Taxmageddon 2025: What does it mean for tax planning?

Split government

With the structural advantages this cycle for Republicans in the Senate and Democrats in the House (see our prior story), there is a strong chance of split government regardless of who wins the White House. Split government would lead to heated tax negotiations where leverage would be important.

Split government could also prompt whoever wins the White House to turn aggressively to the regulatory process if legislation is stymied by the opposition party. For Democrats, this could mean tax regulations targeting various areas, especially partnerships. The Biden administration recently proposed rules aimed at partnership basis transactions and has discussed new rules aimed at self-employment tax.

A Trump administration would be expected to explore tariffs as a policy tool, perhaps even in place of tax legislation. Congress has delegated significant authority to the president to unilaterally manage trade policy with tariffs. Trump has proposed a 10% tariff on all imports generally and 60% on China, though it is not clear whether presidential authority goes far enough to allow for such sweeping tariffs without congressional action.

Key proposals

One of the challenges in planning for future tax changes is determining which aspects of a campaign platform are just political talking points and which have a realistic chance at enactment. Past legislative attempts, technical considerations, congressional reactions, and deficit realities can offer some insight.

The following considerations may be important for key aspects of the Republican platform:

• Corporate rate: It is hard to see Republicans raising corporate rates if Trump wins the presidency and they control both chambers of Congress. At the same time, deficits and the cost of other priorities would make it very difficult for Republicans to cut the corporate rate any further despite Trump proposing a 15% rate for some domestic activities. Under split government, there may be some Republicans willing to concede a moderate corporate rate increase to secure other priorities from Democrats. Top Republican tax writers have said openly that the corporate rate may be on the table.
  
• TCJA extensions: Congressional Republicans have made it clear that they want to re-examine the TCJA rather than blindly extend it, but Trump and many Republicans would be expected to support extensions of much of the policy. Section 199A could emerge as top priority to help small and private businesses. Cost could become an issue, especially as some Republicans will be reluctant to extend aspects of the TCJA that actually would raise revenue, such as the cap on state and local tax (SALT) deductions.
  
• Energy incentives: Trump has been very critical of the IRA’s energy incentives, particularly the electric vehicle credit. Repealing these incentives could be a source of revenue for other priorities, but repeal could be difficult. Republicans typically have been reluctant to rescind tax cuts, and there is a group of House Republicans who openly support many of the energy measures for the investment it has brought to their districts.
  
• New tax cuts: Trump’s proposal to exempt tips from income quicky picked up traction, even among some Democrats like Harris. Its popularity could translate into serious consideration in 2025, though there may be concerns over cost and administrability. The proposal to exempt Social Security payments from income seems less likely based on the reaction so far. It would be very costly and could accelerate the insolvency of Social Security and Medicare.

Key considerations for the Democratic platform include:

• Rate increases: Democrats are certain to resurrect proposals to increase the corporate, individual, and capital gains rates. It is worth noting that although these proposals were ultimately stripped from the IRA, they enjoyed widespread support among nearly all Democrats. Even Sen. Joe Manchin, I-W.V., was largely supportive of the tax increases in the Build Back Better platform; his biggest concerns mostly targeted other issues. It was ultimately Sen. Krysten Sinema, I-Ariz., who refused to accept them. If Democrats gain control in November, the balance of power and the views of its more centrist members will be important.
• Targeted tax increases: The objections of Sinema ultimately led to broader rate increases being replaced with more targeted proposals that initially seemed more like political talking points, such as the stock buyback tax and the new corporate alternative minimum tax. The Biden administration has proposed increasing the rates on both these taxes. If centrists in their own party or Republicans in a split government make broad rate increases difficult again, Democrats may get more traction raising rates on these targeted taxes that have already survived the political gauntlet once.
  
• TCJA extensions: Harris has repeated Biden’s pledge to avoid any tax increases on taxpayers earning less than $400,000, which should encompass extending many aspects of the TCJA for individuals. Democrats will face hard choices on the SALT cap and Section 199A. Extending the SALT cap would raise significant money for other priorities, but it is very unpopular among many Democratic members. Democrats have criticized the Section 199A deduction for benefiting very high-income taxpayers too much, but it may be hard to repeal something viewed sympathetically by some voters as helping entrepreneurs and small businesses. Democrats have in the past proposed an income cap on Section 199.
  
• Political proposals: Some of the more ambitious proposals, such a “billionaire’s tax” that would target unrealized gains are controversial even among many Democrats and don’t appear likely to gain real traction even in a Democratic sweep.
  

