Key Takeaways:
- Republicans will be in control of all three branches of government, which lays a foundation for potential tax law changes.
- Detailed tax policy proposals have not been released, but we know that the administration is seeking to make TCJA changes permanent and have heard other policy proposals from Trump’s campaign.
- With many provisions of the TCJA set to expire after 2025, expect that changes will make their way through Congress rapidly to head off the sunsetting of various favorable TCJA provisions like the QBI deduction for investors in pass-through entities.
- Tariffs are expected to be imposed on imports across the board, making the cost of goods imported from overseas higher by 20 – 60%.
As the political landscape shifts with the re-election of Donald Trump in 2024, taxpayers and businesses alike are analyzing the potential tax reforms that could emerge under his administration and a Republican Congress in 2025. This article explores key areas of tax policy, including corporate tax rates, sunsetting Tax Cuts and Jobs Act (TCJA) provisions, tariffs, the potential repeal of 174 Research and Development (R&D) capitalization requirements, and potential modifications to depreciation limits, to provide insight into what may be expected in the coming years.
Let’s explore some of the potential changes that may be making their way into the Internal Revenue Code in 2025 by starting with the provisions that are already exist but are set to expire in 2025.
Key Sunsetting Provisions from the TCJA
- Individual Tax Rates: The TCJA lowered individual tax rates across various brackets and increased the standard deduction while eliminating personal exemptions. These individual tax cuts are set to expire at the end of 2025. This means that individuals could face higher tax rates and loss of deductions starting in 2026 if no action is taken by Congress.
- Alternative Minimum Tax (AMT): The TCJA increased the exemption with respect to AMT and substantially increased the phaseout thresholds for the exemption (MFJ $200k up to $1.2M!). Should this expire, more taxpayers would be subjected to the AMT and not receive the full benefit of the SALT deduction discussed below.
- State and Local Tax (SALT) Deduction Cap: The TCJA imposed limits on the SALT deduction to a maximum of $10,000. As this cap remains in effect through the end of 2025, taxpayers in high-tax states like California or Illinois may have felt the impact significantly. For those individuals, the expiration of the SALT deduction cap would be a welcome change.
- Qualified Business Income (QBI) Deduction: The TCJA introduced a 20% deduction on qualified business income for certain pass-through entities. This provision is in place until 2025, after which it is set to expire unless further action is taken. This very popular provision is likely to be amongst the top priorities for lawmakers to extend permanently.
- Estate Tax Exemption: The TCJA doubled the estate tax exemption thresholds through the end of 2025. By 2026, these thresholds will revert to pre-2017 levels, significantly impacting estate planning strategies for high-net-worth individuals.
- Depreciation Provisions: While full expensing of capital investments was introduced under the TCJA, this provision was ultimately set to begin phasing out after 2022, leading to a gradual reduction in the expensing capabilities over time. The incoming Congress may seek to reinstate full expensing of capital expenditures.
Year-end planning tip: Consider holding off on capital expenditures until 2025. Bonus depreciation and Section 179 deduction limits may be increasing.
Numerous other provisions of the TCJA were set to expire or be modified beginning in 2025 and 2026. The incoming Congress will be busy determining which provisions they can afford to make permanent and which will expire.
During the campaign, Donald Trump provided some insight into new tax policy changes that he would be promoting. We will highlight some of the more impactful policy proposals.
Reduced Corporate Tax Rates
One of the hallmarks of Donald Trump’s previous administration cutting the U.S. corporate tax rate from 35% to 21%. With Republicans in control, further reductions to corporate taxes are being considered to stimulate economic growth, attract foreign investments, and incentivize domestic manufacturing.
On the campaign trail in 2024, the President-elect proposed bringing the corporate tax rate down to 20% and as low as 15% for certain industries. The rationale behind this reduction centers around increasing company competitiveness globally, thereby driving job creation and wages upward. However, lowering corporate taxes poses risks, such as increasing the federal deficit and potentially exacerbating income inequality, which Democrats may vehemently oppose.
