Immediate tax hikes are unlikely
For one thing, the failure of Democrats to make more sweeping election gains blunts the potential for more transformational proposals. “We can expect a shift towards more bipartisan, moderate proposals,” said Stamper. “For the first six or even 18 months of the Biden administration, the focus will be on COVID-19, economic relief and recovery.” And key Democrats have signaled that tax increases should wait until the economy is less fragile.
As for fears of retroactive tax increases, there can be some comfort in the fact that though they’re not unprecedented, they’re rare.
Regulations could be a deciding factor in any decisions about tax changes. Tax regulations are historically more technical and less political than regulatory changes in other areas. Across-the-aisle horse-trading could produce more modest tax proposals.
As in all important decisions, choose balance
Because tax increases are probably not imminent, many important year-end planning considerations that offered tax liquidity for media and entertainment organizations expecting losses in 2020 may not be appropriate. However, other planning is still available, such as:
- Accelerate deductions into 2020 to juice up net operating loss carryback for a larger refund and rate arbitrage opportunity.
- Amend your 2019 return for a quick refund from disaster loss attributable to COVID-19.
- Claim the employee retention credit.
- Claim retroactive benefit of bonus depreciation on qualified improvement property.
If you have transactions you’re thinking about closing, especially early in 2021, you could accelerate them to protect yourself from the downside risk of a tax increase,” said Stamper. “But you’ve got to balance both sides because there’s risk on the other side, too. If you rush a transaction, you sacrifice value, liquidity and tax flow. A tax increase is looking increasingly unlikely to happen, but you have to balance both sides of the equation.”
In coming to a balanced decision, you’re keeping in mind the possibility of early tax increases. You could still hedge against risk of future tax increases by accelerating transactions scheduled for new year into 2020 if the downside is minimal. There are many gain accelerations strategies.
Any reverse planning should be balanced against downside risk:
- Be cautious about rushing transactions or asset sales in ways that forfeit value to avoid tax increases that appear increasingly unlikely to materialize.
- Consider the effect on liquidity, cash flow and the time value of money.
- Analyze the state and local income tax effect of any strategy.