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Tax Alert: Election Impact on Corporate Tax Planning

By Das Pendeyala

by Das Pendeyala, Tax Director

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Tax and economic policies have been a major campaign focus during the 2020
election. Tax policy is a core driver of business decisions and the winning
candidate/party will play a central role in pushing further stimulus
forward and determining the long-term course for recovery following the
economic fall-out from the COVID-19 pandemic.

Businesses must pay close attention to how the proposed policies of the
candidate/party will affect their total tax liability and be prepared to make any
changes or updates, in some cases, during the two months ending the 2020 tax

With the Presidential Election largely decided, but considerable uncertainty
regarding leadership of the Senate, we can begin to consider the potential impact
on tax and economic planning the rest of 2020 and into 2021.

2020 prospective results overview

Biden Victory | 50/50 Senate Split

In the case of a 50/50 split in the Senate, the tie-breaking vote goes to the Vice President, giving de facto Senate leadership to the party in the White House.

The Biden campaign’s proposed tax plan focused on rolling back tax breaks and
“loopholes” for corporations, specifically related to changes made in the 2017 Tax Cuts and Jobs Act (TCJA). Biden also proposed a number of significant tax breaks and stimulus efforts targeted at spurring growth in historically-disadvantaged communities and the renewable energy sector, while simultaneously rolling back fossil fuel industry subsidies.

Economic Stimulus
In the case of a Biden/Democratic win, it seems unlikely that an out-going President Trump will be motivated to support a new COVID-19 economic stimulus plan before leaving office. On the other hand, an incoming President Biden will likely immediately push for stimulus upon taking office, and will be successful with control over the Senate.

Biden Victory | Republican Senate Majority

Any outcome that has White House and Senate leadership at loggerheads will likely result in the blocking of any major economic and tax policy changes. With Senate Majority Leader Mitch McConnell’s re-election, there is little reason to suspect he’ll alter his long-standing obstructionist stance against Democrat-sponsored and supported bills.

Tax planning considerations

Increase in Corporate Tax Rate

  • Accelerate income in 2020 under preferable tax rate
  • Defer deductions until after tax rate is raised
  • Revisit tax accounting methods
  • Elect out of bonus depreciation to defer the deductions
  • Capitalize R&D expenses
  • Avoid accelerating deduction of prepaid expenses
  • Time the recognition of gains/losses

Social Security Tax Expansion

Reorganize or elect to be taxed as a C-Corporation

  • C-corp owners with $400,000 -$1,000,000 of income could have an effective rate on dividends of 45.1%
  • C-corp owners with greater than $1,000,000 of income could have an effective rate on dividends of 51.9%

Executive Compensation

  • Incentive Stock Options (ISOs) – No FICA tax on option spread
  • Non-Qualified Stock Options (NQSOs) – FICA tax on option spread is delayed until exercise
  • Deferred Compensation – There may be timing benefits down the road

Final thoughts

A Democrat-led White House and Congress has the most drastic potential impact on immediate tax planning. However, pressure to create a COVID-19 relief bill will likely be the priority for the in-coming administration, pushing any substantive tax reform to an effective date after 2022. Even so, understanding proposed changes and early planning are recommended to minimize any negative impact stemming from tax reform.

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