright state subsidies in countries like China. There, state support of telecommunications companies has reached at least $75 billion from 2008 through 2018, about a third of which came in the form of tax incentives to promote tech.
The headline corporate tax rate in China is 25 percent—lower than the current combined federal-state average of 25.7 percent in the United States. Additionally, China provides lower corporate tax rates for certain technology-related sectors. On the tax deduction side, China tends to have faster and more generous cost recovery policies for investments. For instance, intangibles are deducted over 10 years (instead of 15 in the US) and R&D expenses receive a super deduction.
While it would be ill-advised to copy the statist approach in China—which may well threaten future growth and innovation—the US should at a minimum reverse its tax burdens on investment and innovation and resist efforts to add to those burdens.
Stay informed on the tax policies impacting you.
Subscribe to get insights from our trusted experts delivered straight to your inbox.
Subscribe
Share
