US election and corporate taxes in 2021

Tax issues boards should look at now

One would think an election victory for Joe Biden would mean a dramatic shift in tax planning for private and public companies. After all, Biden ran on an aggressive tax platform that would reverse many of the recent Trump tax changes. But with the close presidential race, Republican gains in the Democratic controlled House of Representatives and an undetermined Senate, momentum for many of Biden’s more transformational tax proposals is now in question.

Most notably, Biden has proposed increasing the corporate income tax rate from 21 percent to 28 percent, creating a minimum tax on corporations with book profits of $100 million or higher (similar to an AMT) and doubling the tax rate on Global Intangible Low Tax Income (GILTI) earned by foreign subsidiaries of US firms from 10.5 percent to 21 percent.

Lack of blue wave

Despite a consensus of polls showing a blue wave of Democrats coming into office, this was not the case.

If Republicans keep control of the Senate, their influence will severely limit Biden’s ability to pursue his most ambitious tax proposals. However, there may be room for bipartisan compromise on more modest initiatives. Republicans could also seek to compromise on Democratic priorities in exchange for extending favorable rules in the Tax Cuts and Jobs Act.

Democratic control of the Senate would open up more opportunities for Biden’s tax agenda, but there are several other factors that could still check Democratic ambitions. To pass any legislation without Republican support, Senate Democrats would need complete unanimity among their own members, including many moderates from red states. In addition, Senate rules require a 60-vote majority to avoid filibusters. There are options to overcome this hurdle, but they have real limitations.

Democrats’ slimmer House majority could make it more difficult for leaders to manage tension between liberal and moderate factions within their own party. Moderates, in particular, may seek to assert their power. Key Democrats have already indicated they may be reluctant to raise taxes while the economy is still fragile.

What boards should look at now

Biden’s apparent election victory changes the tax outlook, so companies need to evaluate their long-term and short-term tax planning, and in multiple scenarios. While there are strategies that can offer benefits before tax increases, taxpayers should be cautious with these as the sweeping Democratic gains many expected did not occur. Those would have made tax increases more likely.

Businesses still concerned with tax hikes can consider hedging against risk by accelerating transactions or income. But these strategies should be carefully evaluated for potential downside. It may not be worth it to rush transaction or asset sales in ways that forfeit value just to avoid tax increases that may not come. Companies should also consider cash flow, the time value of money, and state and local tax implications.

Companies less concerned with potential tax increases should consider re-focusing their tax planning on cash flow and liquidity. There are many tax stimulus and other provisions that offer quick refunds, including:

• Net operating loss carrybacks
• Retroactive claims for bonus depreciation on qualified improvement property
• Refunds for 2020 COVID-19 disaster losses against 2019 income
• Employee retention credit claims

It will be important to monitor the legislative process to see how the proposals develop and how quickly tax legislation is moving so that planning can be adjusted appropriately.