The impact of the 2024 election on tax will be historic, according to Nick Gibbons, a partner at Top 25 Firm Armanino.
"It will be one of the most significant elections in memory for tax practitioners," he said. "The two candidates have very different philosophies. If you just isolate the tax rate, we saw the biggest tax break in modern history, from a corporate rate of 35% in 2015 to 21% with the advent of the Tax Cuts and Jobs Act. If Congress goes red and Trump wins, we could see serious tax relief, with the corporate tax rate going as low as 15%. If Harris wins and the Democrats hold onto the Senate and make gains in the House, we're looking at a corporate tax rate up to 28%."
Significant provisions of the TCJA are expiring and will disappear unless Congress acts, Gibbons warned. These include the state and local tax deduction cap, which would expire for the 2026 year. Moreover, the elimination of the Section 174 deduction for R&D expenditures has been "brutal" for corporations, he remarked.
"I work with a number of Silicon Valley companies," he said. "A lot of companies had net operating losses due to the disappearance of the deduction, and they had taxable income for the first time. It was never expected and was shocking for them. They always expected that Congress would fix the problem and reinstate the deduction. They thought capitalization of expenditures would be gone and that the deduction of expenditures on a dollar-for-dollar basis would return."
It's been a burden not only for tech companies but also for other industries tangential to those, according to Gibbons: "Architectural and engineering businesses have been especially affected. They could spend $1 million, but only get to deduct $200,000. They'll eventually get the tax benefit in the future, but not in the year they made the expenditure."
Some saw the TCJA as Republicans taking away some blue state benefits, Gibbons suggested. But he sees Trump restoring the benefits in a new administration, since his alliance with vice presidential candidate J.D. Vance and Elon Musk has made him more tech-friendly.
The uncertainty of the election, coupled with the great variety of tax proposals of the candidates that are complex, nuanced and lack details makes the impact difficult to predict, said Thomas Cryan, a partner at law firm Saul Ewing.
"A couple of good think tanks suggest that Trump would pay for extending the TCJA through tariffs, large or small, depending on what can get through Congress," he said. "Trump would add $8 trillion, and Harris would add $4 trillion, to the national debt. What neither one addresses is the real problem of the national debt on our lives. If spending is not brought under control, the 'bond vigilantes' will stop buying Treasury bonds and will force a raise in interest rates, which will exacerbate the debt bias. Bond buyers will require the Fed to yield higher interest rates. 'Trickle down' has never made enough revenue to pay down the debt since the time of Reagan."
"The problem becomes what will happen if Harris wins and Congress is split," he continued. "The Republicans will take the position to shut down the government. But if Trump gets elected, the Democrats will try to extract increases in taxes in exchange for keeping the government open. That's the dilemma of a split Congress — the Democrats won't shut down government, and the Republicans will be happy to shut down the government. Both Trump and Harris have no plan for the national debt, and that's where Wall Street sees its biggest concern, because we've had a long history of low taxes on corporations. And lower taxes never grow revenue enough to increase taxes as a percentage of GDP and that's why debt has always gone up."
Section 174 Controversy
In 2023, Congress made efforts to address Section 174 capitalization, with standalone bills introduced in both the House and the Senate aimed at its repeal. The support for these bills from both parties is notable, but the legislation is still pending:
- March 16, 2023: S. 866 (43 cosponsors)
- April 18, 2023: H. R. 2673 (220 cosponsors)
At some point, efforts to repeal Sec. 174 got tied to efforts to expand the Child Tax Credit, which created a complicated political dynamic, according to Travis Riley, principal at Top 25 Firm Moss Adams.
Members of both parties managed to resolve their differences in the House, which led to the passage of the Tax Relief for American Families and Workers Act of 2024 with a vote of 357-70. This bill, also known as the Wyden-Smith Bill, proposed delaying the required capitalization and amortization of domestic R&E costs until 2026. However, it failed in the Senate due to GOP concerns about some of the Child Tax Credit provisions.
While it's possible, it is unlikely that any meaningful tax legislation will be passed in the lame duck session of Congress, according to Riley.
"It's also unlikely that any party will have a 60-member majority in the Senate next year, which means major tax bills will likely need to go through the budget reconciliation process," he said. "This process is limited by the Byrd Rule, which prevents laws that would increase the federal deficit beyond a 10-year window."
"Section 174 enjoys broad support across parties and is expected to be part of larger tax discussions as key parts of the 2017 Tax Cuts and Jobs Act near expiration at the end of 2025," he continued. "A major challenge is how Congress will find the funds needed to cover the costs of a 174 repeal, since the TCJA initially used the 174 capitalization to raise about $120 billion to offset other tax cuts."
Sen. Mike Crapo, R-Idaho, ranking member of the Senate Finance Committee, played a significant role in blocking the Wyden-Smith bill in the Senate. With the Senate possibly under Republican control and R&D being a top priority for Crapo, navigating these legislative challenges will be crucial.
Both presidential candidates have indicated support for enhancing R&D incentives:
- Former President Donald Trump supports R&D expensing for U.S. based manufacturers.
- Vice President Kamala Harris's fiscal and economic agenda includes unspecified R&D incentives that would replace the foreign-derived intangible income deduction.
