The future of business taxation is the subject of much speculation as 2025 approaches. Significant portions of the Tax Cuts and Jobs Act (TCJA) are set to expire at the end of that year. In addition, the Republican sweep of Congressional majorities and the White House in the 2024 election set the stage for new tax legislation during 2025. Amid that backdrop, our tax specialists examine what might happen and the key questions that will determine the outcome.
The known: 2024 election results and expiring Tax Cuts and Jobs Act (TCJA)
From a tax standpoint, the 2024 election has been monitored with considerable attention for the past few years. The driver of that attention was the fact that most of the TCJA, enacted under the first Trump administration in 2017, is scheduled to expire on Dec. 31, 2025. Accordingly, the election results would determine which presidential candidate is in office in Congress and the White House for the crucial negotiations over the extension of the TCJA.
The 2024 election results have now clarified that the Republican party will retain its narrow majority in the House, gain a three-seat majority in the Senate, and President-elect Trump will return to the White House for a second term. What does that mean? In short, Republican priorities, including an extension of portions of the TCJA and various new tax proposals, can now be advanced through an expedited congressional process.
The unknowns: Specifics of fiscal and policy choices
While aspects of the TCJA are expected to be extended, there are many specific questions to be addressed. One of the first questions relates to the overall cost of the tax package that will be pursued. A simple extension of the TCJA is expected to cost several trillion dollars, which may drive concerns about deficits and the potential need for revenue raisers in the bill. The overall fiscal contours of tax legislation will inform details such as the provisions that will be included and the length of time over which they will extend. Business tax aspects will also need to be balanced with individual tax changes.
Additional questions relate to specific policy choices. Business taxation directly impacts the economy, employment, and international trade. Downstream effects can ripple further across the country. The remainder of this article will focus on key aspects of business taxation that may be impacted by the expiration of the TCJA and the legislation that’s pursued during 2025.
Corporate taxes
Any discussion about corporate tax rates is necessarily different from other aspects of business taxation, given that it doesn’t involve expiring rules. One key feature of TCJA was a significant tax rate cut for C corporations, resulting in the reduction of the top tax rate from 35% down to 21%. The first Trump administration initially requested a 15% corporate tax rate, but legislative negotiations resulted in the 21% rate in effect today. That rate won’t expire at the end of 2025, so it’s not necessary for Congress to take any further action. However, further modifications to the corporate tax rate could result from negotiations over the 2025 tax bill.
Here are the key questions that we’re monitoring:
- Will the corporate tax rate be modified? Trump has indicated an interest in lowering the corporate tax rate at various points, including a reduction from 21 to 20%. Conversely, at least some Republicans in the House have suggested increasing the corporate tax rate to 25% to help offset other tax cuts. The threshold question about modification of the corporate tax rate is inextricably linked to the overall cost of tax legislation. On balance, both a reduction in the corporate rate and a significant increase (e.g., beyond 25%) seem unlikely due to competing policy interests.
- What about that 15% rate? During his 2024 presidential campaign, Trump promoted a 15% tax rate that would apply to corporations producing goods in the United States. No further details were provided about how such a policy would be implemented. However, the Tax Code in existence prior to the TCJA provides a hint. Specifically, the domestic production activities deduction (DPAD) under Section 199 previously granted a tax deduction to corporations and pass-through businesses that completed qualifying production activities. To achieve a 15% corporate tax rate on domestic manufacturing, Congress may simply choose to restore a modified version of DPAD with a 28.5% deduction. A restoration of DPAD would increase the cost of the tax bill but could help to achieve policy goals related to onshoring production.
- Will parity be maintained? The TCJA made two key changes to the way that business income is taxed. The first was the introduction of 21% corporate tax rate. The second was the introduction of the 20% qualified business income deduction (QBID), discussed below, which reduces the effective tax rate on certain pass-through business income. Republicans in Congress will have to weigh whether or not to make corresponding adjustments to either the 21% corporate rate or QBID if one of those items is altered.
