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 International Auditing and Assurance Standards Board is proposing to tailor some of its standards to align with recent additions to the International Ethics Standards Board for Accountants’ International Code of Ethics for Professional Accountants when it comes to using the work of an external expert.
The
- ISA 620, Using the Work of an Auditor’s Expert;
- ISRE 2400 (Revised), Engagements to Review Historical Financial Statements;
- ISAE 3000 (Revised), Assurance Engagements Other than Audits or Reviews of Historical Financial Information;
- ISRS 4400 (Revised), Agreed-upon Procedures Engagements.
The IAASB is asking for comments via a digital response template that can be found on the
In December 2023, the IESBA approved an exposure draft for proposed revisions to the IESBA’s Code of Ethics related to using the work of an external expert. The proposals included three new sections to the Code of Ethics, including provisions for professional accountants in public practice; professional accountants in business and sustainability assurance practitioners. The IESBA approved the provisions on using the work of an external expert at its December 2024 meeting, establishing an ethical framework to guide accountants and sustainability assurance practitioners in evaluating whether an external expert has the necessary competence, capabilities and objectivity to use their work, as well as provisions on applying the Ethics Code’s conceptual framework when using the work of an outside expert.
President Donald Trump’s tariffs would effectively cause a tax increase for low-income families that is more than three times higher than what wealthier Americans would pay, according to an
The report from the progressive think tank outlined the outcomes for Americans of all backgrounds if the tariffs currently in effect remain in place next year. Those making $28,600 or less would have to spend 6.2% more of their income due to higher prices, while the richest Americans with income of at least $914,900 are expected to spend 1.7% more. Middle-income families making between $55,100 and $94,100 would pay 5% more of their earnings.
Trump has
Economists have warned that costs from tariff increases would ultimately be passed on to U.S. consumers. And while prices will rise for everyone, lower-income families are expected to lose a larger portion of their budgets because they tend to spend more of their earnings on goods, including food and other necessities, compared to wealthier individuals.
Food prices could rise by 2.6% in the short run due to tariffs, according to an
The Yale Budget Lab projected that the tariffs would result in a loss of $4,700 a year on average for American households.
Artificial intelligence is just getting started in the accounting world, but it is already helping firms like technology specialist
Schellman CEO Avani Desai said there have definitely been some shifts in headcount at the Top 100 Firm, though she stressed it was nothing dramatic, as it mostly reflects natural attrition combined with being more selective with hiring. She said the firm has already made an internal decision to not reduce headcount in force, as that just indicates they didn’t hire properly the first time.
“It hasn’t been about reducing roles but evolving how we do work, so there wasn’t one specific date where we ‘started’ the reduction. It’s been more case by case. We’ve held back on refilling certain roles when we saw opportunities to streamline, especially with the use of new technologies like AI,” she said.
One area where the firm has found such opportunities has been in the testing of certain cybersecurity controls, particularly within the SOC framework. The firm examined all the controls it tests on the service side and asked which ones require human judgment or deep expertise. The answer was a lot of them. But for the ones that don’t, AI algorithms have been able to significantly lighten the load.
“[If] we don’t refill a role, it’s because the need actually has changed, or the process has improved so significantly [that] the workload is lighter or shared across the smarter system. So that’s what’s happening,” said Desai.
Outside of client services like SOC control testing and reporting, the firm has found efficiencies in administrative functions as well as certain internal operational processes. On the latter point, Desai noted that Schellman’s engineers, including the chief information officer, have been using AI to help develop code, which means they’re not relying as much on outside expertise on the internal service delivery side of things. There are still people in the development process, but their roles are changing: They’re writing less code, and doing more reviewing of code before it gets pushed into production, saving time and creating efficiencies.
“The best way for me to say this is, to us, this has been intentional. We paused hiring in a few areas where we saw overlaps, where technology was really working,” said Desai.
However, even in an age awash with AI, Schellman acknowledges there are certain jobs that need a human, at least for now. For example, the firm does assessments for the FedRAMP program, which is needed for cloud service providers to contract with certain government agencies. These assessments, even in the most stable of times, can be long and complex engagements, to say nothing of the less predictable nature of the current government. As such, it does not make as much sense to reduce human staff in this area.
“The way it is right now for us to do FedRAMP engagements, it’s a very manual process. There’s a lot of back and forth between us and a third party, the government, and we don’t see a lot of overall application or technology help… We’re in the federal space and you can imagine, [with] what’s going on right now, there’s a big changing market condition for clients and their pricing pressure,” said Desai.
As Schellman reduces staff levels in some places, it is increasing them in others. Desai said the firm is actively hiring in certain areas. In particular, it’s adding staff in technical cybersecurity (e.g., penetration testers), the aforementioned FedRAMP engagements, AI assessment (in line with recently becoming an ISO 42001 certification body) and in some client-facing roles like marketing and sales.
“So, to me, this isn’t about doing more with less … It’s about doing more of the right things with the right people,” said Desai.
While these moves have resulted in savings, she said that was never really the point, so whatever the firm has saved from staffing efficiencies it has reinvested in its tech stack to build its service line further. When asked for an example, she said the firm would like to focus more on penetration testing by building a SaaS tool for it. While Schellman has a proof of concept developed, she noted it would take a lot of money and time to deploy a full solution — both of which the firm now has more of because of its efficiency moves.
“What is the ‘why’ behind these decisions? The ‘why’ for us isn’t what I think you traditionally see, which is ‘We need to get profitability high. We need to have less people do more things.’ That’s not what it is like,” said Desai. “I want to be able to focus on quality. And the only way I think I can focus on quality is if my people are not focusing on things that don’t matter … I feel like I’m in a much better place because the smart people that I’ve hired are working on the riskiest and most complicated things.”
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