How businesses can plan for tax changes under the Trump administration in 2025

November 14, 2024 | by RSM US LLP

Now that Republicans have won the House of Representatives, businesses have more clarity about the direction in which the Trump administration and unified Republican Congress will steer tax policy in 2025.

Republicans are expected to quickly pursue legislation that continues policies they implemented in the Tax Cuts and Jobs Act of 2017 (TCJA), which sought to broaden the tax base and lower tax rates for both individuals and businesses. However, the estimated $4.0 trillion cost of extending TCJA provisions, plus interest costs of $600 billion, add uncertainty to tax policy outcomes. Even nonexpiring TCJA provisions and provisions that were not part of TCJA are subject to change.

Here are five key business issues that potential tax changes could affect, as well as corresponding planning considerations to help businesses make smart, timely decisions.

Cash flow, profitability and investment strategy

Potential tax changes: Corporate and individual tax rates

Modified tax rates could affect businesses’ cash flow and liquidity. Trump has proposed decreasing the corporate tax rate from 21% to 20%, and potentially to as low as 15% for companies that manufacture in the United States.

He intends to extend the TCJA provisions for taxation of individuals, which would entail keeping the top individual income tax rate at 37% along with extending the 20% qualified business income deduction available to pass-through businesses.

Policy perspective

Congressional Republicans generally have been supportive of retaining the current tax rate structure. However, several House Republicans have acknowledged a potential need to increase the corporate rate to raise revenue to offset extension of provisions in the TCJA.

Budgetary considerations will also help shape the discussion about extending individual income tax provisions, which would cost an estimated $3.2 trillion, according to the nonpartisan Congressional Budget Office.

Planning consideration: Accounting method review

Prepare now for changes in income tax rates by developing a playbook of tax accounting methods and elections that can change the timing of income and deductions.

Increased tax liabilities could impact cash flow strategies, liquidity and investment strategies for many corporate taxpayers while placing a premium on alternative strategies—such as shifting to domestic manufacturing—that could yield a more favorable tax rate and return on investment.

Capital expenditures and investments

Potential tax change: Bonus depreciation

For qualified assets, 100% accelerated bonus depreciation may return. Currently, the ability to claim a full depreciation deduction is being phased down and will be eliminated for most property placed in service starting in 2027.

Policy perspective

Trump and congressional Republicans support restoring “bonus” cost recovery for capital expenditures that drive infrastructure and business growth. However, restoring full bonus depreciation would cost an estimated $378 billion, an amount that would likely invoke a broader discussion around the need for revenue raisers.

Planning consideration: Capital expenditure and tax depreciation planning

Review planned capital expenditure budgets and determine which projects have the most flexibility for acceleration, deferral or continuing current course. Quickly identifying such projects and associated placed-in-service considerations will likely strengthen tax results in any legislative scenario. When analyzing the effect of any proposed bonus depreciation changes, take care to model the broad impact of the reduction in taxable income.

Debt analysis

Potential tax change: Deduction of business interest expense

The ability of businesses to deduct business-related interest expenses became less favorable in 2022. Generally, this limitation challenges companies that traditionally rely on debt financing. Such companies may also face other complex issues associated with debt refinancings, modifications and restructuring, which could trigger numerous tax issues, such as potential cancellation of debt income.

Policy perspective

There is Republican support for a more favorable deduction limit, but it was not a top priority for either party in negotiations that produced the ill-fated Tax Relief for American Families and Workers Act early in 2024. The cost of more favorable tax treatment will factor heavily in what Congress does.

Planning considerations: Review debt structure and terms

Review existing debt structures, including the need for potential refinancing based on debt maturity. Intercompany debt agreements could be reviewed, as well as intercompany transfer pricing, to accurately capture debt and interest at the correct entity. This could support strategies to minimize tax impacts under current law.

Global footprint, structuring and supply chain

Potential policy changes: U.S. international taxation and trade

Trump has proposed raising revenue through increases in tariffs, which could have profound implications for U.S. importers specifically and the economy in general.