- What about corporate tax rules from the Biden administration? The Inflation Reduction Act (IRA), enacted in 2022 under the Biden administration and Democratic majorities in Congress, made two key tax changes for corporations. The first was the introduction of corporate alternative minimum tax (CAMT). That tax imposes a 15% minimum tax on the financial statement income of large corporations with average annual financial statement income exceeding $1 billion. The second change was the creation of a 1% excise tax on publicly traded corporations that complete stock redemptions. It’s possible that Republicans in Congress will look to modify these rules as part of any tax legislation; although changes would impact the cost of such legislation. A repeal or modification of CAMT would likely reduce federal tax revenues while an increase in the stock redemption excise tax could be a source of revenue for other tax cuts.
While the corporate tax rate isn’t an expiring item, it will likely be the focus of attention during legislative negotiations. Importantly, this could be a source of revenue to offset other tax cuts and related changes could also be a tool to incentivize domestic manufacturing.
Pass-through business income: The qualified business income deduction (QBID) under Section 199A
The TCJA lowered the effective tax rate on certain pass-through business income through introduction of the qualified business income deduction (QBID) under Section 199A. When fully applied, this deduction-based regime works in conjunction with the lowered individual income tax brackets (top bracket of 37.0%) to impose a top 29.6% effective federal tax rate on qualified business income. Early drafts of the TCJA included a 25% tax on pass-through income, but QBID resulted from congressional negotiations. Currently, the existing version of QBID is scheduled to expire at the end of 2025. That expiration, in conjunction with the expiration of changes to individual tax brackets, would increase the top tax bracket on pass-through business income to 39.6%.
The creation of QBID involved certain policy choices about which types of business income to favor. Crucially, the business income of many professional service businesses — so-called specified service trades or businesses (SSTBs) — is subject to a phase-out beginning in the case of single individuals with $191,950 of taxable income in 2024 ($383,900 for married filing jointly). That phase-out is adjusted annually for inflation. Additionally, QBID may be reduced if the relevant pass-through business don’t pay sufficient W-2 wages or have sufficient original cost basis (UBIA) in business assets during the relevant tax year. Since enactment, QBID has been the subject of many legislative proposals beyond mere extension of such rules.
Specific to QBID, we are monitoring the following questions:
- Is a simple extension possible? The obvious answer is that, yes, Congress could merely extend the existing version of QBID for some period of time beyond 2025. This would be expected to involve a meaningful reduction in future tax revenues, so the price tag of an extension is the key factor to be considered. To alleviate cost concerns, the extension could be restrained in terms of years — e.g., four years instead of 10 years.
- Which modifications will gain traction? The policy choices driving the inclusion of the phase outs discussed above (SSTB, W-2 wages, and UBIA) could be reopened during the tax legislative process. For example, the SSTB rules could be reopened from a policy perspective given the volume of professional service businesses within the economy. Additionally, the W-2 wage and UBIA limitations could be modified from a tax simplification perspective. Any proposals from key Republicans in Congress will be carefully monitored as the legislative process begins in earnest.
- Where are we in the business entity parity discussion? The creation of QBID helped to alleviate the tax disparity on current income recognized by C corporations and pass-through business owners. Anecdotally, this limited the volume of conversions to C corporations in the years after 2017. Ultimately, a decision will need to be made about whether to maintain the current level of parity.
- Will QBID interact with a potential resurgence of DPAD? As discussed above, it’s possible that DPAD could be restored in some form to promote domestic production activities. Trump described the 15% rate on domestic production as being applicable to corporations, so DPAD could be restored solely for C corporations. A more complicated situation could exist if a reinstituted DPAD applies to pass-through income at the same time that QBID is extended.
It’s likely that QBID will be extended in at least some form beyond 2025. However, the current proposals provide tantalizingly few details about the specifics of an extension.