Timing

Lawmakers will be under tremendous pressure to enact legislation in 2025 before the TCJA provisions expire, but there is no guarantee they will act in a timely manner. Congress has become increasingly tardy addressing expiring tax provisions in recent years, often acting retroactively to reinstate provisions even after taxpayers have filed returns. Many businesses are still hoping Congress will retroactively address Section 174 and other changes that took effect in 2022.

The major TCJA changes will not take effect until 2026, meaning it will be early 2027 before they impact most tax returns. Political stalemate could delay action until then, particularly if one party thinks they could gain leverage in the 2026 midterm elections. Pressure could also force action much sooner. Unlike many of the other tax provisions Congress has reinstated retroactively, the TCJA changes will affect individual withholding and could reduce paychecks immediately in 2026. This may be enough to prompt action. When the 2001 and 2003 tax cuts were scheduled to expire at the end of 2010 and 2012, Congress addressed them both times before they could affect withholding.

Planning

The lack of certainty can make planning difficult, but taxpayers should not be sitting idle. It may be prudent hold off on some actions until the election makes the outlook more clear, or even later when policy priorities begin to emerge in the legislative process. But long-term business and tax planning should account for the potential for change, and there are several important considerations taxpayers can start assessing now, including:

• Interest and research expense planning: The prospects have dimmed for retroactive legislation restoring research expensing under Section 174 and the more favorable calculation for the limit on interest deductions under Section 163(j). Taxpayers have already had to implement these unfavorable changes, but early returns were focused mostly on compliance. There may now be opportunities to explore proactive elections and accounting methods to help mitigate the impact of the changes. Taxpayers facing a limit on their interest deduction, for example, could consider options to capitalize interest to other assets to remove the interest from the Section 163(j) calculation.
• Pillar 2 implementation: Regardless of what happens legislatively in the U.S., other countries are moving ahead with the implementation of the model GLoBE minimum tax rules under Pillar 2. Multinationals with global consolidated financial statement revenue of 750 million euros or more will face a variety of compliance, reporting, and planning challenges. It is past time to begin assessing potential changes to accounting systems and procedures needed to comply (see our recent Tax Insights for more information).
  
• International arbitrage: The rate under Section 250 for the deduction for foreign derived intangible income (FDII) and the tax on global intangible low-taxed income (GILTI) is scheduled to decrease in 2026. Taxpayers affected by these provisions could consider timing changes and accounting methods that could effectively leverage the increased deduction before the rate change. Taxpayers should be cautious with mechanisms that will accelerate income, however, as there can be downside risk if the rate changes don’t occur as scheduled. Some efforts to accelerate income ahead of expected rate increases backfired when the IRA ultimately did not change the corporate, individual, or capital gains rates.
• Transfer tax planning: Unless lawmakers act, the $13.61 million lifetime exclusion for the estate, gift, and generation skipping transfer taxes are set to be cut in half in 2026. With the prospects of legislation uncertain, taxpayers with large estates should consider leveraging the higher threshold before it potentially disappears. The IRS has issued helpful guidance allowing taxpayers to use the current exemptions without fear of future changes clawing back the benefit. Taxpayers who do not take advantage of the increased exemptions with gifts before 2026 could forfeit the benefit of the increased exemptions.
• Fixed assets: The phaseout of bonus depreciation could resurrect popular planning strategies that were less important in recent years when taxpayers could immediately deduct 100% of most fixed assets. With hopes for restoring 100% bonus depreciation flagging, taxpayers can consider other options to accelerate cost recovery. There are many accounting method and fixed asset strategies that can help, including identifying costs that can be deducted as repairs under the tangible property regulations. 
• Energy incentives: Republican criticism of the IRA energy credits has many taxpayers wondering whether it is safe to embark on long-term projects. There are no guarantees in the legislative process, but as discussed above, there are several reasons to believe a Republican election victory might not threaten current projects. In addition, lawmakers are generally averse to changing tax rules after taxpayers have already made investments based on them. Energy credit phaseouts in the past have been tied to “beginning of construction” deadlines, so projects already underway may not be affected by any repeal attempts.
  
• Entity choice: The TCJA gave corporations a much bigger rate cut than pass-through businesses taxed at the individual level, changing the math on entity choice. If the TCJA expires as scheduled, rates would further increase on pass-throughs, with the top individual rate increasing from 37% to 39.6% and the Section 199A deduction disappearing. If the corporate rate remained 21%, the rate differential would force pass-through businesses to at least consider whether it would be more tax efficient to convert to a C corporation (see table). It’s important to keep in mind, however, that that there are many other possible rate scenarios, as well as other considerations when choosing an entity, including exit plans, state taxes, accounting methods, loss usage, alternative minimum tax, estate planning, legal considerations, and financial statements.