The Tax Cuts and Jobs Act (TCJA) brought significant changes to the U.S. corporate tax landscape. However, several key provisions of this act are set to expire, posing important questions for businesses as they look towards the financial year 2025 and beyond. Understanding which parts of the TCJA are sunsetting is crucial for strategic planning and financial forecasting. This article breaks down the critical corporate tax changes scheduled for 2025, focusing on pass-through income deductions, business expense deductions, and international tax provisions.
Changes to Pass-Through Income Deduction in 2025
For pass-through businesses, including sole proprietorships, partnerships, and S-corporations, a significant tax benefit is at risk. The provision allowing a deduction of up to 20% of qualified business income (QBI) will expire. This deduction, known as the 199A deduction, was designed to provide tax relief to smaller businesses, mirroring the corporate tax rate cuts for larger C-corporations under the TCJA.
The potential disappearance of this deduction is a concern for many industries, particularly real estate and manufacturing, which have heavily benefited from it. Lobbying efforts are underway to extend this tax break, with proponents arguing it is vital for maintaining a level playing field for small and medium-sized enterprises. The outcome of these efforts will significantly impact the tax liabilities of millions of businesses in 2025 and subsequent years.
Business Expense Deductions: What’s Changing?
Several changes related to business expense deductions are also on the horizon, impacting how companies can write off investments and costs.
Bonus Depreciation Reduction in 2025
One notable shift is in bonus depreciation. The 100% bonus depreciation, which allowed businesses to deduct the full cost of certain capital investments immediately, is being phased out. In 2025, the bonus depreciation rate will decrease to 50%. This means businesses will only be able to deduct half of the cost of qualifying capital investments in the year they are made, with the remainder being depreciated over time. This change will likely influence investment strategies as the immediate tax benefits become less substantial.
Research and Development (R&D) Amortization Persists
Unless Congress intervenes, the TCJA’s requirement to amortize research and development (R&D) costs over five years will remain in effect beyond 2025. This contrasts with the previous rule that allowed for immediate expensing of R&D costs. The current amortization rule increases the after-tax cost of R&D, potentially discouraging innovation. There are ongoing discussions and legislative proposals, such as the Wyden-Smith bill, aimed at restoring immediate expensing for R&D and enhancing the R&D tax credit, but as of now, the amortization requirement is slated to continue.
Business Interest Deduction Reverts
The rules governing the business interest deduction are also set to change. In 2025, the deduction will revert to pre-TCJA rules. Generally, this means that business interest expenses will still be deductible in the year they are paid or accrued, but with potential limitations that may differ from the TCJA rules. Businesses will need to re-familiarize themselves with these older regulations to ensure compliance and optimize their tax strategies related to interest expenses.
International Tax Landscape and 2025
The international tax environment has evolved significantly since the TCJA, largely due to the rise of global tax agreements like Pillar 2, brokered by the OECD. Pillar 2, which is now in effect in many countries, establishes a 15% minimum tax rate for multinational enterprises (MNEs) with substantial global revenue.
While the TCJA also included measures to address tax avoidance, such as the global intangible low-taxed income (GILTI) tax, foreign-derived intangible income (FDII) tax, and the base erosion and anti-abuse tax (BEAT), the interaction between these TCJA provisions and Pillar 2 is complex and, at times, conflicting.
A safe harbor provision currently offers some protection to U.S. companies from the full impact of Pillar 2. However, this safe harbor is set to expire at the end of 2026. Looking ahead to 2025 and beyond, Congress will face increasing pressure to reconcile the TCJA’s international tax rules with the global framework established by Pillar 2 to provide clarity and prevent double taxation or competitive disadvantages for U.S. businesses operating internationally.
As 2025 approaches, businesses need to closely monitor these expiring and changing tax provisions. Understanding the implications of these shifts in corporate tax policy is essential for effective financial planning and ensuring continued profitability in the evolving tax landscape.
