Accounting
Tax and the 2024 election: What’s in the balance
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.
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Barrington, Illinois: Tax preparer Gary Sandiego has been sentenced to 16 months in prison for preparing and filing false returns for clients.
He owned and operated the tax prep business G. Sandiego and Associates and for 2014 through 2017 prepared and filed false income tax returns for clients. Instead of relying on information provided by the clients, Sandiego either inflated or entirely fabricated expenses to falsely claim residential energy credits and employment-related expense deductions.
Sandiego, who
He was also ordered to serve a year of supervised release and pay $2,910,442 in restitution to the IRS.
Ft. Worth, Texas: A federal district court has entered permanent injunctions against CPA Charles Dombek and The Optimal Financial Group LLC, barring them from promoting any tax plan that involves creating or using sham management companies, deducting personal non-deductible expenses as business expenses or assisting in the creation of “captive” insurance companies.
The injunctions also prohibit Dombek from preparing any federal returns for anyone other than himself and Optimal from preparing certain federal returns reflecting such tax plans. Dombek and Optimal consented to entry of the injunctions.
According to the complaint, Dombek is a licensed CPA and served as Optimal’s manager and president. Allegedly, Dombek and Optimal promoted a scheme throughout the U.S. to illegally reduce clients’ income tax liabilities by using sham management companies to improperly shift income to be taxed at lower tax rates, improperly defer taxable income or improperly claim personal expenses as business deductions. As alleged by the government, Dombek also promoted himself as the “premier dental CPA” in America.
The complaint further alleges that in promoting the schemes, Dombek and Optimal made false statements about the tax benefits of the scheme that they knew or had reason to know were false, then prepared and signed clients’ returns reflecting the sham transactions, expenses and deductions.
The government contended that the total harm to the Treasury could be $10 million or more.
Kansas City, Missouri: Former IRS employee Sandra D. Mondaine, of Grandview, Missouri, has pleaded guilty to preparing returns that illegally claimed more than $200,000 in refunds for clients.
Mondaine previously worked for the IRS as a contact representative before retiring. She admitted that she prepared federal income tax returns for clients that contained false and fraudulent claims; the indictment charged her with helping at least 11 individuals file at least 39 false and fraudulent income tax returns for 2019 through 2021. Mondaine was able to manufacture substantial refunds for her clients that they would not have been entitled to if the returns had been accurately prepared. She charged clients either a fixed dollar amount or a percentage of the refund or both.
The tax loss associated with those false returns is some $237,329, though the parties disagree on the total.
Mondaine must pay restitution to the IRS and consents to a permanent injunction in a separate civil action, under which she will be permanently enjoined from preparing, assisting in, directing or supervising the preparation or filing of federal returns for any person or entity other than herself. She is also subject to up to three years in prison.
Los Angeles: Long-time lawyer Milton C. Grimes has pleaded guilty to evading more than $4 million in federal taxes over 21 years.
Grimes pleaded guilty to one count of tax evasion relating to his 2014 taxes, admitting that he failed to pay $1,690,922 to the IRS. He did not pay federal income taxes for 23 years — 2002 through 2005, 2007, 2009 through 2011, and 2014 through 2023 — a total of $4,071,215 owed to the IRS. Grimes also admitted he did not file a 2013 federal return.
From at least September 2011, the IRS issued more than 30 levies on his personal bank accounts. From at least May 2014 to April 2020, Grimes evaded payment of the outstanding income tax by not depositing income he earned from his clients into those accounts. Instead, he bought some 238 cashier’s checks totaling $16 million to keep the money out of the reach of the IRS, withdrawing cash from his client trust account, his interest on lawyers’ trust accounts and his law firm’s bank account.
Sentencing is Feb. 11. Grimes faces up to five years in federal prison, though prosecutors have agreed to seek no more than 22 months.
Sacramento, California: Residents Dominic Davis and Sharitia Wright have pleaded guilty to conspiracy to file false claims with the IRS.
Between March 2019 and April 2022, they caused at least nine fraudulent income tax returns to be filed with the IRS claiming more than $2 million in refunds. The returns were filed in the names of Davis, Wright and family members and listed wages that the taxpayers had not earned and often listed the taxpayers’ employer as one of the various LLCs created by Davis, Wright and their family members. Many of the returns also falsely claimed charitable contributions.
