Stay Informed: Breaking Down The Presidential Candidates Tax Proposals

A little about me: I’m a licensed CPA with over a decade of experience, and I’ve helped over 800 business owners and investors guide through the complexities of tax planning. I run a boutique CPA firm helping clients with tax planning, accounting, and tax preparation.

With less than a month remaining in the 2024 presidential campaign, I’ll be breaking down the tax proposals of both major candidates.

Their proposals differ significantly, and these breakdowns will help you understand how they may impact you.

Remember these are only proposals but it gives you an idea of how each candidate is thinking about taxes for real estate and business income. 

Let’s start by examining the proposed tax policies from Vice President Kamala Harris. 

Here’s everything you need to know about Harris’ plan:

1) Expand Net Investment Income Tax (NIIT) and Increase Rate to 5%

Current Law:

• A 3.8% tax is applied to net investment income for those earning more than $200,000 if single, or $250,000 if married. This includes income such as interest, dividends, capital gains, rental income, and passive income from partnerships. Additionally, the Additional Medicare Tax imposes a 0.9% tax on earned income (wages, compensation, self-employment income) exceeding similar income levels. Also, very important, If you actively participate in your business, like most small business owners, you are not subject to the NIIT.

Proposed Change:

• Include non-passive (active) business income in the NIIT. This means income from active participation in businesses (e.g., S corporations, partnerships, self-employment) could be subject to the 5% NIIT.

Quick Analysis:

The biggest impact here is the expansion of the tax base. If you're a small business owner or active real estate investor, currently, active business income from S corporations, partnerships, or self-employment is not subject to the NIIT—only passive income is taxed under the NIIT. Under the proposed change, if your taxable earnings exceed $400,000 in a given year, your active business income would now be subject to the NIIT.

Taxable income from real estate activities, if considered passive, is currently subject to the NIIT if income thresholds are exceeded. If you qualify as a real estate professional who materially participates, you can classify rental income as non-passive (active), thus avoiding the NIIT. With the proposed tax legislation, if your total income exceeds $400,000, you would be subject to a 5% tax on your rental income—even if you qualify as a real estate professional, since the expansion would include active rental income.

If you have no business income or active real estate income, you may not be affected by the expansion, but you would see the NIIT rate increase from 3.8% to 5% on investment income if above the threshold.

Some tips to consider with this proposal:

• - Evaluating your current business structure to make sure it’s tax-efficient
• - Consider accelerated depreciation like bonus depreciation, Section 179 deductions, or cost segregation studies to create timing differences by taking large deductions in the early years of placing a real estate property in service.
• - if you have an investment portfolio, review how potential increase rates can affect your investment income
• - if you have a business or earn business income, evaluating your current structure is important. Exploring for options to defer income and/or spread over multiple years to stay below the threshold.

2) Limit on Like-Kind Exchanges to $500,000 from Real Estate Gains

Current Law:

Real estate investors can defer 100% of gains from the sale real estate property under Section 1031 when they reinvest proceeds into a similar (like-kind) property within a specified time frame, regardless of the gain amount.

Proposed Law:

Limit like-kind exchanges (Section 1031 exchanges) for real estate gains to $500,000. This means that if you sell a property and have a gain exceeding $500,000, you can only defer taxes on the first $500,000 when you reinvest in a similar property. The excess will be taxed.

Quick Analysis:

Investing in real estate offers unique tax advantages. Investors can deduct depreciation of tangible property assets like buildings, equipment, and furniture. This non-cash expense reduces taxable income without affecting actual cash flow. Certain short-lived assets can qualify for accelerated depreciation, allowing substantial write-offs in the first year. Additionally, 1031 like-kind exchanges enable investors to reinvest proceeds from property sales into similar properties, providing extra cash to acquire more assets.

The proposed tax law diminishes one of the key tax benefits of real estate investing. Many investors could face immediate tax liabilities on gains exceeding $500,000, affecting the capital available for reinvestment and potentially slowing portfolio growth and wealth accumulation.

A tip for investors could be to consider installment sales when selling properties, invest in Opportunity Zones for deferment opportunities, or conduct cost segregation studies to manage tax liabilities.

3) Increase top individual tax rates and long-term capital gains rate

Current Law:

The current individual top tax rate is 37% and the long-term capital gains top is taxed at a maximum of 20%.

Proposed change:

• - Increase the top individual income tax rate to 39.6 percent on income above $400,000 for single filers and $450,000 for married filers.
• - Tax long-term capital gains and qualified dividends at ordinary income tax rates (max. 39.6% per above) for taxable income above $1 million.

Quick Analysis:

Both of these proposed tax rate changes impact a significant portion of taxable income sources, such as business income (from pass-through entities like S-Corporations and partnerships), salaries and wages, investment income (dividends, interest), and capital gains from selling business assets or investments.

Remember, our tax code is progressive—the tax rate you pay increases as your taxable income rises. With this proposal, tax brackets would range from 10% to 39.6%.

The proposed tax policy primarily affect high-income individuals, but the thresholds may capture more taxpayers due to inflation and income growth. If you project that you'll be a high earner, either from an investment sale or income from an active activity, proactive tax planning should be an important factor to consider.

4) Raising the Corporate Tax Rate to 28%

Current Law:

• Under the Tax Cuts and Jobs Act of 2017 (TCJA), the corporate income tax rate was reduced to a flat 21%.

Proposed Change:

• Increase the corporate tax rate from 21% to 28%.

Quick Analysis:

This will result in a higher tax liability for businesses. An increase to 28% means companies will owe more in federal taxes on their profits. For example, if your business has a taxable income of $1 million, your federal corporate tax would increase from $210,000 to $280,000—a $70,000 difference.

