President Donald Trump is heralding the 2017 Tax Cuts & Jobs Act (TCJA), which went into effect in 2018, and is looking to institute additional tax cuts. Some of the provisions in the 2017 TCJA are set to expire by the end of 2025, and the President proposes to make them permanent. Joe Biden, the Democratic nominee, has stated that he would seek to repeal certain parts of the TCJA that apply to high-income filers and make changes to some of the current tax structure in order to increase federal funding. The difference between the two candidates’ tax proposals is stark, and the proposed policies, if adopted by Congress and put forth into legislation, would affect the technology industry in different ways.
The TCJA reduced the maximum corporate income tax rate from 35% to 21%. Trump pledges to reduce the rate further. Biden has proposed to raise the maximum corporate income tax rate to 28%. In addition, for companies with $100 million or more of book profits, Biden’s tax proposal would seek to introduce a corporate alternative minimum tax equal to the greater of the regular corporate income tax or 15% of book profits.
The TCJA introduced a new tax on income of foreign subsidiaries called the Global Intangible Low Tax Income (GILTI) tax. Under current law, the tax on the foreign income is 10.5%. Biden’s proposed plan would seek to change the tax rate to 21%, but it would not alter the current ability for companies to offset GILTI income with net operating loss carryforwards.
The TCJA allows owners of partnerships and S corporations, and sole proprietorships to deduct 20% of their Qualified Business Income on their individual tax returns. This deduction is scheduled to expire at the end of 2025, but Trump’s proposed tax plan would seek to make this deduction permanent. Biden’s tax plan would aim to phase out this deduction for individuals earning over $400,000 per year. Biden has also stated that his plan, if adopted into legislation, would restore the top individual income tax rate from 37% to 39.6%. Depending on where corporate tax rates land relative to individual tax rates, businesses may need to reconsider their 2018 tax planning and optimal entity structure.
There would also be significant tax implications for investors in technology companies. Capital gains are currently subject to a tax rate ranging from 0% to 20% depending on the taxpayer’s income. There is also the 3.8% surtax on net investment income. Trump’s proposed plan would seek a reduction in the capital gains tax, while the proposed tax policy put forth by Biden would seek an increase by taxing capital gains as ordinary income for taxpayers with income over $1 million. For holders of stock options and restricted stock units, these changes could influence investor behavior. Neither candidate has proposed any changes to the existing qualified small business stock exclusion at this time.
Businesses are currently allowed to deduct 100% of qualified research and development expenses, but starting in 2022, these costs will be required to be amortized over 5 years. Neither candidate has proposed specific tax policy changes related to research and development at this time.
While the outcome of the election is uncertain, the need for tax planning is not. Regardless of who wins, businesses will always benefit from advanced thought and planning. What is unique about this election is the level of divergence between the two candidates’ proposals.
Please consult with your Withum tax advisor to help identify tax planning opportunities in regard to the proposed changes in tax policy this election season.