Davis prepared and filed the false returns; Wright provided him information and contacted the IRS to check on the status of the refunds claimed.
Davis and Wright agreed to pay restitution. Sentencing is Feb. 3, when each faces up to 10 years in prison and a $250,000 fine.
St. Louis: Tax attorneys Michael Elliott Kohn and Catherine Elizabeth Chollet and insurance agent David Shane Simmons have been sentenced to prison for conspiring to defraud the U.S. and helping clients file false returns based on their promotion and operation of a fraudulent tax shelter.
Kohn was sentenced to seven years in prison and Chollet to four years. Simmons was sentenced to five years in prison.
From 2011 to November 2022, Kohn and Chollet, both of St. Louis, and Simmons, who is based out of Jefferson, North Carolina, promoted, marketed and sold to clients the Gain Elimination Plan, a fraudulent tax scheme. They designed the plan to conceal clients’ income from the IRS by inflating business expenses through fictitious royalties and management fees. These fictitious fees were paid, on paper, to a limited partnership largely owned by a charity. Kohn and Chollet fabricated the fees.
Kohn and Chollet advised clients that the plan’s limited partnership was required to obtain insurance on the life of the clients to cover the income allocated to the charitable organization. The death benefit was directly tied to the anticipated profitability of the clients’ businesses and how much of the clients’ taxable income was intended to be sheltered.
Simmons earned more than $2.3 million in commissions for selling the insurance policies, splitting the commissions with Kohn and Chollet. Kohn and Chollet received more than $1 million from Simmons.
Simmons also filed false personal returns that underreported his business income and inflated his business expenses, resulting in a tax loss of more than $480,000.
In total, the defendants caused a tax loss to the IRS of more than $22 million.
Each was also ordered to serve three years’ supervised release and to pay $22,515,615 in restitution to the United States.
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The American Institute of CPAs is still concerned about the Public Company Accounting Oversight Board’s new firm and engagement metrics standard, despite some modifications from the original proposal.
During a board meeting Thursday, the PCAOB
Under the new rules, PCAOB-registered public accounting firms that audit one or more issuers that qualify as an accelerated filer or large accelerated filer will be required to publicly report specified metrics relating to such audits and their audit practices. The metrics cover the following eight areas:
- Partner and manager involvement;
- Workload;
- Training hours for audit personnel;
- Experience of audit personnel;
- Industry experience;
- Retention of audit personnel (firm-level only);
- Allocation of audit hours; and,
- Restatement history (firm-level only).
The AICPA reacted cautiously to the announcement. “We’re still studying the components of the final firm metrics requirements but, as we stated in our comment letter to the PCAOB this past summer, these rules will place a significant burden on small and midsized audit firms and could lead some to exit public company auditing altogether,” said the AICPA in a statement emailed Friday to Accounting Today. “This is not just conjecture: a majority of respondents (51%) to a recent survey we did of Top 500 firms with audit practices said they would rethink engaging in public company audits if the requirements were approved.”
The PCAOB it made some modifications to the original proposal in response to the comments had received since April:
- Reduced the metric areas to eight (from 11);
- Refined the metrics to simplify and clarify the calculations;
- Increased the ability to provide optional narrative disclosure (from 500 to 1,000 characters); and,
- Updated the effective date. (If approved by the SEC, the earliest effective date of the firm-level metrics will be Oct. 1, 2027, with the first reporting as of September 30, 2028, and engagement-level metrics for the audits of companies with fiscal years beginning on or after Oct. 1, 2027.)
The AICPA welcomed those changes but doesn’t think they go far enough. “We’re glad the PCAOB took some comments to heart by extending implementation dates, particularly for smaller firms, and lowering the number of required metrics,” said the AICPA. “But the potential consequences of the remaining requirements — reduced competition and market diversity in the public audit space — are a significant risk. We hope the SEC will give these unintended outcomes the weight they deserve before giving final approval to the requirements.”
The Securities and Exchange Commission would still need to give final approval to the standard, as well as the new firm reporting standard. Last week, the PCAOB decided to
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