With Donald Trump’s 2024 U.S. election win and the Republican’s win of the House of Representatives, several changes to tax laws are anticipated as Trump takes office. These proposals particularly focus on provisions of the Tax Cuts and Jobs Act of 2017 (“TCJA”) as many provisions are set to expire. Below are some of the proposed changes relevant to businesses:
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Corporate Tax Rates:
Trump has proposed decreasing the corporate tax rate from 21% to 20%. He has also proposed decreasing the corporate tax rate to 15% for companies that manufacture in the U.S. Republicans have been mixed on their support with some in favor of the current structure, some wanting to increase tax rates due to budgetary considerations, and others in agreement with Trump.
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Bonus Depreciation
Bonus depreciation, a tax incentive allowing a business to immediately initially deduct 100% of first-year depreciation for eligible assets, has been phasing out by 20% annually and is scheduled to end by 2027. Under the Trump administration, 100% bonus depreciation may return for eligible assets which would be especially beneficial for those involved in real estate. Both Trump and congressional Republicans have been in support of restoring bonus depreciation. However, restoring bonus depreciation may result in significant costs that will need to be considered before passing. Furthermore, other legislation may pass with the effect of restoring bonus depreciation.
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Carried Interest:
Currently, carried interest is treated as long-term capital gain if held over three years. This rule is set to expire in 2025. However, there has been discussion that the Trump administration may extend this rule. Support for this proposal has been mixed with some concern about the potential implications of such an extension.
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Qualified Opportunity Zone Investments:
The gains from sales of assets that are reinvested in a qualified opportunity zone within 180 days are offered certain deferred capital gains treatment and a reduction of gain if held for five to seven years. This rule is set to expire after 2025. However, the Trump administration has proposed extending the present rule. This proposal has support from both sides as it encourages investments in economically distressed areas.
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Qualified Business Income Deduction:
Currently, there is a 20% deduction for certain qualified business income which is set to expire after 2025. The Trump administration has proposed extending the deduction, and even making this deduction permanent. Such a proposal has support amongst Republicans and small business owners and is especially beneficial to most real estate developers.
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Business Interest Expense Deduction:
Although not a top priority, many Republicans are in support of a more favorable deduction limit for business-related interest expenses. Trump has also discussed reverting the business interest expense deduction calculation to EBITDA from EBIT, which would allow companies to claim larger tax deductions. Many are in support of this proposal; however, others are concerned about its impact on federal revenue.
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R&D Expenses:
There has been discussion on reinstating research and development expenses to reduce the burden that companies take on when investing in new products and technologies. This reinstatement of immediate expensing for research and development costs is generally supported due to the way it encourages innovation and investment in new technologies.
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Renewable Energy Tax Credits:
Currently, applicable entities that invest in certain renewable energy projects may receive refundable tax credits. However, the Trump administration has discussed rolling back or eliminating this credit. Environmental advocates and those who benefit from these tax credits oppose the Trump administration’s proposed rollback.
Looking Ahead
While there is support behind many of the Trump administration proposals, any changes to the current tax rules are subject to the legislative processes and technicalities. The likelihood of passage varies by proposal and each must overcome political challenges, complex negotiations, budgetary hurdles, and alignment with broader policies. The upcoming months and commencement of Trump’s second term will be critical in determining how these proposals evolve.