From the increasing complexity of the tax code to the dangers that you expose yourself to in the event something goes wrong, tax planning represents a significant cost and a challenge for both companies and individuals. Worse yet, all this happens before you have to deal with things like sales taxes, state and local taxes, international considerations like VAT, and more.
For corporate finance professionals, the name of the game is to minimize your tax burden. After all, as a cost, you have to offset it somehow—often in the form of higher prices for customers, lower wages, or reduced return on equity.
Tax changes may be in order under the incoming Biden/Harris Administration, and corporate finance professionals will need to prepare.
Top Questions to Ask Yourself about a Biden Tax Plan
Luckily, a recent Deloitte brief explored some of the implications and things to know about taxes under the Biden Administration. Following our initial look at some of the goals this administration hopes to accomplish and the approaches the administration will use to secure revenue, we would today like to discuss what questions you should be asking yourself before January 20.
Will A Doubled Global Low-Taxed Income Provision Encourage Onshoring?
Following the past few years of seeing incentives and tariffs encouraging companies to re-shore operations, one area of Biden’s tax plan looks to push this further. One of these areas consists of modifying the global intangible low-taxed income (GILTI) provision by raising the tax rate on such income to 21% from 10.5%.
The doubling of the GILTI tax rate—combined with the elimination of the exemption from GILTI for a 10% return on the taxpayer’s qualified business asset investment—could encourage even more onshoring of operations in the coming years.
However, this depends on other changes, according to Deloitte, who notes that “depending on what other changes have been made to the corporate tax rate […] [companies] could potentially benefit from the lower effective rate on foreign-derived intangible income, the accelerated depreciation, and the 10% advanceable tax credits, among other incentives currently in the tax code.”
Will Mergers and Acquisitions Need to Be Structured Differently?
From the end of capital gains preferences for certain stakeholders to the higher income tax rates expected, some companies may benefit from closing deals faster and others may benefit from restructuring deals.
As noted by Deloitte, the TCJA’s reduction of the corporate tax rate resulted in a significant decrease in the tax cost associated with taxable M&A, but under Biden, this could change. For example, by ending capital gains preferences for high-income shareholders, companies may benefit from tax-deferred M&A activity. Further, many companies may benefit from closing deals ASAP to provide a buffer against potential tax increases in 2021.
How Will You Need to Plan for Potential Changes in Labor Costs?
One of the most likely aims of a Biden tax plan will be the increased payroll tax. Under current law, a 6.2% payroll tax to fund Social Security is collected from both the employer and employee (for a combined rate of 12.4%) on the first $137,700 of income (the wage cap for 2020, indexed for inflation).
Under Biden’s tax plan, another 6.2% in Social Security taxes would be collected from both the employer and employee on wages and other compensation only above $400,000, although it is not immediately clear if that wage cap would be adjusted for inflation in future years.
While this looks like a priority, it may be the least likely piece to be enacted. Budget reconciliation may not touch Social Security, making a payroll tax hike a challenge.
What’s on the Investor Relations Front?
Higher taxes means lower dividends and lower stock prices. Understanding and selling investors on the potential fallout may require a different approach to communications. In addition, Biden’s proposal to increase the top tax rate for capital gains—from 23.8% to 39.6%—could spur an end-of-year sell-off by investors looking to take advantage of the lower rate this year.
Staying on Top of the Evolving Tax Landscape
With a new administration taking over on January 20, corporate finance professionals need to plan for the changes before they become a reality. Understanding the evolving landscape is a constant challenge, and it pays to have a place to discuss the best practices and tactics needed to reduce costs. We launched the Controllers Council for people like you, providing a community to allow discussion and provide advice.
If you’re looking for a place to connect with other professionals, we have a special offer. From now until the end of the year, we’re offering a discounted annual membership. Membership provides everything from community to discounted CPE courses, helping you to get more out of 2021. Click here to learn more about the benefits of membership.
Additional Tax Resources