The trifecta: R&D, business interest deductions, and bonus depreciation
The TCJA was largely focused on providing tax cuts to businesses and individuals. However, concerns about the overall price tag of that bill required the introduction of revenue-raising tax rules. Importantly, three tax rules, commonly referred to as the trifecta, were enacted with deferred effective dates. Such rules reduced annual tax deductions beginning in 2022 based on the following:
- Research and experimentation expenses under Section 174. Prior to the TCJA, businesses were able to deduct certain research and experimentation expenses under Section 174. Those rules provided tax incentives to both businesses in the startup phase and operating companies. Section 174 also worked in conjunction with the research and development (R&D) tax credit under Section 41. However, the TCJA dramatically changed Section 174 by imposing a capitalization and amortization regime. Beginning in 2022, businesses were required to capitalize their Section 174 costs and amortize them over five years (domestic costs) or 15 years (foreign costs).
- Business interest expense limitation under Section 163(j). The TCJA also imposed a new limitation on the deductibility of business interest expenses. Initially taking effect in 2018, this limitation caps annual business interest deductions at 30% of adjusted taxable income (ATI). During the first four years of applicability, ATI was defined as taxable income with several adjustments, including the add-back of depreciation, amortization, and depletion deductions. However, beginning in 2022, depreciation, amortization, and depletion was no longer allowed as an add-back. Such change reduced the base on which the 30% limitation was applied, which, in turn, tightened the limitation. Notably, this occurred shortly before inflationary pressures resulted in increased interest rates across the economy. Taken together, the tightened limitation and increased interest payments have meaningfully increased the amount of suspended interest deductions.
- Bonus depreciation. The TCJA provided for 100% bonus depreciation for assets placed in service between late 2017 and the end of 2022. Starting in 2023, bonus depreciation was reduced annually by 20%, with full phase-out in 2027.
The deferred changes related to the trifecta have resulted in meaningful reductions in tax deductions for many businesses. In that sense, such rules have been uniformly unpopular and the subject of multiple legislative efforts. Most recently, the Tax Relief for American Families and Workers Act of 2024 (TRAFWA) would have modified all three rules. TRAFWA had considerable bipartisan support in the House, where it passed easily, but ultimately stalled out in the Senate. Given considerable bipartisan support for modifications to the trifecta, the key questions about enactment appear to turn on when and how rather than if.
State pass-through entity tax (PTE) deductions
The TCJA imposed a limitation on the deductibility of state and local taxes by individual taxpayers. Almost immediately, states began examining alternative ways to allow pass-through businesses and their owners to generate tax deductions on state and local income tax payments. A key breakthrough on this front occurred when the Treasury Department published Notice 2020-75 in November 2020. Such guidance provided that pass-through businesses would be allowed to deduct state and local income taxes imposed on and paid by partnerships and S corporations within certain parameters. The majority of states have subsequently enacted state pass-through entity (PTE) tax regimes adhering to Notice 2020-75.
The SALT cap is discussed in greater length in our article regarding individual taxes. That cap is scheduled to expire at the end of 2025 but could be extended in the future. State PTE regimes vary, but some have expiration dates that correspond with the SALT cap, while others will remain in existence into the future. However, a key question is whether Congress will address the state PTE tax deductions as part of legislation in 2025. That could involve adopting the rules set forth in Notice 2020-75 or it could include limitations on deductions by PTEs.
Business tax credits
Many federal income tax credits are extended periodically through tax-extender legislation. For 2025, Republicans in Congress will be faced with both expiring business tax credits and the potential repeal of other credits.
Expiring tax credits
- New Markets Tax Credit (NMTC): The NMTC is a key tax incentive for the development of projects in low-income communities. Such credit is also set to expire at the end of 2025.
- Work Opportunity Tax Credit (WOTC): The WOTC is an employment-based incentive for employers that hire certain groups of people, including veterans, low-income earners, and people with disabilities who have completed state-approved rehabilitation plans. It’s also scheduled to expire at the end of 2025.
