There has been much talk about the need for tax changes. Many tax rules put in place by the Tax Cuts and Jobs Act of 2017 (TCJA) are set to expire at the end of 2025. And other tax changes that were part of the Tax Relief for American Families and Workers Act of 2024 (Tax Relief Act), languished in Congress (it passed the House but never made it for a vote in the Senate).
Starting in January, with a Republican President and a Republican Congress, expect to see some tax legislation. It may be comprehensive; it may be minimal. It may impact 2025, it may not take effect until 2026, but some provisions could be retroactive to 2024 or even earlier years.
Here’s what to watch for with respect to federal business tax changes (those for individuals are not covered here) and my predictions for change.
Retaining the low corporate tax rate. The flat 21% rate set by TCJA likely will be retained. It could be reduced by one percentage point. Currently, the Tax Foundation found that the U.S.’ corporate tax rate is lower than some countries but higher than others. The old domestic production activities deduction, which expired at the end of 2017, could be restored. If the deduction is set at 28.5%, it would have the effect of lowering the corporate rate to 15% for those that can use the deduction. In my opinion, this is a long shot.
Reverting to expensing for R&D. Before 2022, businesses could expense their research and experimentation expenditures (technically referred to as specified research or experimentation expenditures, or SREEs). After 2021, such costs have to be amortized over a period of 5 years (15 years for foreign SREEs). The Tax Relief Act would have restored the expensing rule retroactively. In my opinion, it is highly likely that will occur. If so, it would require filing amended returns for 2022 and 2023 to change from amortization to expensing. Part of the filing would require a change in accounting method (another form).
Restoring 100% bonus depreciation. The TCJA created 100% bonus depreciation—a first-year expensing write-off—for the costs of buying equipment and other eligible property rather than having to depreciate the cost over a number of years. The percentage declined to 80% in 2023 and is 60% this year; it’s scheduled to decline to 40% in 2025, 20% in 2026, and zero thereafter. The Tax Relief Act would have restored 100% bonus depreciation, also retroactively. Again, in my opinion, this will happen. And 2023 returns may have to be amended to increase the bonus depreciation deduction.
Exempting certain income. Trump promised to exempt tips and overtime pay from income comes. If this comes to pass, it would mean reduced payroll taxes for employers. In my opinion, this may not happen. The tip exemption could open up a can of worms for many employees’ pay to be classified as tips. For example, if I’m performing legal services for my professional corporation and my client specifies that part of my fee is “tips,” would I have tax-free income?
Eliminating certain green energy subsidies. The Inflation Reduction Act (IRA) created a number of subsidies for solar, wind, and other clean energy projects and purchases. Trump said he wanted to end them. In my opinion, this won’t be a wholesale rebuke of green energy policy; some breaks could go but most others will continue. Reuters noted that many green energy projects are in Republican states.
Estate taxes. The TCJA significantly increased the estate tax exemption, but the higher amount—adjusted annually for inflation—is set to expire at the end of 2025. This would mean a considerably lower exemption and require more estate tax planning for business owners hoping to preserve family wealth. Trump proposed making the higher exemption amount ($13.61 million for 2024; $13.99 million for 2025) permanent. In my opinion, this has a good chance of being enacted.
Final thoughts
There are other factors that come into play in tax policy:
- Tariffs. A discussion of taxes would not be complete without the mention of tariffs. Trump vowed to impose various tariffs to protect American goods. Tariffs are certainly a way to raise revenue, but could trigger retaliatory tariffs. In my opinion, the imposition of tariffs likely will not be automatic; it would depend on what happens with our economy and the action of foreign players, particularly China. We’ll have to see.
- The national debt. Another aspect of taxes is their impact on the national debt, which stood on November 6, 2024, at $35.975+ trillion based on the live National Debt Clock. The Senate Budget Committee reported in June that “debt held by the public is projected to increase from $26.2 trillion (97.3% of GDP) in 2023 to $50.7 trillion (122.4% of GDP) in 2034. The “debt-to-GDP” ratio will overtake its all-time high by 2027 and rise from there.” While debt isn’t talked about much, it can’t be overlooked in any discussion about tax policy.
- Social Security. No one argues that there’s a need for reform in order to keep the promise for Social Security to remain solvent. How this will be done is unclear. Increases in Social Security and Medicare taxes—through a hike in the tax rate, a boost to the wage base ceiling, or something else—will likely fall partly on employers and partly on self-employed individuals.
The next several months are going to be interesting, if nothing else!
