Publish Date
Sep 17, 2024
Expertise
With just under two months to go before the elections and one presidential debate under our belts, the candidates have yet to divulge complete economic plans that fully address the extent of their tax policies. Both Vice President Kamala Harris and former President Donald Trump have provided some general policies, along with certain specific tactics, released in piecemeal fashion and without much detail. The situation remains dynamic and as election polling continues to evolve, so do the candidates’ positions.
With many Tax Cuts and Jobs Act (TCJA) provisions set to expire or change by 2026, it seems likely that some form of tax legislation will advance, and the results of the election could significantly affect the tax landscape over the next four years and beyond. However, the uncertainty and difficulty in predicting which tax proposals might survive (even if one party controls the White House and Congress) complicates investment analysis and tax planning.
This alert includes a snapshot of some predominant business and individual tax proposals that could be considered for 2026 (or potentially sooner) based on the candidates’ released statements, as well as the current Administration’s FY 2025 Budget for Harris (although Harris has already started to distance herself from certain of the Administration’s proposals) and Trump’s previous positions, including TCJA provisions.
A&M Insight: The candidates’ positions on the corporate income tax rates potentially set the upper and lower bounds, with a compromise being a possible outcome. A key factor of the ultimate tax rates will be the extent to which the party in control (if there is one) seeks to raise revenue to offset proposed tax cuts and reduce the deficit. For example, it would be easy for Republicans to concede to quadrupling the excise tax on stock repurchases in negotiating support for certain tax cuts.
Trump’s recent proposal of a 15% tax rate for domestic manufacturers raises numerous questions. For example, what constitutes being manufactured in America? A preferential income tax rate for domestic manufacturers, coupled with the general tariffs Trump proposes (discussed below), could obviously affect decisions on where to locate manufacturing operations.
Research and Development (R&D) Expenses (§174): Expenses currently required to be capitalized and amortized over five years (15 years for foreign R&D).
A&M Insight: The reversion to allow immediate deductibility for R&D expenses is likely to be included in a tax bill, although it may be limited (e.g., reinstated only for domestic expenses), and the effective date (whether retroactive or just prospective) is unclear. There has been bipartisan support for the proposal, but the Democrats have required a concession for adoption.
Business Interest Expense (§163(j)): Deductions currently limited to 30% of an EBIT-like calculation.
A&M Insight: Many are anticipating a reversion to the EBITDA-like calculation to be included in a tax bill, although with wavering support since the change in 2022 it would not be surprising if the law remains unchanged. This will obviously impact leveraged buyouts and the overall cost of capital.
Bonus Depreciation (§168(k)): The amount of bonus depreciation has been ratably declining from 100% since 2023, with complete phase-out beginning in 2027.
A&M Insight: An increase in the percentage of costs eligible for bonus depreciation is likely to be included in a tax bill as many view it as critical for investments in U.S. manufacturing. Like the other TCJA business provisions, it is unclear whether the proposal would be retroactive or only prospective.
A&M Insight: Neither campaign has focused on the current U.S. international tax regimes listed above. Nevertheless, taxpayers should assess how the potential proposals could affect their current investment strategies and cross-border transactions. Additionally, with many countries adopting Pillar 2, U.S. parent companies should carefully assess and model potential implications of re-reshoring or restructuring their foreign holding companies. [1] The analysis should also consider the effects of proposed tariffs, particularly for imports from China, with Trump considering more than 60% across the board and Harris potentially considering proposals under the Biden Administration that would target certain sectors (e.g., the steel and aluminum, technology, energy, and medical product sectors). Trump would also increase tariffs on imports from other countries to 10%, or as high as 20%, which could significantly affect U.S. companies with offshore operations.
A&M Insight: Harris has not wavered from her position that millionaires/billionaires should pay their “fair share” of taxes but has conceded to a long-term capital gains tax rate of 33% (28% plus the 5% tax on net investment income), which is less than the Biden Administration’s proposal of 44.6% (39.6% plus 5%). While frequent promises by Democrats, and by Trump in 2017, to close the “carried interest loophole” were to no avail, the probability of advancing such legislation depends on the outcome of the elections and the degree of influence of lawmakers opposing the change. Taxing unrealized gains, on the other hand, will have higher hurdles to overcome, including potential constitutional challenges, as hinted by the U.S. Supreme Court in its recent decision in Moore v. United States (discussed in our prior alert). [2]
Déjà vu! It’s another presidential election year like no other, yet no different when it comes to the difficulty of predicting the outcomes, the tax policies the candidates will actually propose once elected, and which policies will likely become law. But as election day nears, each day could bring new developments for future tax policies. Thus, it is critical for taxpayers to stay informed of the policies and positions of the candidates and consider the potential implications under different scenarios, as the candidates have divergent views (not only regarding tax rates highlighted in this alert but also the future of certain tax incentives, including the enhanced energy tax credits under the Inflation Reduction Act of 2022 (IRA)).
If you would like to discuss the proposed tax policies and their implications for your business and tax planning decisions, please feel free to reach out to Kevin M. Jacobs of our National Tax Office.
https://www.alvarezandmarsal.com/insights/election-2024-navigating-tax-policy-twists-and-turns