Built-in changes make 2025 a pivotal year for tax

The 2024 election will be pivotal for the future of tax policy, as broad swaths of the Tax Cuts and Jobs Act (TCJA) are set to expire at the end of 2025. Lawmakers from both parties are treating the coming year as a unique opportunity to reshape tax policy, dubbing it with nicknames ranging from the “Fiscal Cliff” to “Taxmageddon.”

The built-in changes to the tax code will affect not only individual provisions, but also key areas of business and international tax. More importantly, tax provisions that are not scheduled to change, such as the corporate rate, could be on the table as lawmakers look for ways to offset the cost of other priorities. Growing federal deficits will force lawmakers to make hard choices. To complicate matters, many countries are moving forward with the implementation of the Pillar 2 global minimum tax agreement.

Assessing the potential policy outcomes, and the impact on planning, should start with an understanding of what is scheduled to change. Additional stories will detail the tax platform of the two candidates, preview the election, and discuss the potential policy outcomes and the impact on planning.

Built-in changes

The TCJA was enacted with both temporary and delayed provisions because Republicans used the reconciliation process to avoid 60-vote procedural hurdles in the Senate. Under Senate rules, reconciliation bills generally cannot lose revenue outside of the 10-year budget window. To comply with this limitation, the TCJA added sunsets to nearly all individual provisions and included several delayed business and international tax increases. In addition, lawmakers have since lined up several other temporary business provisions, and those also expire at the end of 2025.

The following tables identify major changes to the tax code scheduled to occur in 2026 along with the revenue estimates for extending them. All revenue estimates come from supplemental data provided by the Congressional Budget Office with their May 8, 2024, report, “Budgetary Outcomes Under Alternative Assumptions About Spending and Revenues.” Positive numbers indicate the cost to taxpayers if favorable tax provisions aren't extended, while negative numbers indicate taxpayer savings if taxpayer-unfavorable provisions aren't extended.

In addition, there are several recent changes to the tax code that lawmakers have tried and failed to address over the last two years. Supporters could renew their effort to reverse these changes in 2025, which include the following:

• Taxpayers are required to amortize rather than expense research costs under Section 174 over five years (15 years for foreign costs) for tax years beginning after 2021
• The deduction on interest is limited to 30% of adjusted taxable income (ATI) under Section 163(j), and depreciation and amortization must be included in the calculation of ATI for tax years beginning after 2021
• Bonus depreciation is only 80% for property placed in service in 2023 and 60% for 2024, and is scheduled to revert to 40% for 2025, 20% for 2026, and expire completely in 2027.

Offense versus defense?

Don’t expect Democrats to call for the full expiration and repeal of TCJA, or for Republicans to push to extend it in its current form without change. There are elements of the TCJA that Democrats support, and there are provisions in the TCJA that Republicans are interested in revisiting. Both sides want to use 2025 as a broader opportunity to reshape tax policy. Everything will be on the table, even the corporate rate, as House Ways and Means Committee Chair Jason Smith, R-Mo., has said himself:

“Whether you’re doing it through reconciliation or in a bipartisan approach, if you think the C corp(oration) rate is not on the table for discussion, every tax provision is on the table. Nothing is permanent.”

Senate Finance Committee ranking minority member Mike Crapo, R-Idaho, had similar thoughts: “There are those who would like to see an entirely new type of tax code drafted; there are those who would like to see nothing changed; [and] there is everything in the middle. We’ll be looking at everything.”

One of the reasons Republicans are so willing to revisit the TCJA is that the Republican caucus today is very different from the one that was in place in 2017 when the TCJA was crafted.

Debt

Federal deficits could play a major role in negotiations in 2025. The budget picture is only getting worse, with the Congressional Budget Office projecting annual deficits totaling $20 trillion from 2025 through 2034. The latest estimates from CBO show that extending the TCJA as currently written would add $4.6 trillion to that total.

Democrats widely support a variety of tax increases that could address deficits or pay for other priorities. The bigger question is whether the growing deficits will force Republicans to concede revenue offsets, particularly in negotiations with Democrats if there is split government in 2025.

“Without a doubt one of the biggest challenges that will be discussed, debated, and decided in 2025 is, should [tax cuts] be paid for or should they not be paid for,” Smith said.

Pillar 2 global minimum tax

Implementation of the global minimum tax under Pillar 2 has stalled in the United States but is moving forward abroad. Three critical rules are taking affect across many of U.S.’s trading partners in 2024 and 2025:

• Income inclusion rule: The IIR will allow parent countries to impose “top-up” tax on earnings of foreign subsidiaries with effective rates below 15%
  
• Under-taxed profits rule: The UTPR can impose additional tax on certain other types of income with effective rates under 15%
• Qualified domestic minimum top up tax: The QDMTT “tops up” tax on domestic entities to 15% before another country’s UTPR or IIR applies

The taxes will affect both U.S. multinationals and the U.S. Treasury as other countries potentially target tax revenue that would otherwise be collected by the United States. Both outcomes could put pressure on the U.S. to respond, though Republicans and Democrats are deeply divided over the best way forward.