The New Year Brings Fresh Uncertainty for U.S. Business Tax Professionals
The tax rules and regulations U.S. companies will operate under in 2021 and beyond will be shaped in the coming months by Biden Administration priorities, the balance of power in the U.S. Senate, the future of COVID-19 relief, and the fiscal crisis facing the 50 states.
A recent Thomson Reuters webinar, Get Ready for 2021: Using Checkpoint Edge to Plan for Uncertainty, explored these issues and cautioned companies to brace themselves for significant changes. Here are key takeaways from the presentation, which can be viewed here.
“We’re left to approach tax-filing season with a great deal of uncertainty,” said Melissa Oaks, a Thomson Reuters tax specialist who presented the webinar. “We’re not sure what’s in store for future tax policy or what’s going to happen retroactively for prior tax years.”
Three COVID-19 relief bills enacted in 2020 had wide-ranging tax implications for companies, Oaks noted—the CARES Act, the Families First Coronavirus Response Act, and the Paycheck Protection Program Flexibility Act. This legislation provided relief for businesses and workers, impacted employer-paid sick leave and family leave, deferred the payroll tax, and made changes that affected the employee retention credit, net operating loss (NOLs) reporting, business interest limitations, the alternative minimum tax credit, and other issues. Businesses in 2020 also navigated new regulations affecting foreign tax credits, foreign-derived intangible income (FDII), global intangible low-taxed income (GILTI), consolidated groups’ NOLs, meal and entertainment expenses, and bonus depreciation.
“These are not simple regulations,” Oaks said, noting that the new business interest regulations alone were more than 800 pages long. “On top of these final regulations, there are a lot of proposed regulations for business taxation and proposed and final regs on the individual income tax side, as well.”
Adding to the complexity and uncertainty, tax authorities have routinely issued sub-regulatory guidance such as FAQ documents, Oaks said. “On the one hand, it’s good we’re getting this quick guidance and a window into how the IRS is going to be interpreting various provisions, but this is non-binding guidance which adds another dimension to your research and decision-making. Do you have substantial authority for your return position? When are you going to go against FAQs of proposed regs? What level of disclosure is needed in those situations?”
The Biden Administration and the Balance of Power
President-Elect Joe Biden will take office Jan. 20 with an ambitious tax agenda and a singular priority. “The first priority for the Biden Administration is going to be COVID relief,” Oaks said, whether or not Congress passes a relief bill before Biden is sworn in.
Biden’s corporate tax policy agenda calls for increasing the corporate income tax rate from 21% to 28%, changing the way GILTI is calculated, creating onshoring incentives, and more. “These are just proposals and what really matters is what can get through Congress,” Oaks said, “so all eyes are on the Senate runoff elections in Georgia.”
Biden’s ability to advance his agenda will depend largely on whether Democrats or Republicans control the Senate—and that will be determined by the outcome of the Jan. 5 election for Georgia’s two Senate seats.
“If we have a Democratic Senate, (Biden’s legislative priorities) could move quite quickly,” Oaks said. “If it’s a Republican-held Senate . . . the Democrats are going to have difficulty advancing any of their legislative priorities.”
If power is divided between a Democratic president and House and a Republican Senate, Oaks said, “we’re likely to see tax legislation addressing things extending provisions of the Tax Cuts and Jobs Act (TCJA), technical corrections, and smaller things like that. Bigger tax proposals just won’t advance at all.”
If Democrats win both Georgia seats, they will have the slimmest possible Senate majority—a 50-50 tie in the chamber with Vice President Kamala Harris casting tie-breaking votes. That scenario could make it difficult to maintain a united coalition on tax proposals, Oaks said, because there are divergent economic policy views among Democratic senators. It also could affect the composition of Senate committees in ways that hamper Democrat legislation.
“The proposals we’ll likely see in a Democratic Senate scenario are going to be in the nature of revenue-raising provisions in bills that target their other policy priorities, like healthcare, rather than a large tax reform package like the TCJA.”
There could be bi-partisan support for modifications to TCJA provisions scheduled to take effect in or after 2022. “This includes the requirement to amortize R&D over five years, a phaseout of full expenses, and, most importantly, a change in the calculation of interest deduction limitations,” Oaks said. “We could see action on any of these next year—to either push back the implementation dates or to eliminate them altogether.”
For tax professionals advising companies, it’s difficult to monitor the myriad paths, possibilities, and developments and to respond strategically.
Monitoring Changes in the States, Too
At the state level, election outcomes and the pandemic’s impact on tax revenues are affecting government budgets and tax rules and regulations. Oaks detailed several tax-related developments from the November election that warrant watching:
- Republicans took full control of the House, Senate and governorship in Montana and New Hampshire, a consolidation of power that could impact tax policy. “In Montana, this may mean property tax cuts,” Oaks said, “and in New Hampshire Republicans are looking at cuts to both the Room and Meal Tax and the Business Enterprise Tax.” The economic downturn is hitting state revenues, however, so tax cuts may be difficult to implement.
- In California, Proposition 22 classified app-based delivery drivers as independent contractors and exempted companies from providing them with certain benefits. This worker classification is expected to be model for other states, Oaks said.
- Colorado lowered its income tax rate, Arizona passed a high-income surcharge, and Illinois rejected a progressive income tax proposal.
- Four states—Arizona, Montana, New Jersey, and South Dakota–legalized recreational marijuana, which will carry excise taxes and other taxes and fees.
“What do we expect to see next year as state’s start their legislative sessions?” Oaks asked. “COVID is going to be the priority. States have seen a dramatic increase in expenditures while also seeing decreases in tax revenue.”
“If Congress doesn’t pass state and local government relief . . . states will need to cut expenses and services and/or raise taxes,” she said. “In the case of Unemployment Insurance, those tax increases could be automatic once the state’s UI Trust Fund drops below a certain level. In that case, you would need legislative action to prevent the tax increase.”
Other state tax issues likely to take center stage—and require careful monitoring—include marketplace facilitator policies, nexus questions related to remote workers, and states’ regulatory conformity with the IRS tax code, particularly related to evolving TCJA and the CARES Act provisions.
Keeping Up with the Changes
“There are a lot of things you can do now to get your company in a position to deal with whatever may come in the tax world,” Oaks said. “Most importantly, you want to document the tax now while things are happening. Take this time to research the issues so you can properly evaluate the strength of your position and document your basis for those positions—especially around issues where the only guidance, for example, is an FAQ.”
Given the uncertainty, complexity, and ceaseless change, tax professionals need up-to-date, accurate, and detailed information on legislative proposals and actions. Checkpoint Edge is an AI-powered research platform that enables users to conduct sophisticated inquiries, review authoritative sources, and access news, legislative updates, tax calendars, and relevant editorial content, references, illustrations, cautions, and recommendations.
“Uncertainty is also an opportunity to strengthen the relationship between the corporate Tax Department and senior leadership,” Oaks noted. “There aren’t going to be straightforward answers to a lot of questions in the coming years, and the Tax Department can be a key player in managing expectations and reducing risk for the business.”