While the Republicans do control both houses of Congress, they do not have a supermajority, which means that any tax bill that they put forward will have to go through the budget reconciliation process. This will limit how aggressive Congress can be in cutting taxes, as they will have to find a way to pay for any tax cuts that are adopted.
Planning tip: Post legislation business owners may want to revisit their entity choice to be sure they are utilizing the most tax efficient vehicle to operate their business while still achieving their long-term goals.
Tariffs as a Tool for Revenue and Trade Policy
Another significant area of tax policy under a Trump administration is the use of tariffs. The previous administration employed tariffs as part of a broader strategy to reshape trade relationships and bolster domestic industries. Going forward, tariffs could serve two purposes: protectionism and revenue generation. Remember, any new income tax cuts will have to be paid for and these import taxes may be the balancing entry for the cuts that the administration wishes to see. The proposal is to impose a tariff of 20% on all goods coming into the country with a tariff as high as 60% on goods imported specifically from China.
These tariffs can lead to increased prices for consumers and businesses reliant on imported goods, but they also could support U.S. manufacturers by making foreign products less competitive. The potential for tariff revenues may also give lawmakers additional leeway to fund other initiatives, albeit this strategy would likely attract criticism from free-traders within the Republican Party and among Democrats.
Companies who import from foreign suppliers will need to perform a thorough review of their supply chain and analyze how these tariffs may impact their cost of goods sold. Will customers accept increased prices and share the tax burden?
With tariffs on Chinese-produced goods being significantly higher than those proposed on imports from other countries, companies may consider identifying suppliers here in the U.S. or in other parts of the world.
Year-end planning tip: Consider purchasing additional inventory prior to Trump taking office before those imports are subjected to an increased tariff.
Repeal of 174 R&D Capitalization
A critical tax issue facing businesses who innovate is the implementation of Section 174, which requires businesses to capitalize and amortize R&D expenses over five years (15 years for foreign R&D). This provision of the TCJA had a delayed enactment date, in the 2022 tax year, and has sparked concern among companies that heavily invest in research. Technology companies who previously were not paying income tax in early stages have started reporting taxable income. Critics argue that allowing companies to deduct their research and development costs as they are incurred has incentivizes and fosters innovation and increases R&D activity.
In 2025, a Republican-led Congress might prioritize the repeal of this capitalization requirement, returning to a system that allows for the immediate deductions of R&D costs. This would provide immediate relief to innovative companies, encouraging ongoing investment in new technologies and services. The discussion surrounding R&D tax incentives underscores a broader commitment to enhancing America’s position in competitive technologies, particularly with China’s accelerating advancements.
The Legislative Path Forward
The path to enacting new tax legislation may be more streamlined compared to recent years where a divided government stalled meaningful reform. With a Republican-controlled Congress, the potential to pass tax cuts and revisions using budget reconciliation—where only a simple majority is needed—would be feasible, similar to how the TCJA was passed.
Republican priorities would likely focus on reducing tax burdens for individuals and businesses, stimulating job growth, and enhancing U.S. competitiveness abroad. The broader theme will hinge on a narrative of economic recovery and expansion.
Conversely, dissenting voices within the party, particularly those concerned about the fiscal responsibilities and long-term impacts of tax cuts on a growing deficit, may lead to more moderate policies. The complexity of balancing these interests will shape the final outcomes and can significantly influence the economic landscape.
Conclusion
Trump’s re-election combined with a Republican majority in Congress in 2025 could result in significant changes to U.S. tax policy in the near future. From the potential extension of all (if not all) of the TCJA provisions, reduced corporate tax rates and increased tariffs on imports to re-evaluating R&D expenditures and depreciation limits, the foundational elements of tax legislation will endure intense scrutiny and debate. As this new political era unfolds, stakeholders must remain vigilant and adaptable to navigate the evolving tax landscape effectively.
