With the November election mere weeks away, there is still time for tax professionals to ponder the strategies available to meet the proposals of each candidate.
The contrast between the candidates is clear, according to Ian Boccaccio, principal and practice leader of the income tax practice at global tax firm Ryan.
"If one thinks about the federal consequences on U.S. tax on U.S. activity, no doubt if the Democrats win they will increase taxes," he said. "This is made clear in a number of different proposals. First, there's the increase in the corporate tax rate. It was 35% before the Tax Cuts and Jobs Act dropped it to 21%. Harris wants it to go to 28%, whereas Trump would peg it at between 15% and 20%, depending on the speech."
Some tax professionals are advising their clients to look at temporary differences and build a game plan to optimize or minimize their federal tax liability in either scenario, according to Boccaccio.
"They advise a review of potential accounting changes to defer potential deductions from 2024 into 2025," he explained. "Let's say you have $100 of expenses. You would only get $21 in tax benefit this year but if the rate goes up, that same expense would get a 28% benefit in 2025. These are temporary differences between book method and tax. Conversely, if the rate drops to 20% in 2025, you would want to accelerate deductions into 2024, so that the same $100 deduction would generate an extra dollar for a deduction. By moving the deduction from one year to another year, you are building a plan with levers that you can pull to optimize your tax liability under either Trump or Harris."
Next, he explained the potential impact on non-U.S. activity for U.S.-based companies: "Today, if a U.S. multinational has non-U.S. subsidiaries, they are taxed at roughly 10-½% under GILTI. Harris wants to move that from 10-1⁄2% to 21%, effectively doubling the U.S. tax on non-U.S. activity," he said. "So U.S. companies that receive revenue from non-U.S. customers are only taxed on that revenue stream at roughly 13.25% versus 21% on [Foreign Derived Intangible Income — the value of tangible assets used in earning foreign income]. The FDII regime incentivizes U.S. companies that are earning non-U.S. revenue to keep intellectual property in the U.S., so if the rate goes to 21% under Harris, one could argue there would be less incentive to maintain intellectual property in the U.S." If the FDII benefit looks likely to be reduced next year, Boccaccio advises looking for methods to expedite revenue from non-U.S. customers in 2024 to maximize the FDII benefits before they are potentially reduced in 2025.
The Inflation Reduction Act, passed in August 2022, has created a tax credit marketplace, so corporate taxpayers are able to now effectively buy down a portion of their federal tax liability through the purchase of discounted federal tax credits from renewable energy companies. Although many argue that a Trump victory would be the end of this tax credit marketplace, since they believe Trump would abolish all aspects of the IRA, Boccaccio believes this is not the case.
"Trump publicly denounces the 'green new deal,' but the fact is that the vast majority of green energy investments announced since the IRA was enacted has been in Republican jurisdictions," he said. "And Trump is pro-jobs — the IRA's green energy policy has created thousands of new jobs, mostly in Republican counties. So my advice to U.S. taxpayers is to continue to acquire discounted federal tax credits and to think ahead as far into the future as your corporate planning will allow."
