The Expiration of TCJA Provisions: Positioning Yourself for The Unknown

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Much attention is being directed on the 2024 presidential election in the United States, but it's crucial for business owners and executives to look ahead to 2025 and beyond. Regardless of who wins in November, major tax legislation change is anticipated in the 2025-2026 tax periods with the expiration of significant provisions of the 2017 Tax Cuts and Jobs Act (TCJA). Changes in tax law like what we are about to experience create opportunities to enhance your business and personal financial affairs by implementing better tax planning and capital budgeting conscious of the changing environment. Further, it creates an opportunity to reshuffle and revisit your business operations and finances to better handle the changing landscape.

The expiration of, and anticipated modifications to, TCJA’s federal and international provisions will likely lead to higher US corporate taxes, especially as other countries aim to increase their corporate tax rates as well. What is more, the expiration of these federal tax laws in the 2025-2026 tax periods will have a similar chain reaction at the state and local level, the most obvious and widespread being the rollback of various state-level pass-through entity elective tax payments that allow partners and shareholders of pass-through entities to make their personal state tax payments deductible at the federal level, which is currently limited to only $10,000 per year.

What is at issue

Key concerns include the individual provisions set to expire, such as the 37% top individual income tax rate, the 20% deduction for pass-through business income, and the higher standard deduction. Additionally, if no action is taken, significant international business tax rates will rise, including those for global intangible low-taxed income (GILTI), the base erosion and anti-abuse tax (BEAT), and the foreign-derived intangible income (FDII) rate.

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The High Cost of Extending TCJA Provisions

The Congressional Budget Office estimates a hefty $3.5 trillion price tag (in terms of lost tax revenue) over the next decade if all TCJA individual provisions are extended across all income levels. Despite broad bipartisan support for maintaining most provisions, even President Biden's proposal to limit the extension to those earning below $400,000 carries a significant cost of $2 trillion to $2.25 trillion. The provisions applicable to only business entities, on the other hand, come with a lower price tag (in terms of lost tax revenue) of roughly $1 trillion over the next decade.

However, if policymakers choose to let these provisions expire, economic growth could suffer due to increased costs of business investment and job creation and taxation eating into the bottom line of businesses and individuals. This adds pressure to find alternative revenue sources as the fiscal deficit grows and the "fiscal cliff" compounds. Here is where we face uncertainty: no one knows with precision the tax and business environment we'll be in at the federal level in 2025-2026. The best route forward is to be prepared for the most likely situations factoring in the realities we face: (1) Political and legislative gridlock, regardless of which side takes the Executive branch, (2) An increasingly competitive business and political environment considering souring relations with our traditional trade partners, (3) A looming national debt that is, at this point, out of control, (4) A need to continue supporting healthy economic growth, business spending, consumer spending, and household saving, among other factors.

Corporate Tax Rate: A Target on the Back?

With mounting debt concerns, executives fear the corporate tax rate could be an easy target for lawmakers. The TCJA's permanent reduction to 21% may be revisited due to political pressure and deficit worries. Even if the 21% rate remains, Congress could modify other business tax rules, effectively raising corporate tax burdens.

Global Minimum Tax: A New Landscape

Even without US tax increases, multinational corporations face a higher overall tax bill under the new global minimum tax regime established by Pillar Two. While many aspects of the OECD's framework came into effect on January 1, 2024, key details are still under negotiation. This ongoing uncertainty poses a compliance challenge for taxpayers and multinational enterprises seeking to navigate the long-term implications of Pillar Two. 

Shifting Landscape on Capitol Hill

The composition of Congress has undergone significant changes since 2017. Consider the House Ways and Means Committee, where only four of the 24 Republicans who helped write the 2017 Act remain. This highlights the importance of clear communication - you cannot assume today's Congress is familiar with past events or your organization's current priorities.

As election day approaches, details regarding the tax plans of the presidential contenders will become clearer. The Tax Foundation reports that former President Donald Trump has proposed making the expiring individual tax cuts and the current 21% federal corporate income tax rate permanent.

In contrast, President Biden outlined his tax policy in his State of the Union Address. This includes raising the corporate income tax rate from 21% to 28%, increasing the domestic corporate alternative minimum tax from15% to 21%, and implementing a new 25% minimum income tax on the wealthiest Americans, the specifics left undefined. He further elaborated on this plan in his March 11th budget proposal for fiscal year 2025, which proposes a net tax increase of nearly $5 trillion for corporations and individuals with incomes exceeding $400,000.

The dramatic rise in federal debt and interest costs suggests a potential for higher taxes for businesses regardless of who wins the election.

Therefore, it is crucial to act now. Businesses have an opportunity to utilize this time effectively by marshaling resources and formulating several strategic alternatives with their financial, tax, and legal advisors. It’s crucial to rely on a team effort as there are many conflicting priorities when considering all stakeholders and other unknowable factors —owners, employees, customers/clients, regulators, among others.