Publish Date
Nov 19, 2024
A&M Tax Advisor Weekly
As President-elect Donald Trump and his fellow Republicans prepare to take the reins, the fear of tax increases has diminished. However, uncertainty looms over many key issues. Questions remain about the future of the expiring Tax Cuts and Jobs Act (TCJA) provisions and whether they will be extended or made permanent. Additionally, the fate of the Inflation Reduction Act (IRA) provisions, including the Corporate Alternative Minimum Tax (CAMT), the excise tax on stock repurchases, and a myriad of green energy incentives, is unclear. Further, it is uncertain the extent to which costs for any extended and new tax breaks will be offset or lead to increased deficits.
On the global front, potential repercussions could arise if the Trump administration decides to withdraw from the OECD global tax agreement, the Paris Climate Agreement (as Trump did in 2017), and perhaps even NATO.
In this alert, we explore several aspects of anticipated tax reform and discuss critical implications for businesses and individuals.
During his campaign, Trump did not present a cohesive economic and tax plan but hinted at various elements that are likely to make their way into his signature tax legislation. The full spectrum of the tax reform that the Republicans will push through Congress remains uncertain. Some observers point to “Project 2025” – a 2023 publication of a broad conservative “Mandate for Leadership” that extends beyond tax, which was written by former Trump administration officials and confidants. Although Trump distanced himself from Project 2025 during the campaign, the fate of its proposals remains uncertain. Drastic tax reform proposals— such as a simplified two-rate individual tax system with permanent repeal of all non-business tax deductions and exemptions suspended by the TCJA— seem unlikely, particularly for the first major tax legislation of the Trump administration.
So how will tax reform play out? With a Republican-controlled Congress and slim margins in the House and Senate, the budget reconciliation process will be the path of least resistance. This process allows Republicans to avoid a filibuster by only needing a simple majority to pass the legislation. In navigating this process, Republicans will first have to agree on a top-line budget number and deal with restrictions on what can be included in the bill. It is noteworthy that this Congress could operate differently (perhaps not as dysfunctional) compared to prior ones, even when one party was in control. While factions of the Republican Congress may not fully align with Trump, more Republicans are expected to tow the party line with less chance of dissenters carrying significant weight (like Senators Manchin and Sinema when Democrats attempted to pass tax legislation).
Corporations eagerly anticipate Trump’s revival of his “America First” agenda and his critical stance on the IRS, which could mean a seismic shift in tax policies is on the horizon. These changes may include more advantageous tax laws and reduced enforcement threats. Key tax implications for corporations could include:
A&M Insight: A Business-Friendly Forecast
Domestic corporations can generally expect a more business-friendly administration in the coming years. For example, the Biden administration’s corporate tax proposals, such as modifying the tax treatment of tax-free spinoffs or further limiting deductions for excess executive compensation are likely to be shelved temporarily and the Republicans are not likely to use corporate tax rates as an offset to spending or to reduce the deficit.
Corporations are also hoping that Congress will repeal the CAMT and the excise tax on stock repurchases, as suggested in Project 2025. However, doing so would come with a hefty price tag and so the Trump administration may consider simplifying the proposed overly complex and burdensome Treasury and IRS rules for CAMT [1] and the stock repurchase excise tax [2].
Given the anticipated favorable corporate tax landscape, corporations could benefit from deferring income and accelerating expenses. However, it remains crucial to model different scenarios and stay on top of congressional developments and signals.
Notwithstanding that the U.S.’ international tax regime was not discussed during the presidential campaign, Trump’s America First policies suggest significant changes could be on the horizon. Key international tax policies that should be monitored include:
A&M Insight: Heightened Trade and Tax Implications
The U.S.’ potential withdrawal from the OECD agreement could have far-reaching consequences. Without the U.S. at the table, achieving a global consensus on tax reforms will be challenging. This could lead to increased unilateral measures by other countries, resulting in a fragmented international tax landscape, potential double taxation, and increased compliance burdens for multinational enterprises. For example, if the U.S. does not adopt Pillar 1, other countries may adopt unilateral Digital Services Taxes (DSTs), prompting retaliatory actions from the U.S., such as tariffs. Additionally, if the U.S. does not adopt Pillar 2, U.S. earnings could be subject to higher taxes in a foreign jurisdiction that has adopted Pillar 2. This may not be a concern to the Trump administration if such taxes discourage U.S. companies from setting up entities in certain jurisdictions. The Trump administration may employ other strategies like economic leverage, tariffs, and diplomatic pressure to protect U.S. businesses targeted by foreign jurisdictions, which could have other consequences for the economy, trade, and foreign relations. In addition, the Trump administration may rely on current anti-base erosion provisions, which means the section 385 regulations allowing the IRS to recharacterize certain related-party debt as equity may not be repealed anytime soon.
Corporations should also consider other policies that encourage investment in the U.S., which would disadvantage U.S.-parented structures with foreign subsidiaries while favoring foreign-parented structures with U.S. subsidiaries. With the myriad of evolving tax and trade policies and resulting complexities, it is crucial to thoroughly analyze and model decisions, such as whether to reshore operations.
