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.
The Internal Revenue Service released its annual financial information Thursday in its fiscal year 2024
One of the accomplishments included the resolution of a longstanding significant deficiency in information system controls after 11 years. The change comes after the IRS made substantial improvements and beefed up its information technology internal controls.
During FY 2024, the IRS collected over $5.1 trillion in tax revenue, plus more than $98 billion in enforcement revenue thanks to increased funding from the Inflation Reduction Act. The agency also distributed $553 billion in federal tax refunds and other outlays.
Samuel Corum/Bloomberg
The
“I am proud of the transformation work we have done in FY 2024, and I am committed to completing the additional work that remains on many fronts: maintaining the outstanding level of service for our main phone line and closing gaps on other lines, expanding digital options for all taxpayers, further strengthening data security, and increasing support for vulnerable populations by such actions as increasing access to the Earned Income Tax Credit and other refundable credits, as well as protecting and supporting scam victims,” said IRS commissioner Danny Werfel in his introduction to the report..
The IRS also noted that it received an
Vanguard agreed to pay $40 million to settle a potential class-action case over steep capital-gains taxes that hit thousands of investors in the firm’s target-date funds.
In the Nov. 6 preliminary settlement awaiting approval in Philadelphia federal court, the asset management giant did not admit any guilt or wrongdoing. However, the payout would add on to another $6.25 million in fines and restitution against Vanguard in 2022 in the settlement of a case filed by Massachusetts regulators on behalf of investors who absorbed capital gains — and the accompanying tax burden — when the firm opened the lower-cost institutional share classes of the funds to midsize retirement plans it had previously shut out from them in 2020.
Those clients rushed into the cheaper shares in a move described by The Wall Street Journal as an “
“You got these huge capital gains that had to be distributed, and that was really the big problem,” said Daniel Sotiroff, a manager research senior analyst of passive strategies for
Representatives for Vanguard didn’t respond to requests for comment on the case or the settlement.
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It and the plaintiffs had indicated in September filings that they reached agreement in private mediation that month. The investors accused Vanguard and its top executives of breaching their fiduciary duty, aiding and abetting that breach, gross negligence, breaking the covenant of good faith and fair dealing, unjust enrichment and violations of several state laws. In the course of discovery, Vanguard deposed 10 of the plaintiffs and produced 250,000 documents.
The company agreed to the settlement “solely to eliminate the burden and expense of further
litigation,” and nothing in it is “an admission or finding of any fault, liability, wrongdoing or damage whatsoever or any infirmity in the defenses that [the] defendants have asserted, or could have asserted,” according to court filings.
“Defendants have denied, and continue to deny, that they have committed any act or omission giving rise to any liability or violation of law,” the “stipulation of settlement” document stated. “Defendants have asserted, and continue to assert, that the conduct was at all times proper and in compliance with all applicable provisions of law, and they believe that the evidence developed to date supports their positions that they acted properly at all times and that the action is without merit.”
In the agreement ordering Vanguard to pay $40 million to target-date investors who paid the tens or even hundreds of thousands of dollars in taxes three years ago, the plaintiffs agreed to take roughly 15% of the “best-case scenario” payment of $259.5 million in damages, according to their filing for approval of the settlement. The settlement agreement limited attorney fees to no more than one-third of the award and capped litigation expenses at $985,000. If the settlement gets preliminary approval, the plaintiffs would then reach out to potential class members for their reaction before seeking the final green light on the agreement.
The cash settlement “provides an immediate recovery to impacted Vanguard [target-date fund] investors and avoids the considerable risks of continued litigation in this complex class action,” the filing stated. “Plaintiffs and class counsel believe that the case has merit, but they recognize the significant risk and expense that would be necessary to prosecute Plaintiffs’ claims successfully through class certification, continued fact and expert discovery, summary judgment, trial and subsequent appeals, as well as the inherent difficulties and delays complex class action litigation like this entails. As previewed in the parties’ class certification briefing, which focused almost exclusively on damages model issues, proving damages would be risky, complicated, and uncertain, involving conflicting expert testimony.”
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Besides the substantial payout, the case helped remind financial advisors and their clients of the potential risks involved with holding mutual funds in taxable accounts, Sotiroff said. ETFs or separately-managed accounts could help avoid the tax surprises in non-retirement holdings, even though target-date funds may not be as readily available in that form.
“If you’re going to hold a mutual fund, you have to expect that you’re probably going to get some capital gains distributions from it,” Sotiroff said. “You’re always potentially on the hook for a capital gains distribution.”
The Aldrich Group of Companies includes Aldrich CPAs + Advisors LLP, a Top 75 Firm, as well as Aldrich Wealth LP, a registered investment advisory firm with over $6 billion in assets under management, and Aldrich Advisors Capital LP, which provides advisory services for business transactions.
Financial terms of the deal were not disclosed. All four HMA partners and 25 employees will be joining Aldrich, which has $86 million in revenues and 500 team members across the U.S. and India. Aldrich ranked No. 72 on Accounting Today‘s 2024 list of the Top 100 Firms.
The acquisition of HMA CPA will enable Aldrich to expand to the Spokane and Coeur d’Alene, Idaho, area, by adding HMA’s four partners and their employees. Financial terms of the deal were not disclosed.
“We share with HMA a commitment to serving our people, our clients, and our communities and are honored to build on HMA’s 40-year legacy,” said Aldrich CEO partner John Lauseng in a statement Tuesday. “We are excited to work together to help Spokane and Coeur d’Alene-area companies, owners and employees meet their financial goals.”
HMA was founded in Spokane in 1983 and has grown by expanding its services and through acquisition. In addition to Kevin Sell, HMA’s other owners, Kristi Bushnell, Laura Hays and Mike Whitmore, will be joining Aldrich, along with their colleagues.
“Joining Aldrich will allow our team to deliver even more value to our clients, as well as create growth opportunities for our professionals,” said HMA CEO Kevin Sell in a statement. “Aldrich shares our entrepreneurial spirit, and we look forward to providing more services to our Spokane area clients through Aldrich CPA + Advisors, Aldrich Wealth, and Aldrich Capital Advisors.”
After the deal, Aldrich now has eight offices in the Western U.S. across Oregon, California, Colorado, Utah and Washington.
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