Tax

In 2017, Congress passed the Tax Cuts and Jobs Act (TCJA), ushering in significant changes to the tax landscape for businesses. Many key provisions under the TCJA are set to expire at the end of 2025. As legislators gear up to address these expiring provisions and other major tax priorities in 2025, it is crucial for businesses to stay informed and plan ahead. Understanding which provisions are set to change, how these changes could impact business models, and other tax issues being considered will be essential for effective planning and engagement in the legislative process.

Corporate Tax Rate

The TCJA permanently established a flat corporate tax rate of 21%, a significant reduction from the previous top marginal rate of 35%, and also repealed the corporate Alternative Minimum Tax (AMT). President Trump has called for lowering the corporate tax rate to 15% for certain companies.

Limit on Net Operating Loss (NOL) Deductions

The TCJA limited the use of NOLs to 80% of taxable income, allowing carryforwards indefinitely but generally disallowing carrybacks.

• Current Limitation: NOLs can offset up to 80% of taxable income.
• Expected Impact: The limitation is permanent unless addressed by legislation and businesses will continue to face restrictions on the full utilization of NOLs.

Section 199A Deduction for Qualified Business Income

The TCJA created a 20% deduction for qualified business income (QBI) for pass-through entities, such as sole proprietorships, partnerships, and S corporations.

• Current Deduction: Eligible businesses can deduct up to 20% of QBI (subject to income thresholds and other limitations).
• Expected Impact: Without extension, this deduction will no longer be available, and pass-through business income will be taxed at ordinary individual income tax rates.

Bonus Depreciation

The TCJA temporarily allowed businesses to immediately deduct 100% of the cost of eligible new and used property placed in service.

• Current Deduction: 80% for property placed in service in 2023, decreasing by 20% each year until it fully phases out in 2027.
• Expected Impact: The bonus depreciation provision will phase out entirely after 2027.

Interest Expense Deduction Limitation (Section 163(j))

The TCJA increased limitations for deduction of net business interest expense.

• Current Limitation: The sum of any taxpayer’s business interest income for the tax year, 30% of adjusted taxable income (ATI), and floor plan financing interest expense. Starting in 2022,  depreciation, amortization, and depletion were no longer added back when calculating ATI, which significantly reduces any benefit for highly leveraged businesses.
• Expected Impact: Unless addressed in legislation, deduction of business interest expense rules will revert to pre-TCJA law narrowing the application of the general rules, although the 2022 change will remain in effect.

Research & Development (R&D) Expense Amortization

The TCJA required businesses to amortize R&D expenses over five years (15 years for foreign research), replacing the previous practice of immediate expensing.

• Current Requirement: R&D costs must be amortized over five or fifteen years.
• Potential Impact: The amortization requirement will continue unless legislative changes are made.

Expanded Expensing under Section 179

The TCJA increased the maximum amount of qualified assets a business could expense under Section 179 to from $500,000 to $1 million, with a phase-out threshold increased from $2 million to $2.5 million.

• Current Expensing Limit: $1.16 million with a phase-out beginning at $2.89 million for 2023 (adjusted annually for inflation).
• Potential Impact: While Section 179 expensing is a long-term tax fixture, additional changes to the expensing limits or phase-out thresholds might be considered during tax negotiations.

Other key tax provisions are also on the table, many of which are affected by the impending expiration of TCJA measures. These include individual income tax rates, the Child Tax Credit, mortgage interest deductions, and estate tax exemptions, among others. Additionally, Republicans have indicated they may reclaim unallocated funds from the Inflation Reduction Act (IRA) to offset proposed tax cuts. These areas will likely be crucial points of negotiation as lawmakers consider the future of the tax code.

A tax legislative package will likely result in increased tax liabilities and changes in tax planning strategies for many companies. Dentons can help businesses assess the potential impact of these changes now and help develop strategies to mitigate the effects of the expiring provisions.