Election uncertainty hampers companies’ tax planning

With the November election approaching, businesses are bracing for the potential impact of two very different sets of tax policies, with the resulting uncertainty making long-term tax planning increasingly difficult.

The Democratic presidential nominee, Vice President Kamala Harris, has proposed eliminating taxes for tips, in addition to proposals to raise the corporate income tax rate to 28% from 21%, tax capital gains at a 28% rate for taxpayers who earn $1 million or more and quadruple the tax on stock buybacks.

According to the Internal Revenue Service, the tax rate on most capital gains is no more than 15%, but individuals making more than $492,300 and married couples making more than $553,859 annually are subject to a 20% capital gains tax rate.

The Republican nominee, former President Donald Trump, has spoken favorably about making the 2017 Tax Cuts and Jobs Act permanent. He also has proposed lowering the corporate tax rate to 15% and exempting tip and overtime income from taxes. Trump was the first candidate to propose eliminating tip taxes, doing so during a July 18 speech at the Republican Party’s national convention.

Most businesses are waiting for the election results to make important decisions, with 75% of executives saying the outcome will affect their business decisions around financial forecasts and budgets, according to a PwC Pulse Survey of C-suite executives released Wednesday. More than 70% said the decision-making around using tax credits to fund investments hinges on the election, according to the survey.

A 28% corporate income rate is a major concern for tax leaders, said Rohit Kumar, co-leader of PwC’s Washington national tax services practice. According to the PwC survey, U.S. corporate tax policy is the second-highest policy risk under a Harris administration, with economic policy being ranked as executives’ top concern. If Trump is elected, U.S. corporate tax policy is the fifth-highest policy risk for executives, according to the survey.

“The big difference is [that] under a hypothetical Harris administration, there is a lot of angst around a potential corporate rate increase,” Kumar said, adding that executives expect to react dramatically to that tax hike.

While many aren’t saying it publicly, tax leaders privately say that if the rate were to increase to 28%, they would have to reduce labor costs and shift investment outside the U.S., Kumar said. Three-quarters of executives polled said their companies would significantly reduce their investments in the U.S. if a 28% corporate rate is implemented, according to the PwC survey.

“And to the extent that that didn’t work, third on the list would be ‘we’d have to go back and talk to our suppliers about squeezing costs out of the system,’ which is just a reminder that corporations, at some level, actually don’t have their own money,” Kumar said. “They have money from their shareholders, from their customers and their workers and if they end up raising the corporate tax rate, that money will come from some combination of customers, workers and shareholders.”

Evan Morgan, a certified public accountant and tax principal at Kaufman Rossin & Co., agreed that corporations are going to be concerned about a possible corporate tax rate hike in the short term, adding that other types of taxpayers likely have other concerns when approaching their tax planning.

Companies doing business internationally may be concerned about the extension of the TCJA’s base erosion and anti-abuse tax or a potential increase of U.S. taxes on foreign earnings, Morgan said. Individuals and small businesses might be concerned with a capital gains tax rate hike, the expiration of qualified opportunity tax zone tax benefits or a tax on unrealized gains for wealthy taxpayers, he said.

Many of the provisions businesses are concerned with are scheduled to expire or phase out if Congress can’t come to an agreement to extend them, Morgan said.

“Some of this is going to happen naturally if they do nothing,” according to Morgan.

What will become law primarily depends on what the 119th Congress can pass, Morgan said.

The end of the election likely won’t mean the end of uncertainty for businesses, particularly if the next president only spends one term in office, Morgan said.

“In a political campaign, you’re giving your aspirational goals, but I think most business owners have been around long enough and are smart enough to realize that whoever wins, it’s going to be [tough] for them to get anything passed, at least in the short term,” Morgan said. “That’s why I say it may be more about four years from now or eight years from now.”

The makeup of Congress will play a key role in what can and will happen in 2025 and beyond, Morgan said, and the uncertainty of which party will have control over each chamber further complicates the tax planning process.

Kumar agreed that if Congress is divided, campaign promises will likely need to be pared back to get the votes required to become law. A 28% corporate rate is off the table if Congress is split, and if Republicans control the House and Senate, and potentially the White House, a corporate tax rate increase probably “is not happening at all,” Kumar said.

“In a world where Vice President Harris is now President Harris, but Republicans have the Senate – and that’s not a crazy scenario to think about — then a 28% rate … is not happening,” Kumar said.

“There’s no universe where House and Senate Republicans, or Senate Republicans in this hypothetical, are going to vote for a 28% headline corporate rate.”

Ultimately, “there’s really nothing to be certain about,” especially in a political climate where lawmakers have found it difficult to agree on much in recent years, Morgan said.

“Forget about balancing a budget; they can’t get a budget and they’re going to pass complicated tax laws?” Morgan said. “I don’t think so, frankly.”

Read the full article at Law360.