How the Inflation Reduction Act Affects Accounting | September 2022
After months of negotiations in the House, the Inflation Reduction Act was passed and signed by President Joe Biden into law.
After months of negotiations in the House, the Inflation Reduction Act was passed and signed by President Joe Biden into law. This climate, health care, and tax bill is intended to reduce energy and health care costs in addition to decreasing the deficit.
In part, the bill is funded by a 15% minimum tax on corporate “book income” above $1 billion. “Book income” refers to income reported to shareholders which may not be the same as that reported to the Internal Revenue Service. Companies may report a profit to shareholders but a loss to the IRS because of differences in accounting standards, and there is nothing illegal about these two sets of books because the companies comply with the tax laws created by congress.
This measure addresses concerns that corporations do not pay their fair share of taxes. Many multinational corporations based in the United States pay little to no federal income taxes due to legitimate tax breaks. For example, in 2020 more than 50 of America’s largest companies did not pay any federal income taxes.
What is the Financial Accounting Standards Board?
The Financial Accounting Standards Board (FASB) sets the principles and standards of financial
accounting and reporting in the private sector. Its mission is to establish and improve standards of financial accounting and reporting for the guidance and education of the public, including issuers, investors, auditors, and users of financial information.
The FASB, established in 1973, is based in Norwalk, Connecticut, and is run by a board of accountants and financial professionals. The board consists of people from the accounting industry with years of professional experience at firms like Ernst & Young and Deloitte. Board members include the former chief accountant for the Securities and Exchange Commission (SEC) as well as a former professor of accounting. The board members serve full-time and are required to cut ties with the organizations they served before joining the board to maintain independence.
How this bill affects the FASB
According to the White House, the Inflation Reduction Act will generate $124 billion in savings from collecting taxes from wealthy people and large corporations. This projection could be reduced if FASB rule-makers rewrite profit calculations. The FASB and the SEC have the ability to determine how companies report their profits. After public hearings and academic feedback on proposed rule changes, FASB can issue a rule that companies follow as “Generally Accepted Accounting Rules.”
Critics are concerned about this new dynamic due to the board’s political connections and lack of diversity with so many of the board’s members previously connected to Wall Street or professional accounting firms. FASB’s chair, Richard Jones, has previously stood against a minimum corporate tax based on book income. According to Jones, using book income to determine taxes inserts public policy into financial accounting, putting pressure on FASB and its mission.
In the Classroom
This article can be used to discuss the nature of accounting (Chapter 14: Accounting and Financial Statements). The Financial Accounting Standards Board website is available for any interested student who wants to learn more about the FASB.
Discussion Questions
What is the Inflation Reduction Act?
What is the Financial Account Standards Board’s role in the world of accounting?
How might the Inflation Reduction Act affect accounting?
This article was developed with the support of Kelsey Reddick for and under the direction of O.C. Ferrell, Linda Ferrell, and Geoff Hirt.
Sources
Andrew Ross Sorkin, Vivian Giang, Stephen Gandel, Lauren Hirsch, Ephrat Livni, and David F. Gallagher, "The New Deciders on Corporate Taxes," The New York Times, August 4, 2022, https://www.nytimes.com/2022/08/04/business/dealbook/inflation-reduction-act-fasb-accountants-corporate-minimum-tax.html
Juliana Kim "What the Inflation Reduction Act Does and Doesn’t Do About Rising Prices," NPR, August 13, 2022, https://www.npr.org/2022/08/11/1116229743/inflation-reduction-act-questions-answered
The White House, "By the Numbers: The Inflation Reduction Act," August 15, 2022, https://www.whitehouse.gov/briefing-room/statements-releases/2022/08/15/by-the-numbers-the-inflation-reduction-act/
Geoffrey A. Hirt of DePaul University previously taught at Texas Christian University and Illinois State University, where he was chairman of the Department of Finance and Law. At DePaul, he was chairman of the Finance Department from 1987 to 1997 and held the title of Mesirow Financial Fellow. He developed the MBA program in Hong Kong and served as director of international initiatives for the College of Business, supervising overseas programs in Hong Kong, Prague, and Bahrain, and was awarded the Spirit of St. Vincent DePaul award for his contributions to the university. Dr. Hirt directed the Chartered Financial Analysts (CFA) study program for the Investment Analysts Society of Chicago from 1987 to 2003. He has been a visiting professor at the University of Urbino in Italy, where he still maintains a relationship with the economics department. He received his Ph.D. in finance from the University of Illinois at Champaign-Urbana, his MBA at Miami University of Ohio, and his BA from Ohio Wesleyan University.
