A&M Tax Advisor Weekly
While taxpayers are still adjusting their organizational structures and transactions to address the TCJA and the COVID-19 guidance that has been released (and continues to be released) by the Treasury and IRS on a weekly, if not daily, basis, they need to be cognizant that inauguration day is less than 6 months away. With that in mind, if there is anything that the 2016 election has reinforced it is that there are no certainties when it comes to politics. Nevertheless, this alert sets out to highlight some of the potential tax implications for funds and their managers if Democrats should acquire control of both the White House and Congress. At the outset, it is important to note that former Vice President Biden, the presumptive Democratic nominee, has not released a detailed tax policy document. Moreover, it is likely that the tax plank of the Democratic platform will reflect the joint efforts of the Biden and Sanders teams. Of course, even if Democrats control both the White House and Congress, there is no guarantee that any, or all, of these proposals would be adopted. However, we thought it would be helpful to highlight some of the potential tax implications. The following is a summary of the more significant income tax changes Biden has proposed based on press reports and institutional white papers.
Impact on Corporations
For corporations, the most impactful proposed change is to the tax rate, with:
A&M Insight: While it is obvious that tax liabilities of corporations would increase under the proposal, the proposed rate increase could have collateral consequences beyond the mere rate differential. For example, the increase in rate could reduce the amount of tested income or subpart F income of a controlled foreign corporation that is eligible for the high tax exceptions. The higher rate could also increase the cost of restructuring multinational corporations as it will be harder to offset the full U.S. tax cost with foreign tax credits.
The proposed alternative minimum tax could also impact the expected return on investment from capital intensive projects (because it would reduce the benefit of bonus depreciation), startup companies, and other companies whose taxable income is likely to be materially lower than their book income. Therefore, for these businesses in particular, we encourage taxpayers to factor in the potential 15% minimum tax.
Another proposed change involves the Foreign-Derived Intangible Income (FDII) and Global Intangible Low-Taxed Income (GILTI) deduction. Currently, corporate taxpayers are generally entitled to a deduction equal to 50% of their GILTI inclusion, until 2026 when the deduction will be reduced to 37.5% of GILTI. Biden proposes to reduce the amount of the deduction to 25% of the GILTI inclusion.
A&M Insight: Currently, the baseline effective U.S. tax rate on GILTI (net income from foreign operations of a controlled foreign corporation) is 10.5% (21% tax rate * GILTI net of 50% deduction). But the combination of the proposed tax rate increase and decreased GILTI deduction would cause the effective tax rate to increase to 21% (28% tax rate * GILTI net of 25% deduction). The combination of the proposals would cause the effective tax rate on GILTI to double…