- Paid Family and Medical Leave Credit: A third business credit, for paid family and medical leave, was introduced as part of TCJA. It was initially enacted as a two-year pilot but was later extended through the end of 2025. Like the WOTC, this credit is available to employers.
These expiring credits managed to stay out of the political spotlight during the election season, and each stands a good chance of being extended. The NMTC, for example, has been extended multiple times since it was first introduced in 2000, and that pattern is likely to continue in the coming year. Although it’s possible that an extension of these credits could be done on a bipartisan basis through legislation separate from the TCJA extension.
Tax credits subject to repeal or modification
However, the political spotlight was on renewable energy-related credits during the election cycle. Trump repeatedly expressed his disapproval of the set of green energy credits that were expanded by the IRA and made available for a wide range of purposes and projects. Whether and to what extent these set of credits will continue is itself a complicated question that will be explored in a separate article. However, the key questions related to these credits include:
- Are these actually new credits? The IRA did include the creation of certain new tax credits, often with new credits taking the place of existing credits. However, the IRA also modified tax credits that had been in existence for many years. Those include the Section 48 investment tax credit (ITC), the Section 45 production tax credit (PTC), the Section 30D clean vehicle credit, and the Section 30C alternative fuel refueling property credit (e.g., for EV charging). The impact of that prior history is unclear but could signal the retention of certain credits in modified form.
- How will local dynamics factor into the equation? Since enactment, the IRA has spurred the development of tax credit projects across the country. Those range from the installation of energy-producing property (e.g., wind and solar projects) and energy-efficient equipment to development of manufacturing facilities that will produce solar equipment, batteries, and electric vehicles. The wide distribution of those projects is expected to impact any efforts to repeal or modify the IRA credits.
- What about projects currently in process? Certain types of credit projects, especially those involving the ITC and PTC, are capital-intensive and span multiple years from planning to completion. If Congress does choose to modify the IRA credits, then a choice will be required about how to handle projects that are in the development and construction cycles. It’s possible that Congress will utilize existing beginning of construction rules to establish project eligibility. However, no specific details have yet been provided.
The 2025 tax legislative process will undoubtedly involve discussions about modifications to the tax credits in the IRA. Some changes will almost certainly be included in a final bill even if a full-scale repeal of all associated tax credits appears to be a remote possibility. However, the specifics of such changes remain unclear until the legislative process begins in earnest.
International tax implications
The international tax rules implemented by the United States are also expected to be a widely discussed subject during the 2025 legislative session. On this front, the expiration of the TCJA will likely provide limited impact, but complicated international trade considerations are certainly implicated. A future article will explore these rules in greater depth, but here are the key questions that we’re monitoring.
- How will the TCJA’s international rules evolve? The TCJA established several important international tax rules, but only certain aspects of such rules are set to expire. The effective tax rate under the global intangible low-taxed income (GILTI) rules will increase from 10.5 to 13.125%. Similarly, the effective tax rate on foreign derived intangible income (FDII) will increase from 13.125 to 16.406%. A third anti-erosion measure, the base erosion anti-abuse tax (BEAT) will move from 10 to 12.5%. Finally, payments between related controlled foreign corporations will no longer be eligible for look-through treatment. Congress will almost certainly revisit these international tax rules during 2025, but the result is far from clear.
- What happens with OECD efforts? The Organization for Economic Cooperation and Development (OECD) began efforts over a decade ago to combat tax avoidance and enhance the global international tax system. This initiative includes two main pillars, with Pillar 1 focusing on the largest multinational companies and Pillar 2 imposing a minimum tax on multinational companies. The OECD efforts will certainly be in the background as legislation is considered in 2025. Specifically, House Ways & Means Chairman Jason Smith (R-MO) previously targeted Pillar 2 after gaining that position in 2023.
- Where do tariffs fit in? Tariffs aren’t an income tax item, and Congress may not be required to act. However, any actions impacting global trade are expected to factor into the overall international landscape.