The voters have decisively re-elected Trump both by electoral votes and the popular vote. Trump may view the results as endorsement for all of his policies, including taxes. As such, he will likely strive to fulfill campaign promises for lower taxes, especially if Republicans want to retain control after the mid-term elections. For individuals, the most significant tax implications likely include:
A&M Insight: Tax Increases Dodged
For individuals, particularly high-net-worth taxpayers, the outlook looks rosy as the tax regime is anticipated to essentially be status quo, dodging the Democrats’ attempts to increase tax rates. One notable item that Trump has not recently addressed is the preferential capital gains treatment for carried interest, which he vowed to eliminate in his first term. However, with a Republican-controlled Congress it seems less likely that carried interest will be up for discussion. Additionally, private equity funds and other firms may feel more secure knowing that the Democrat-led massive reforms targeting passthrough entities will likely remain on the shelf for now. We will have to wait and see whether the Trump administration revisits other policies, such as the much-criticized partnership related-party basis shifting guidance Treasury and the IRS issued earlier this year, which could extend the government’s reach beyond abusive transactions to upend legitimate transactions.
Trump’s reelection signals a massive reform of federal agencies and their practices and regulations, which could entail:
A&M Insight: Regulatory Overhaul
Trump’s return to the White House is likely to mirror his first term, marked by a flurry of executive orders affecting federal agencies’ actions, including freezing and eliminating regulations [3]. The CRA will be a critical tool for overturning “major” regulations, with the caveat that substantially similar rules cannot be promulgated. In his first term, Trump overturned 16 regulations, which was unprecedented, given 20 rules have been overturned using the CRA between 2001 and 2022 [4]. While no tax regulations have yet to be overturned under the CRA [5], potential targets include energy credits under the IRA and the manufacturing investment credit under the CHIPS and Science Act. Additionally, the Trump administration is expected to reduce staffing levels, which will not only mean fewer regulations but also more limited enforcement initiatives.
With Republicans dealing an overwhelming blow to the Democrats, the Biden administration may rush to publish final regulations despite the threat of being overturned by the Trump administration or by a court under Loper Bright [6]. The administration may also attempt to deploy any unused funds, such as those tied to renewable energy incentives under the IRA or for investments under the CHIPS Act. During this lame-duck period, Congress is expected to prioritize funding the government, disaster relief, and other priorities, with significant tax measures unlikely to be addressed.
Trump has already announced many Cabinet members, pending Senate confirmation, including Chris Wright, a current fossil fuel executive, as Energy Secretary. Wright is expected to help dismantle aspects of the Biden administration’s IRA green energy initiatives. This creates an intriguing dynamic, as Trump has tasked Elon Musk, known for his ties, amongst other things, to Tesla and other green energy ventures, to co-lead the new Department of Government Efficiency (DOGE) and reduce federal spending. It will be key to watch for early clues as to whether this dynamic will result in a more balanced approach between oil and gas producers and green energy producers.
Further, Republicans are aiming to move quickly, potentially attempting to pass tax legislation in the first half of the year, a rather aggressive timeline, notwithstanding a unified Congress. It is essential for taxpayers to immediately consider how the evolving tax policies, anticipated regulatory overhaul, and highly uncertain geopolitical environment could affect their businesses. If you would like to discuss how the evolving legislative and regulatory landscape could affect your business strategies and tax planning, please feel free to reach out to Kevin M. Jacobs of our National Tax Office.
[1] Kevin M. Jacobs et al., “CAMT in a Nutshell: ‘Fair’ Taxes, Complex Rules and Compliance,” Alvarez & Marsal, Tax Alert, October 1, 2024, https://www.alvarezandmarsal.com/insights/camt-nutshell-fair-taxes-complex-rules-and-compliance
[2] Kevin M. Jacobs et al., “‘Can’t Get [Much] Satisfaction’ from Proposed Stock Repurchase,” Alvarez & Marsal, Tax Alert, April 19, 2024, https://www.alvarezandmarsal.com/insights/cant-get-much-satisfaction-proposed-stock-repurchase-rules
[3] See Executive Order No. 13771, “Reducing Regulation and Controlling Regulatory Costs,” issued January 30, 2017, https://trumpwhitehouse.archives.gov/presidential-actions/presidential-executive-order-reducing-regulation-controlling-regulatory-costs/
[4] Congressional Research Service, “The Congressional Review Act (CRA): A Brief Overview,” August 29, 2024, https://crsreports.congress.gov/product/pdf/IF/IF10023
[5] Steven J. Balla and Sarah Hay, George Washington University Regulatory Studies Center, “Will History Repeat Itself? Forecasting CRA Use in a Second Trump Administration,” May 3, 2024, https://regulatorystudies.columbian.gwu.edu/sites/g/files/zaxdzs4751/files/2024-05/cra_will_history_repeat_itself_may2024_final.pdf
[6] Kevin M. Jacobs et al., “Supreme Court Overturns Chevron: Navigating the New Landscape for Tax Regulations and Judicial Review.” Alvarez & Marsal, Tax Alert, July 2, 2024, https://www.alvarezandmarsal.com/insights/supreme-court-overturns-chevron-navigating-new-landscape-tax-regulations-and-judicial