In addition, several U.S. international tax rates are scheduled to increase at the end of 2025, as required by the TCJA: Global intangible low-taxed income (GILTI), foreign-derived intangible income (FDII), and the base erosion and anti-abuse tax (BEAT).

Meanwhile, many U.S. multinationals are operating in countries that have adopted the Organisation for Economic Co-operation and Development’s (OECD) Pillar Two framework, which is designed to combat profit shifting and base erosion.

Policy perspective

Republicans prefer to maintain the current GILTI, FDII and BEAT rates. Extending the current rules would cost an estimated $141 billion.

They also prefer current U.S. international tax rules and have resisted adopting the OECD’s Pillar Two framework due to their concerns about the global competitiveness of U.S. businesses and a potential loss of tax sovereignty.

Planning considerations: Review global structure and entity type

A shift in income tax rates raises questions for businesses about whether their tax structure is optimal for their business objectives. Reviewing the differences between C corporate taxation and pass-through taxation could identify ways to improve cash flow and other areas of the business.

Businesses should also evaluate how scheduled U.S. international tax rate increases could affect their global footprint, supply chain and economic presence in foreign jurisdictions. A review of corresponding international tax strategies, including transfer pricing and profit allocation, could help businesses identify additional tax savings. While the goal is optimization, these analyses also bring out areas of tax leakage in a global legal structure which would increase a business’ overall global effective tax rate.

To prepare for tariff increases, importers may be able to capitalize on several well-established customs and trade programs.

Innovation and research and development

Potential tax changes: Tax treatment of R&D expenses

Reinstating immediate R&D expensing would reduce the financial burden companies take on when they invest in new products or technologies. The tax treatment of R&D expenses became less favorable beginning in 2022, as required by the TCJA. Companies must capitalize and amortize costs over five years (15 years for R&D conducted abroad.)

Policy perspective

There is bipartisan support for reinstating immediate R&D expensing. But it’s uncertain how much it would cost the government to implement more favorable R&D expensing rules and how that cost would factor into a broader tax package.

In addition, companies are seeing more IRS exam activity around R&D credit issues. IRS funding remains a source of contention between congressional Republicans and Democrats. After Democrats in 2022 committed approximately $46 billion to IRS enforcement as part of $80 billion in funding for the agency through 2031, Republicans rescinded approximately $21 billion through budget legislation. Expect them to try to claw back more.

Planning considerations: Review R&D spending and sourcing plans

Businesses should review their R&D spending plans with an eye on how their approach to innovation might change with more favorable expensing. Focus on:

• Whether it makes financial sense to outsource R&D.
• Differences between conducting R&D domestically or internationally.
• Interplay between the R&D tax credit and R&D expense deductions.

Also, as companies are analyzing their R&D expenditures, it is wise to review prior R&D credit documentation to ensure complete and accurate reporting for R&D tax credit claims and R&D expenses.

The tax policy road ahead

With more than 30 provisions in the TCJA scheduled to expire at the end of 2025, Republican lawmakers have indicated a desire to act quickly on tax legislation after taking office in January. Under Republican majorities in both chambers, the budget reconciliation process would allow the Senate to pass legislation with a simple majority.

However, the estimated cost of tax changes could complicate an agreement between Senate and House Republicans, given continued concerns about the size of the existing federal debt and the continuing annual federal deficits.

In other words, even under a unified Republican government, some complicating factors continue to shroud tax policy outcomes in uncertainty.

Proactive planning will be crucial to navigate tax changes and optimize tax positions. Businesses that work with their tax advisor to monitor legislative proposals and model the effects on cash flows and tax obligations will be best equipped to make smart, timely decisions based on policy outcomes.

We invite you to register to attend our tax policy webcast on Nov. 18. We will discuss:

• Aligning business structure with your current strategy and potential tax changes 
• Income accelerations and deduction deferrals to enhance cash flow 
• Preparing for potential adjustments in your business transition plans for either a family transfer or a sale