
The 2024 election's impact on taxation is considerable. According to Accounting Today, Nick Gibbons, a partner at Armanino, said it will be historic.
Gibbons said that the Nov. 5 election will be one of the most significant elections for tax professionals, given that the presidential candidates have very different policies in this area. "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 (TCJA). 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%."
TCJA's key provisions will expire and disappear unless Congress acts, Gibbons said, adding that these include the state and local tax deduction cap expiring in 2026. Additionally, he characterized the removal of the Section 174 deduction for R&D expenditures as "brutal" for corporations.
Gibbons elaborated on the Silicon Valley companies he is working with and the effect of the TCJA's expiring provisions on them. He said that many firms "had net operating losses because of the deduction’s disappearance, and they had taxable income for the first time,” which was unexpected. “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," he said.
According to Gibbons, having no extension has become burdensome for tech firms and related sectors. He cited architectural and engineering companies that were specifically impacted.
The election uncertainty and the many variations in tax proposals from the candidates, which are complicated and nuanced but do not have details, make the real impact hard to predict, noted Thomas Cryan, a partner at law firm Saul Ewing.
Cryan said that a couple of think tanks “suggest that Trump would pay for extending the TCJA through tariffs, large or small, depending on what can get through Congress. Trump would add $8 trillion, and Harris would add $4 trillion to the national debt. Neither one addresses the real problem of the national debt in our lives. If spending is not controlled, the 'bond vigilantes' will stop buying Treasury bonds and will force a rise in interest rates, exacerbating 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, he said, is what happens if Harris wins and Congress is split, he said. "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 the government, and the Republicans will be happy to shut down the government,” he said, adding that candidates do not have a plan for the national debt, which is where Wall Street sees its biggest worry because of a long history of low taxes on corporations. Lower taxes never grow revenue sufficiently to increase taxes as a percentage of GDP, which is why debt has risen consistently.
In 2023, Congress attempted to address Section 174 capitalization, with standalone bills introduced in both the House and the Senate to repeal it. Both parties' support for these bills is notable, although the legislation is still pending.
According to Travis Riley, principal at Moss Adams, efforts to repeal Sec. 174 got entangled with efforts to expand the Child Tax Credit, creating a complex political dynamic.
Representatives from both parties resolved their differences in the House, which resulted in the passage of the Tax Relief for American Families and Workers Act of 2024, also known as the Wyden-Smith Bill. The bill proposed delaying the required capitalization and amortization of domestic R&E costs until 2026. However, it was not passed in the Senate because GOP worries about certain Child Tax Credit provisions.
Riley said that although possible, it is not likely that any meaningful tax legislation will be passed in Congress' lame duck session. He added that it is also not likely that any party will have a 60-member majority in the Senate in 2025, which "means major tax bills will likely need to go through the budget reconciliation process," Riley noted. "This process is limited by the Byrd Rule, which prevents laws that would increase the federal deficit beyond a 10-year window."
Riley said that Section 174 has broad support across parties and should be part of bigger tax discussions as critical provisions of the 2017 Tax Cuts and Jobs Act are close to expiring at the end of next year. "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," he said.
Sen. Mike Crapo (R-Idaho), a ranking member of the Senate Finance Committee, was instrumental in stopping 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 critical.
According to Accounting Today, both presidential candidates have supported 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.