The upcoming election will be crucial for the future of tax policy and has the potential to dramatically affect the economic consequences of future M&A activity.
President Donald Trump and Democratic nominee Joe Biden have proposed very different visions for the tax code. It’s important to remember that both tax platforms are partially driven by campaign politics and many of the proposals will face major hurdles regardless of who wins. Still, there’s no doubt the winner will have substantial influence to reshape tax policy. The current proposals will evolve but provide valuable insight into potential shifts in the tax landscape. The following discusses how some of the most significant aspects of the platforms could affect M&A strategy.
Corporate tax rate
Biden has made raising the 21% corporate rate a cornerstone of his tax agenda, and it will be a top priority if he is elected. His proposed 28% rate would impact business cash flow, company valuation, or even discourage stock acquisitions. In addition, Biden is proposing to create a new 15% corporate minimum tax based on book profits. Few details are available, but any shift toward taxing based on financial statement income could affect the tax consequences of M&A activity in areas where book and tax rules differ substantially, such as debt restructuring and the treatment of transaction costs.
Trump has pledged to retain the 21% corporate rate. The 21% rate is not itself scheduled to expire, but other major expiring provisions from the Tax Cuts and Jobs Act could give Democrats leverage to negotiate for other changes, including to the corporate rate. A second-term Trump Administration would likely focus on making the entire bill permanent.
Biden has proposed returning the top rate on ordinary income to 39.6% from the current 37%. In addition, his proposal to repeal the Section 199A deduction for individuals with more than $400,000 in income would raise the top effective rate on qualifying pass-through business income from 29.6% to 39.6%.
Trump has pledged to make permanent the 37% rate and Section 199A deduction, which are scheduled to expire in 2026.
Biden has proposed taxing long-term capital gains as ordinary income at a top rate of 39.6% for taxpayers with income above $1 million. This is one of his most aggressive proposals, and while it would be a top priority, compromises during the legislative process could lead to a more modest increase. Any increase in capital gains tax could have a chilling effect on sales of business assets or stock owned by individuals and pass-through entities.
Trump has proposed retaining the 20% rate on long-term capital gains. He has criticized the rates on carried interest in the past, but since the TCJA changed the holding period, Trump has not targeted carried interest in comments or campaign proposals.
Payroll tax increase
Biden is proposing to subject wages over $400,000 to Social Security tax. The Social Security wage base is currently indexed for inflation and is $137,700 per employee in 2020. Biden has not clarified whether his proposal is meant to include only the employee share or both the 6.2% employer and employer shares. For businesses with highly paid employees, any increase in the employer share could have ramifications on cash flow. Any partner paying self-employment tax on partnership income would also be affected.
International and onshoring provisions
Both candidates have made encouraging investment in the United State a priority. Trump officials have proposed immediate expensing for businesses that bring operations and jobs back to the United States. Trump would also be likely to use a second term to try to prevent increases in the tax rate on global intangible low-taxed income (GILTI) from taking effect. Under current law, the 10.5% effective rate is scheduled to increase to 13.125% in 2026.
Biden has proposed a new 10% advanceable tax credit to encourage the reopening and revitalization of closed plants and expanding U.S. production. At the same time, however, Biden has proposed to increase the GILTI rate to 21% and potentially expand it into a true global minimum tax. Biden is also proposing a 10% surtax for U.S. companies selling back into the United States that would create a 30.8% rate on these profits. These changes could decrease cash flow and burden private equity groups and portfolio companies with restructuring their foreign operations.
The outcome of the election will have a significant impact on the economics of M&A activity, but it’s important to remember both candidates would face significant challenges actually enacting their platforms in their current forms. Either candidate even in victory could face one or both congressional chambers controlled by the opposite party. The Senate in particular is considered a toss-up, so neither side is expected to approach the 60 votes needed to avoid procedural hurdles. To pass tax legislation, the winning candidate will need to either compromise with the minority, use the restrictive budget reconciliation process, or push through a historic shift in Senate rules.
Even with the legislative challenges, the presidential winner will undoubtedly have a major impact on the future of tax policy. A Biden victory in particular could usher in significant changes. Our table below shows how even tax increases more modest than those currently proposed could still significantly alter the economics of a hypothetical sale of business for $300 million. Private equity groups should examine the tax platforms carefully and be prepared to incorporate the election results in their long-term M&A planning.
To learn more visit gt.com/tax
Candice M. Turner
Candice Turner is a principal in the M&A Tax Services group and serves as the business line leader for the Northeast Region.
New York, New York
- Real estate and construction
- Asset management
- Retail and consumer products
- Private equity
Christopher P. Schenkenberg
Chris Schenkenberg has extensive experience working in M&A, conducting tax due diligence reviews for both financial and strategic clients. He also has significant technical knowledge in acquisition structuring, divestiture planning and tax accounting methodologies.
- Technology and telecommunications
- Retail and consumer products
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