One of the most contested elections in years was completed last week. While several races are still undecided and the results in multiple states could end up in court, most of the results from the 2020 elections have been decided. Here is a summary of the 2020 elections:
President. In a long, bitter and expensive campaign, former Vice President Joe Biden defeated President Donald Trump. With a few states still not declared (North Carolina, Georgia and Alaska), Biden has secured the necessary 270 electoral votes. Trump is still considering legal actions in several states, as the remaining states are completed. Biden will soon start with transition plans.
Senate. The Republicans held a three-seat margin in the U.S. Senate going into the November elections. The Democrats picked up one net seat thus far, with two races undecided in North Carolina and Alaska. Even if the Republicans prevail in these races, control of the Senate will turn on Georgia’s and its two Senate races. Georgia requires the winner to obtain over 50% of the votes cast, and this did not occur in either of its Senate races. The top two vote-getters will thus square off in a run-off election on January 5, 2021 with the candidate with the most votes winning the seat. Georgia will be on everyone’s mind in January with these two run-off elections.
Control of the U.S. Senate hangs in the balance with these special two Senate races in January. If the Republicans win at least one of these two races, then they will control the U.S. Senate. However, if Democrats sweep both Georgia Senate races in January, the Senate will end up in a 50-50 tie. The tie would be broken by the Vice President, which will soon switch from Mike Pence to Kamala Harris. Thus, campaigning and commercials will continue in Georgia from now through January 5, 2021, and if the Democrats sweep these races, they will control the Senate, the House and the White House. A split in these Georgia races (or a Republican sweep) allows the Republicans some control in Congress. The significance of these Senate run-off races in Georgia cannot be underestimated.
House. The Democrats went into the fall elections with a 20+ seat margin in the House. They were hopeful to add to their majority but gave up four sets (with several races undecided), and thus have a smaller margin now in the House.
Outlook on Tax Policy
Biden proposed various tax changes during the campaign. Some of these proposals included the following:
- Individual Tax Changes. Biden would look to repeal much of the Tax Cuts and Jobs Act (TCJA). His focus would be on pushing higher tax rates on those with incomes over $400,000.
- Capital Gain Taxes. Biden seeks to raise capital gain taxes by taxing these gains as ordinary income (taxed at higher rates) for those with higher incomes.
- Social Security Taxes. Biden has also advocated for imposing higher Social Security Taxes for those earning over $400,000.
- Itemized deductions will be limited in their benefit perhaps to 28% to those with higher incomes (likely those with incomes over $1,000,000).
- Like-kind Exchanges are common in real estate and provide a significant tax benefit, but Biden aims to eliminate these exchanges for higher income taxpayers.
- Step-up in Basis in Estates. Biden has proposed to repeal the step-up in basis in an individual’s estate, and instead establish that a cost basis be applied for beneficiaries of the estate. He has further advocated to reduce the estate tax exemption from the higher amount established in the TCJA.
- Corporate Tax Rates. The corporate tax rates were dropped to 21% by the TCJA. Biden recommends pushing this rate up to 28%. Biden further supports raising the GILTI tax impact (also from TCJA).
- Energy Taxes. There are several other tax hikes Biden has talked about in order to fund an energy program (“Green New Deal”).
Outlook
Campaigning on tax changes is one thing, actually making and implementing them is another. Biden will need to work with Congress to enact any tax changes. As noted above, the key to adopting any tax changes next year and in his first term will be whether the Senate is controlled by Republicans or Democrats.
- If controlled by the Democrats, look for the House and Senate to push major tax reform changes including many of the items listed above. But with businesses and individuals still suffering from the pandemic, it may be a challenging time to seek higher taxes. Still much of Biden’s tax plan may get pushed through Congress and implemented.
- If controlled by the Republicans, any comprehensive tax reform by Biden will be muted. Republicans will not support wholesale changes that Biden would advocate. There may still be some tax changes, but not broad based. Some changes may include removal of the $10,000 SALT limitation on state and local tax deduction. Other changes could involve curbing “carried interests” in partnerships. Tax rates for individuals and corporations could also face upward pressure, but any hikes would be less than Biden would like and perhaps come with other tax changes supported by Republicans (possibly extension of the 100% bonus depreciation after 2022 from TCJA).
Stay Tuned
The candidates talked much about taxes in their campaigns, but now they will soon have the challenge of working through the legislative process to see what will be adopted. The scope of tax changes hinges on the outcomes of the Georgia Senate races in January. As always, we will keep you posted.
Please contact your Sikich tax advisor to learn how possible tax changes may impact you and your business, as well as planning strategies to consider. You may also want to join us on Tuesday, November 17, 2020 for our Sikich Webinar covering the 2020 election, tax outcomes to expect and any 2020 year-end tax planning ideas.
About our authors
Jim Brandenburg
Jim Brandenburg, CPA, has extensive experience and knowledge in corporate and partnership tax law, mergers and acquisitions and tax legislation. His expertise includes working with owners of closely held businesses to identify tax planning opportunities and assist them in implementing these strategies.
Tom Bayer
Thomas E. Bayer, CPA, CExP, has more than 25 years of experience providing a broad range of accounting, tax, and business advisory services to commercial clients across various industries and Sikich offices. Tom has specialized expertise in the areas of business succession planning, tax planning and compliance, and business advisory. He puts his business succession planning abilities and knowledge to work firm-wide, serving clients in advisory services across the country.
