Companies Revisit Financial Forecasts Ahead of Potential Tax Changes

Mr. Biden suggested raising the corporate tax rate to 28% alongside other measures such as an alternative minimum tax of 15% on businesses generating profits of $100 million or more.

He also plans to raise tax rates on income earned by foreign subsidiaries of American businesses and proposed a 10% tax penalty for U.S. companies with offshore production that sell to customers at home, along with a tax credit for businesses that create new jobs in the U.S.

Finance chiefs and tax executives at food manufacturer Conagra Brands Inc., energy provider NRG Energy Inc. and aviation services firm AAR Corp. are taking a hard look at their companies’ books and operations to see what these proposals could do to their tax obligations.

“People now have to revisit their modeling exercise,” said John Gimigliano, principal-in-charge of KPMG’s U.S. tax legislative and regulatory services business. “Companies are going back to the Biden plan and looking at the proposals.”

Conagra’s Chief Financial Officer David Marberger said the company behind brands such as Reddi-wip and Birds Eye is looking at various parts of its balance sheet.

“We try to scenario-plan what this could mean,” Mr. Marberger said, adding that higher taxes could result in less money available for repurchasing shares or for mergers and acquisitions. Chicago-based Conagra’s effective tax rate was 19.1% in the six months ended Nov. 29, 2020, compared with 14.3% during the prior-year period.

A higher corporate tax rate would affect companies across sectors and appears to be a core concern for executives, said Matthew Mullaney, a partner at Anchin, Block & Anchin LLP, an accounting firm.

Democrats have a narrow majority in the House, and the tiebreaking vote of Vice President-elect Kamala Harris will give them the edge in the Senate. Because of that, lawyers expect there might be a successful proposal to raise the statutory tax rate to about 25%, up from 21%, but not as high as the 28% Mr. Biden had campaigned for, said Eric Sloan, a partner at the law firm Gibson, Dunn & Crutcher LLP.

Changes to rules on global intangible low-taxed income, or GILTI, also could result in a higher tax burden for companies. Under GILTI, companies tabulate their tangible foreign assets and don’t have to pay taxes on 10% of the total. Above that threshold, GILTI creates a 10.5% floor through 2025 on what U.S. companies pay in foreign taxes and lets them get some foreign tax credits.

Mr. Biden has suggested raising the GILTI rate to 21%. Combined with the proposed reintroduction of an alternative minimum tax, which was taken away in the 2017 Tax Cuts and Jobs Act, such proposals could result in “significant increases,” said George Salis, principal economist and tax policy adviser at Vertex Inc., a compliance software and services company.

Also, certain allowances that currently help companies reduce their tax burden, such as the provision on Qualified Business Asset Investment that companies rely on to calculate how assets are treated for the application of GILTI, could be removed, tax lawyers said.

Businesses still lack clarity around other ideas such as tax credits for companies that create new manufacturing jobs in the U.S. Some of those could help mitigate a potential increase in the base rate, said Todd Metcalf, a principal in the tax policy services unit of PricewaterhouseCoopers. “If you get a 2% increase, but a 10% incentive, maybe the two offset each other,” Mr. Metcalf said.

Renewable-energy companies also might receive help from the government through tax regulation. Mr. Biden has pledged support for clean energy production, and businesses in that industry hope it will be delivered through extensions to the investment-tax credit for renewable energy.

“I think it’s…tax incentives, specifically around renewable energies, that is probably the biggest focus for us,” said Kirkland Andrews, the finance chief of NRG, which is based in Houston and Princeton, N.J.

Companies also will be watching for changes in areas such as deductibility of interest costs or net operating losses, tax advisers said. Last year’s Cares Act provided companies with additional options to deduct a larger portion of their interest charges and make wider use of net operating losses, but those elements expired at the end of the year.

Mr. Biden last week proposed a new stimulus plan, but hasn’t provided additional insights into his tax plans in recent weeks. The Biden transition team didn’t immediately respond to a request for comment.

Despite executives’ forecasting efforts, businesses most likely will wait until there is proposed legislation before considering how to deal with eventual tax changes. “As greater detail is available, I assume companies will do more so they can outline their tax picture going forward,” Mr. Mullaney of Anchin, Block & Anchin said.

Sean Gillen, the finance chief of Wood Dale, Ill.-based AAR, is doing just that: Waiting for more details. “The reality is that…until a proposal is made, it’s hard to analyze anything on the tax front in detail,” Mr. Gillen said.

AAR reported an effective tax of 26.5% for its most recent quarter ended Nov. 30, compared with 23% during the prior-year period, mainly due to lower forecast pretax income in the current fiscal year because of the coronavirus pandemic, the company said in a filing with securities regulators.

—Kristin Broughton and Richard Rubin contributed to this article.

Write to Nina Trentmann at [email protected]