As 2025 draws closer, the spotlight is on the future of business tax policy. With major provisions of the Tax Cuts and Jobs Act (TCJA) set to expire on December 31, 2025, and Republicans gaining control of both Congress and the White House in the 2024 election, the path is set for potential new tax legislation. Our tax specialists have analyzed the key issues that may shape the future of business taxation.
What We Know: 2024 Election Results and Expiring TCJA Provisions
The 2024 election has been a significant milestone for tax policy. With President-elect Donald Trump returning for a second term and the Republican Party securing a three-seat majority in the Senate and retaining a narrow majority in the House, Republican priorities are poised to take center stage. Key among these priorities is extending significant portions of the TCJA and introducing new business tax measures.
The TCJA, originally enacted in 2017, brought sweeping tax changes, including a reduction in corporate tax rates and tax incentives for pass-through entities. Many of these provisions are set to expire at the end of 2025, and the coming legislative sessions will focus on deciding which elements to extend and which new initiatives to introduce.
What Remains Uncertain: Fiscal and Policy Decisions
Although an extension of the TCJA seems likely, many specific policy questions remain unanswered. One of the key issues is the overall cost of the tax package. Extending the TCJA would be costly, raising concerns about deficits and the need for potential revenue-raising measures. This cost factor will influence decisions about which provisions to include and the duration of their extension.
Corporate Taxes
The TCJA reduced the corporate tax rate from 35% to 21%, which will not expire in 2025. However, modifications to the corporate tax rate could still be part of the 2025 tax discussions. President-elect Trump has floated the idea of reducing the corporate rate to 20% or even introducing a special 15% rate for companies manufacturing goods domestically. Conversely, some House Republicans have suggested increasing the corporate tax rate to 25% to help offset other tax cuts. These discussions will be influenced by broader budget considerations and competing policy priorities.
Another key focus is the corporate alternative minimum tax (CAMT), introduced by the Inflation Reduction Act (IRA) in 2022, which imposes a 15% minimum tax on large corporations. Republican lawmakers may push to modify or repeal this tax as part of broader corporate tax reforms.
Pass-Through Business Income: Qualified Business Income Deduction (QBID)
The TCJA introduced the qualified business income deduction (QBID) under Section 199A, effectively lowering the tax rate on certain pass-through business income. This deduction is set to expire at the end of 2025, which would increase the top tax rate on pass-through business income to 39.6%. It is likely that Congress will look to extend QBID in some form, but the specifics are yet to be determined. Discussions may also consider whether to modify phase-outs and other limitations tied to the deduction to simplify tax compliance for small businesses.
The Trifecta: R&D, Business Interest Deductions and Bonus Depreciation
The TCJA implemented several deferred changes that began taking effect in 2022, commonly referred to as the "trifecta":
1. Research and Experimentation Expenses (Section 174): Businesses are now required to capitalize and amortize research and experimentation expenses over several years instead of deducting them immediately.
2. Business Interest Expense Limitation (Section 163(j)): Beginning in 2022, the limitation on business interest deductions became stricter by reducing the base for calculating allowable interest deductions.
3. Bonus Depreciation: The TCJA allowed 100% bonus depreciation for assets placed in service from late 2017 to the end of 2022, with annual reductions starting in 2023.
These deferred provisions have been unpopular with many businesses, and there is bipartisan support for modifying them. The key question is not whether changes will be made but when and how they will be enacted.
State Pass-Through Entity Tax (PTE) Deductions
In response to the TCJA's $10,000 cap on state and local tax (SALT) deductions, many states introduced pass-through entity (PTE) tax regimes to help businesses and their owners generate tax deductions for state income taxes. Congress may revisit the PTE tax deduction rules in 2025 to address inconsistencies and provide clarity for business owners.
Business Tax Credits
Several business tax credits are scheduled to expire at the end of 2025, including the New Markets Tax Credit (NMTC), the Work Opportunity Tax Credit (WOTC) and the credit for paid family and medical leave. These credits are expected to receive bipartisan support for extension, given their positive impact on employment and community development.
At the same time, President-elect Trump has expressed opposition to many of the green energy credits expanded by the IRA. These credits, which cover investments in renewable energy and electric vehicles, could be modified or repealed during the 2025 legislative process, depending on negotiations.
International Tax Implications
The TCJA also introduced several international tax rules, some of which are set to change at the end of 2025. These include increases in effective tax rates on global intangible low-taxed income (GILTI) and foreign-derived intangible income (FDII). Congress is likely to revisit these rules to address competitiveness and compliance concerns, and broader international trade issues, such as tariffs, may also play a role in tax negotiations.
Looking Ahead
The future of business taxation in 2025 will be shaped by a mix of extensions to the TCJA, new Republican proposals and fiscal constraints. Businesses can prepare for potential changes by:
1. Reviewing Tax Strategies: Assess the potential impact of expiring tax provisions and consider strategies to minimize future tax liabilities.
2. Monitoring Legislative Developments: Staying informed about the direction of tax legislation will be crucial in planning for the upcoming changes.
3. Engaging with Lawmakers: Consider engaging with trade organizations or industry groups that have a voice in Washington to advocate for favorable business tax policies.
If you have questions about how upcoming changes may affect your business, our team is here to help you
navigate the evolving tax landscape and make informed decisions.
