Businesses should prepare for Biden’s tax reforms

After much speculation about whether the Biden administration would prioritize the tax changes proposed during the 2020 election campaign, President Biden released additional details of his tax reform plan, dubbed the "Made in America Tax Plan," less than 100 days after taking office.

The tax plan arrives hand-in-hand with the American Jobs Plan, a massive infrastructure project that aims to “reimagine and rebuild a new economy,” fueled largely by increased tax revenue.

To generate the revenue needed to fully fund the American Jobs Plan, the Made in America Tax Plan proposes to reverse the corporate tax decrease that was the centerpiece of the Trump administration’s Tax Cuts and Jobs Act of 2017. President Biden’s tax plan also proposes a number of other changes, mostly concerning international taxation, with the stated goal of incentivizing job creation and investment in the U.S.

While major tax changes could be coming in the future, it is difficult to predict the ultimate changes or how seismic they will be. The fact sheet released by the White House is in many respects light on details, and a comprehensive explanation of each proposal will not be available until the Treasury Department releases its “Green Book” this spring. Moreover, each proposal will likely face considerable pushback from congressional Republicans, and the enactment of any proposal will minimally require the unanimous support of Senate Democrats and the support of the overwhelming majority of House Democrats. Accordingly, the president’s more ambitious proposals could very well face congressional gridlock and may require considerable revision to amass the support necessary for enactment. Compounding this conundrum, several cabinet members, including Treasury Secretary Janet Yellen, have repeatedly indicated that proposed changes will be introduced iteratively, in separate legislation. That, combined with the lengthy congressional reconciliation process, makes it difficult to predict when any one proposal might be enacted, let alone become effective.

The difficulty of forecasting the tax plan’s ultimate impact and the likelihood of a prolonged legislative process make interim tax planning exceptionally difficult, as tax professionals cannot reliably predict precisely what is coming, or when. The Biden administration has not provided any concrete details about timing, but in the fastest possible timeline, legislation could be introduced within the next six weeks and voted into law within the next six months, with some changes potentially becoming effective for the 2022 tax year. However, the timetable could be considerably longer.

That said, there are financial, operational and other remedial measures that companies can implement in 2021 to mitigate the eventual impact of Biden’s tax plan. First and foremost, companies should work with their tax advisors to model the potential impact of each of the proposals and, to the extent possible, include milder variants of each proposal (e.g., if the corporate income tax rate were raised to 25 percent rather than 28 percent). Using the results of these modeling efforts, companies should devise a strategic plan that accounts for the likeliest changes and identifies both interim and post-enactment measures that can mitigate the impact of potential changes.

Taxpayers and their advisors should also communicate with lawmakers about how each proposal would impact their bottom line, profitability, hiring practices or other aspects of their business that could be negatively affected by these proposals.

Businesses should consider ceasing international expansion to the extent the tax plan’s proposals would undermine or negate the benefits. However, in some instances, it may well be advantageous to accelerate international expansion or the offshoring of certain operations. Modeling results can inform whether such measures would be beneficial or to a company’s detriment.

Despite the uncertainty, some tax-planning measures may well be advisable in 2021. For example, the likelihood that the corporate income tax rate will be increasing could make it advisable to accelerate income recognition in 2021 under a preferable tax rate. Other timing measures could also prove beneficial, such as deferring losses and deductions to a later tax year, refraining from accelerating the deduction of prepaid expenses, capitalizing R&D expenses, or electing out of bonus depreciation. Businesses should work with their tax advisors to identify those measures which should be implemented in the interim period, before any tax law changes are implemented.

The stated goal of Biden’s Made in America Tax Plan is to “raise over $2 trillion over the next 15 years and more than pay for the mostly one-time investments in the American Jobs Plan and then reduce deficits on a permanent basis.” Whether these changes will ultimately be implemented or have the desired effect remains to be seen. In the meantime, U.S.-based corporations, especially those with international operations, must prepare for significant changes to their tax reporting and obligations, despite the difficulty they will face in accurately predicting what those changes will be.