C-Corporations already face taxation at both the corporate level and again at the shareholder level when cash or property are distributed. With a higher corporate tax rate, the impact of double taxation becomes more significant. If individual income and capital gains tax rates also rise, the total tax burden on distributed profits could lead to an effective tax rate in the high 40%s.

Higher corporate tax rates might make pass-through entities like S-Corporations, LLCs, or partnerships more attractive because they're taxed once at the individual level, potentially at lower rates.

Also, higher tax rates make Net Operating Losses (NOLs) more valuable because they would offset income taxed at a higher rate. Also, carryover credits from prior years for research and development, energy efficiency, and other activities become more beneficial.

Planning the timing of recognizing income and losses to maximize tax benefits would become more important.

5) Expand the Start-Up Expense Deduction to $50,000

Current Law:

If you start a business, you can immediately deduct $5,000 for start-up expenses. Any excess must be capitalized and amortized over 15 years.

Proposed change:

Increase the immediate tax deduction for start-up expenses to $50,000.

Quick Analysis:

Potentially, those considering starting a business or expect to incur start-up expenses, you could immediately deduct up to $50,000 in the first year instead of just $5,000. This could provide significant tax benefits for new businesses.

Other Proposed Tax Laws to Note:

1. - Exempting tip income from taxation by creating an above-the-line deduction for occupations where tips are currently customary.
2. - Taxing unrealized gains, currently, the IRS only taxes realized gains (i.e. sold). The proposal would impose a minimum 25% tax on income, including unrealized capital gains, for individuals with a net worth above $100 million.
3. - Increase the child tax credit to $3,600 and to create a new $6,000 tax credit to cover expenses for a newborn for middle- and low-income families.
4. - Create a tax credit for first-time homebuyers The credit will be given to first-time home buyers over 4 years.

What’s Next:

Let’s dive into former President Trump’s proposed tax policies and compare them to Harris’ plan.

Here's everything you need to know about Trump's plan:

1) Make the Expiring Provisions of the TCJA Permanent

Current Law:

Many provisions of the Tax Cuts of 2017 provisions are set to expire after 2025, including:

• - Bonus depreciation allowing 60% immediate expensing of qualified assets
• - Expensing of research and development (R&D) costs is done via amortization by several years
• - Interest expense deduction limitations

Proposed Change:

Make these provisions permanent:

• - Maintain 100% bonus depreciation for qualified assets like machinery, equipment, furniture, and qualified improvements.
• - Allow immediate expensing of research and development costs.
• - Reinstate favorable interest expense limitations to allow full deduction of business interest expenses.

Quick Analysis:

Making these provisions permanent would provide long-term tax planning opportunities for real estate investors and business owners. Here's how you might benefit:

• - 100% Bonus Depreciation: Continue to deduct the full cost of qualified assets in the year of purchase, reducing taxable income significantly. This encourages capital investment and modernization of equipment.
• - Immediate Expensing of R&D Costs: Deduct R&D expenses immediately rather than amortizing them over several years, improving cash flow for companies investing in innovation.
• - Favorable Interest Expense Deductions: Being able to fully deduct interest expenses reduces the cost of borrowing, making debt financing more attractive.

For real estate tax planning significant acquisitions or relying on debt financing, these provisions can enhance after-tax cash flow and support growth strategies.

2) No Changes to Capital Gains and Dividend Taxes

Current Law:

Long-term capital gains and qualified dividends are taxed at preferential rates of 0%, 15%, or 20%, depending on your taxable income.

Proposed Change:

Maintain current tax rates on capital gains and dividends.

Quick Analysis:

Stability in capital gains and dividend tax rates provides predictability to those who are planning to sell a real estate property or rely on investment income, you can continue to expect the same tax treatment. This could influence decisions on timing asset sales or dividend distributions.

3) Repeal the Cap on State and Local Tax (SALT) Deductions

Current Law:

Under the Tax Cuts of 2017, the itemized deduction for state and local taxes paid is capped at $10,000.

Proposed Change:

Reinstate an unlimited itemized deduction for state and local taxes or discontinue the cap.

Quick Analysis:

Removing the state and local tax cap would benefit individuals in high-tax states who itemize deductions. For instance, if you pay $25,000 in state and local taxes, lifting the cap allows you to deduct the full amount, reducing your taxable income by an additional $15,000 compared to the current law.

4) Lowering the Corporate Income Tax Rate to 20% and 15% for Domestic Manufacturers

Current Law:

Under the TCJA, the corporate income tax rate was reduced to a flat 21%.

Proposed Change:

• - Decrease the corporate tax rate from 21% to 20%.
• - Further reduce the rate to 15% for companies that manufacture their products in the United States.

Quick Analysis:

This reduction would lower the tax on all corporations and more significantly to those corporations that manufacture their products in the United States. This could incentivize more corporations that manufacture products in foreign countries to move back into the United States.

Potentially, for business owners who have a different entity classification such as S-corporation or Partnership, considering to classify these as C-corporations to save more taxes could be considered.

Other Proposed Tax Laws to Note:

• - Exempting tip income from taxation by creating an above-the-line deduction for occupations where tips are currently customary.
• - Exempting tip income from taxation. Currently, up to 85% of social security benefits may be taxable, depending on your income level
• - Exempting overtime pay from taxation, employees working overtime would see an increase in their net earnings. This could incentivize workers to take on additional hours and help businesses meet increased demand.

That’s it!

These proposed tax changes give you a glimpse of how each candidate is thinking about taxes and how they could potentially impact real estate investors and business owners.

Staying informed empowers you to make proactive decisions that safeguard your financial well-being.

Feel free to reach out if you have any questions.