Corporate Taxes and Digital Transformation: Four Essential Takeaways
A big part of digital transformation planning involves your budget. What will these investments cost? How quickly will you see ROI? What credits and incentives are in place to defray costs.
Four experts from Deloitte recently sat down with us to talk about current tax policy, legislative developments, tax accounting planning, and tax credit and incentive opportunities—as well as the impacts of these things on businesses like yours.
To quickly recap what these professionals shared, we put together a list of four essential takeaways. If you want to dig deeper, make sure to watch the on-demand conversation (details at the end of this blog)!
1. All Signs Point to Corporate Tax Increases
There will undoubtedly be a tax increase—but the amount of that increase is still up in the air. Currently sitting at 21%, the corporate tax rate could increase by as much as 7% (up to 28%), which is what President Biden proposes as part of his infrastructure plan. Most experts we’ve spoken with believe it will end up somewhere closer to 25% or 26%, but we should know more soon.
Regardless of the percentage, this tax increase will cause companies to stray from the traditional best practice of deferring income and accelerating deductions in accordance with tax law. Instead, it could encourage companies to increase taxable income (knowing taxes will be higher later).
2. A Renewed Commitment to Nationalism and Onshoring
The pandemic shined a bright spotlight on the fact that many countries—the United States included—lack resources within their own borders. Instead, they rely on outside sources to get everything from batteries and masks to pharmaceuticals.
As a result, we could see future tax penalties for offshoring, as well as tax incentives for bringing manufacturing back to the United States. For example, there’s discussion about a 10% surtax being applied to services and sales to U.S. customers from a U.S. company’s foreign affiliate. (If that business also faces the proposed 28% corporate tax rate, then the effective tax rate would be 30.8%.)
A proposed 10% Made in America tax credit may also be given to businesses that take specific steps to bring production or service jobs back to the United States, incentivizing an onshore supply chain.
These incentives and penalties don’t mean we’ll completely stop relying on resources from other countries, but important lessons were learned about the benefits of nationalism and onshoring.
3. More Carbon Credits to Choose From
The current administration has been clear about its commitment to fighting climate change—and that commitment is reflected in new incentives to reduce carbon-dioxide output. If carbon dioxide is emitted as part of your manufacturing process, then there are new opportunities available to you.
In addition to obtaining carbon credits over a 12-year period based on the greenhouse gases you capture and dispose of via government-approved deep wells (currently part of the Section 45Q Carbon Capture Credit), there are two more opportunities to earn credits:
- Capture/injection, which offers tax credits for capturing greenhouse gases and selling them to a company that can use them for fracking.
- Capture/utilization, which offers tax credits for capturing greenhouse gases and using them to produce electricity. The end-user also receives a 30% credit on the cost of the installed equipment to support this capture and utilization.
Another new opportunity in 2021 is the ability to transfer carbon credits. For example, you can transfer your credits to another tax-paying organization that helped you complete the capture/injection or capture/utilization cycle (the organization you sold the greenhouse gases to).
4. Expected Tax Incentives for Digital Transformation
Although we don’t know much about it yet, tax incentives for digital transformation are on the table at both the state and federal levels.
In the future, we’re likely to see tax incentives for everything from industrial and enterprise network improvements to investments in data mining software, databases, servers, remote learning, and virtual and augmented reality technology (and some of these are in place already).
Although these incentives may sound enticing, it’s truly up to your organization to decide when it’s time to take the next step toward digital transformation. With these savings on the horizon, however, waiting too long could mean you miss the chance to cost-effectively begin your investment in digital transformation. Even if you’re not ready to go all in, incentives may help you shift from legacy platforms in a phased approach instead of making one giant leap forward.
For comparison, think about upgrading your Microsoft operating system. If you first migrated from Windows XP to Windows 7, and then to Windows 10, the migration probably went pretty smoothly. But if you attempted to jump straight from Windows XP to Windows 10 without that step in the middle, it may have been a more distressing transition.
Webinar: Methods to Reduce the Cost of Your Digital Modernization Project
TRANSFORM Webinar Series
This blog is based on insights shared during a webinar in Van Meter’s TRANSFORM series, which addresses different aspects of digital transformation.
Want to hear more about making digital transformation more affordable? Watch “Methods to Reduce the Cost of Your Digital Modernization Project” on demand here. Then sign up to watch other webinars in the series here!
