The Biden administration has pledged to enact new regulatory policies that veer from the current path laid out by the Trump administration. He is expected to seek to reinstate regulations that the Trump administration eliminated. This may increase the cost of doing business and may create obstacles for start-ups, emerging companies, and expansions, impacting time-lines and sourcing of capital. Taking action before new regulatory proposals take hold would seem prudent.
Businesses of all sizes are expected to be affected to some degree by President-elect Biden’s support for a $15 per hour national minimum wage, which could put upward pressure on all wages. In addition, President-elect Biden seeks mandated paid family and medical leave for up to 12 weeks, and an examination of how companies treat and classify independent contractors compared to employees. This latter change is predicted to be similar in nature to recent legislation enacted in California.
Additionally, labor unions could see a resurgence as President-elect Biden campaigned to help union organizations in countless ways and give workers new legal protections. There could be an increase of funding and staffing at the Department of Labor to more aggressively enforce wage, hour, health and safety rules across the country.
President-elect Joe Biden has pledged on his first day as president to push to raise corporate income taxes. This promise falls under Biden’s larger proposed tax plan, stressing Americans making under $400,000 will not pay more in taxes.
Under this plan, one or more of the following are or may be prime targets for change:
- Increase in top income tax rate of individuals to 39.5%;
- Increase in corporate tax rate from the current 21% rate – likely up to 28%;
- Reduction of the Sec. 179 “expense” deduction;
- Phasing out of the LIFO rules;
- Increase in capital gain rates with the increase to apply above a higher gain level (e.g., 25% rate on gains more than $X million, and predicted 30% on gains over $Y million, and even no capital gain rate for gains in excess $Z million);
- Increase in wage limits for cutoff of application of Social Security tax (e.g., current cutoff of $137,700 increased to $200,000 and in some cases reduced Social Security tax phased in over higher wage levels);
- In conjunction with an increase in corporate tax, may see a reduction of the 199A deduction for “pass-through” entities; and
- Elimination of capital gain tax rates for qualified dividends (e.g., all dividends taxed as ordinary income and treated the same as interest income).
Enormous coronavirus-related government spending in 2020 will produce large federal deficits going forward, and this will impose political pressure on Republicans to support some level of tax increases.
Finally, there is much precedent for changes in income tax law to be made retroactive to a prior date (e.g., January 1 of the enactment year). This suggests that (a) action on or before Dec. 31, 2020 may be prudent (e.g., of dividends by a C corp. to take advantage of the current tax on dividends at capital gain rates; cap ex to use the current Sec. 179 deduction; year-end compensatory bonuses), or (b) inaction this year may be prudent (e.g., defer deductible expenses to 2021).
President-elect Biden has proposed the “Made in America” plan, to include $400 billion in procurement measures, boosting domestic manufacturing and an additional $300 billion in research and development. Government policy is expected to favor investments in U.S. businesses that create products in the fields of clean energy, automotive (particularly as to EV’s), medicine, biotechnology, telecommunication, and artificial intelligence. These investments are expected to also help diversify manufacturing in communities of color, as well as cities and rural locations.
COVID-19 will continue to negatively impact businesses and GDP. The Biden administration is expected to seek more Federal funding of relief programs – in addition to the coronavirus relief package most recently passed by Congress (Dec. 21). Unemployment will continue at high levels with likely decrease in State revenues. States may enact new tax measures to address their budget needs.
The Biden administration will inherit a toxic relationship with the world’s second-largest economy, China. Some hard choices the administration will face regarding a relationship with China will include deciding whether to support tariffs on nearly $360 billion worth of Chinese imports or to relax the levies in exchange for concessions on economic issues. If President-elect Biden embraces increased trade with China, there may be trade fallout and loss of opportunity with South Korea, Japan, Vietnam, India, U.K., and Mexico.
Mergers & Acquisitions
Private-equity activity, along with big mergers, are expected to continue its rebound in 2021, despite President-elect Biden’s promise to continue to scrutinize foreign takeover more closely. Changes in policy will influence businesses and corporations regarding M&A activity.
For larger companies looking to sell, some of the changes, particularly increased tax rates, may hurt working capital and investment/retooling capital (amount of “free cash flow”) and this may encourage a sale to achieve capital formation and market diversification, and to preserve current value.
For smaller companies looking to sell, the changes may lead to a “defensive” move to sell based on various principals such as:
- A feeling that “now is the time” and that the future portends an uphill battle to grow the business or to even sustain the progress/gains/profits made during the Trump years;
- A desire to protect employees and customers, believing that selling to a better strategically positioned or more financially stable acquirer is prudent.
For companies interested in buying, the changes will encourage those companies to acquire new businesses for various reasons, most likely falling into one of the following categories:
- Company views itself as a solution for perceived/known concerns of targets as well as themselves; or
- Company sees unique opportunity and benefits from “roll up” scenarios (the 1+1 = 3 calculus).
President-elect Joe Biden has ambitious plans to do things differently. However, the goals of the administration will be counterbalanced by a divided electorate and uncertain, and potentially fleeting, support of the Congress. Even if major legislative reform proves to be out of reach of the new administration, other options exist within the powers of the executive branch. The foreseeable future predicts many changes for entities of various sizes across a board range of industries and will affect the business community in diverse ways with or without the full cooperation of Congress. Our attorneys at Carlile Patchen & Murphy LLP are here to help navigate the inevitable changes to come.