Trump’s Return Equals Major Tax Changes for Businesses
Economic uncertainties may have played a significant role in Donald Trump winning a second term in the White House and Republicans gaining control of the House and Senate. Trump’s tax-related policies are likely to have a marked impact on businesses, especially related to tariffs, provisions in the Tax Cuts and Job Act (TCJA), and international tax matters.
During his campaign, Trump made numerous promises regarding tax changes he would put in place if reelected. Among those promises would be to extend certain provisions of the TCJA, which are set to expire at the end of 2025. This could include extending tax provisions related to bonus depreciation, business interest deductions, and more.
In addition, Trump stated he would impose a tariff of 10-20% on all imported goods. He vowed to tax imports from Mexico, the top US trading partner, by at least 25% and suggested a 60% tariff on Chinese goods. Leading economists have differing opinions on the effect of the tariffs on the US economy, but many believe they could have a harmful impact. Some potential results would be lowering domestic output and raising consumer prices.
Extending certain provisions of the Tax Cuts and Jobs Act
The TCJA was the largest tax code overhaul in almost thirty years. Major provisions of the law impacting business included a reduction of the corporate tax rate from 35% to 21%, 100% bonus depreciation, interest deduction limitations, and significant changes to international tax policy. Many of these provisions are set to expire at the end of 2025, and CFOs and tax professionals should consider the details of these provisions as well as monitor for tax policy updates in 2025 and beyond:
Bonus Depreciation – The bonus depreciation provision allowed a 100% current deduction for certain capital investments that historically were required to be depreciated over time. The deduction would be phased out by 2027 if not extended. A phase-out of the TCJA bonus depreciation deduction would reduce tax savings for businesses, potentially leading to decreased investment and slower economic growth. Businesses should monitor to determine if the provision will be extended or be prepared to adjust their tax strategies accordingly.
Research & Development – For tax years starting after Dec. 31, 2021, taxpayers are required to capitalize and amortize R&D costs over 5 or 15 years. Historically, taxpayers were allowed to deduct R&D costs in the year incurred.
Business Interest Deduction – Before the TCJA, business interest expense was generally deductible in the year the interest was paid or accrued, subject to certain limitations. The TCJA expanded IRC Sec. 163(j) by limiting the net business interest expense to 30% of the taxpayer’s adjusted taxable income (ATI) for most businesses.
International Tax Provisions – International tax policy has changed since the TCJA was passed and will likely continue to evolve over the next four years.
The Organization of Economic Co-operation and Development (OECD) instituted a global agreement called Pillar Two, which went into effect in 2024. Pillar Two applies to multinational companies with global annual revenue of 750 million euros, subjecting them to a 15% minimum tax rate in each jurisdiction in which they operate.
The TCJA also attempted to address tax avoidance through measures such as: a Global Intangible Low-Tax Income tax (GILTI), Foreign-Derived Intangible Income tax (FDII), and a Base Erosion and Anti-abuse Tax (BEAT), which will need to be addressed by the incoming administration.
The differences between TCJA and Pillar Two create potential conflicts for US multinational corporations operating in a globalized economy. While the TCJA aims to make the US more competitive by lowering the corporate tax rate, Pillar Two’s global minimum tax could increase the tax and compliance burden on US companies, especially those with significant foreign operations.
It’s also important to note that the US has not yet fully implemented Pillar Two. US multinational corporations should be aware of these potential conflicts and be prepared to adapt their tax strategies accordingly, which can be a time-consuming endeavor. Corporate accounting teams can take a proactive approach by ensuring they are prepared to compile a new set of books itemized by jurisdiction.
Trade-offs: The potential disruption of US tariffs
A tariff is a tax on imports, but it is not paid by the exporting country. If President-elect Trump installs a 10-20% tariff on all goods imported to the United States, the importer of the goods would pay the tax. A tariff is thought to serve two purposes. The first is to protect certain domestic industries by making it more expensive to import a product; thus, a tariff would be in line with Trump’s “put America first” agenda. The second purpose is to generate revenue for the US government. The nonpartisan Tax Foundation estimates that a 10% universal tariff would raise $2 trillion in revenue for the federal government from 2025 through 2034, while a 20% tariff would raise $3.3 trillion over that same period.
One negative impact of the tariff is that domestic companies would pass the cost along to US consumers by raising prices. Exactly how much it would raise prices is hard to say. The Peterson Institute for International Economics estimated a 10% blanket tariff would cost the average household $2,600 annually while the Tax Foundation estimated the increase to be $1,253 annually.
A tariff could also start a trade war. Typically, in a situation where a country is imposing a number of new tariffs, there is a reaction from the impacted countries, resulting in higher prices for consumers in both countries.
The 2025 tax outlook for businesses
With the Republican sweep in the executive and legislative branches of government the likelihood of swift tax reform is high. Although the exact changes are not known, the extension of some TCJA provisions and new or higher tariffs are expected, almost guaranteed.
