As the 2020 national election season comes to a close, it's time for business owners to consider the consequences for taxes.
The Trump administration mounted significant changes to the tax code in 2017 with its Tax Cuts and Jobs Act (TCJA), and you would expect those changes to remain in place in a second term. Under Biden, by contrast, it's possible he'd rework some of the rates but keep in place a few of the key changes from the 2017 tax restructuring.
Now that businesses have dealt with these new rules for the last few tax years, they must contemplate further changes depending on the results of the November presidential election and the stated policy differences between the candidates. Here's a look at where we are now, and what the future might bring.
The TCJA offered wide-ranging reforms, yet the rule changes related to the U.S. income taxation of corporations, particularly multinationals, was notable. The law reduced the overall tax rate, limited the type of income subject to tax, and imposed a new tax on intangible assets (such as patents, copyrights, and trademarks) held abroad.
When the TCJA passed, much attention was paid to the reduction in the corporate tax rate to a flat 21 percent. This was a significant departure from the prior tax code that featured corporate income tax rates based on a graduated bracket system ranging from 15 percent to 35 percent, with most multinationals being subject to the top rate.
Comparatively, the average global corporate tax rate at the time was approximately 25 percent, or 10 percent less than the prior U.S. top rate. Under the theory that this disparity put the U.S. and its corporate taxpayers in a competitive disadvantage in the global marketplace, the TCJA established the 21 percent flat tax. The top marginal tax rate on individuals and pass-through entities like limited liability companies and S corps also got a haircut--to 37 percent from 39.6 percent.
The TCJA made another significant, but less discussed, change to the U.S. corporate tax structure by converting it from a worldwide system to a territorial one. Under the previous worldwide tax structure, U.S. corporations had to pay taxes on their business profits earned both at home and abroad even though those foreign profits were taxed by the country in which they were earned. However, under the previous system, the U.S. did not tax those foreign earnings until they were repatriated to the U.S. The current territorial system established under the TCJA exempts these foreign earnings from taxation, whether or not repatriated, and only taxes corporations on earnings from sources in the U.S.
Congress was, however, worried that completely exempting U.S. multinationals' foreign earnings might further incentivize them to shift profits abroad. To address this concern and discourage this type of income shifting, Congress included a new 10.5 percent minimum tax on multinationals. The tax is imposed on income earned from intangible assets held abroad, commonly known as the global intangible low-taxed income (GILTI). The goal of GILTI to approximate the income from these types of assets and was intended to discourage U.S. firms from shifting these assets offshore. Since the TCJA, the phenomenon of the corporate inversion appears to have slowed substantially.
With this context behind us, we can turn our attention to each candidate and his platform pertaining to corporate taxes. Since the Trump administration has made these corporate tax changes a centerpiece of its administration, it is unlikely that much would change by way of corporate tax rules if he is reelected. Since many of the provisions of the TCJA are set to expire around 2025, a Trump administration would likely look to extend them permanently. Any prognostication here must also take into account that the president has been vague about his tax priorities for a second term.
As to a potential Biden administration, its corporate tax platform is based on the retention of the current territorial system. However, the Biden calls for, among other things, revising the corporate tax rate to 28 percent and the GILTI rate to 21 percent. Additionally, the Biden platform calls for a new corporate minimum tax of 15 percent on book profits of over $100 million.
As with every election, platforms often serve as only a guide to a candidate's thinking and aren't generally enacted into law. But, they can be informative when making a decision at the ballot box.