By Jeffrey T. Rogers, CPA, MST | Partner, E.J. Callahan & Associates
The 2024 election has passed and, in January, Donald Trump will be taking office for his second term as President. In addition, the election resulted in Republicans gaining majority control over the House and Senate, a fact that could help him to bring his plans into law. With that, it’s worth taking a look at what that may mean for the tax landscape in the coming years. Trump floated a lot of new ideas along the campaign trail such as exempting tip, overtime, and social security income from income tax, creating an itemized deduction to write off auto loan interest and, of course, introducing tariffs on US imports. However, much of what Trump hopes to accomplish tie back to provisions of recent legislation, including the most significant piece that he signed into law, the Tax Cuts and Jobs Act (“TCJA”). In fact, that’s probably the best place to start.
In December 2017, during his first term in office, Trump passed the TCJA which, among other things, reduced the corporate tax rate to a flat 21% and the top individual tax rate to 37%. It also introduced a new 20% deduction on pass-through income under the newly created Section 199A of the US tax code, doubled the standard deduction, and increased first year “bonus depreciation” expensing to 100% of the cost of the capital improvement, up from 50%. However, because a process called “reconciliation” was used to get the bill expeditiously passed, measures were needed to pay for the tax benefits. For that reason, the Section 199A deduction and the reduced 37% individual tax rate were only enacted on a temporary basis with both due to sunset at the end of 2025 along with several other provisions. Similarly, 100% bonus depreciation was only a temporary measure. Beginning in 2023, the percentage was reduced by 20% per year until it’s scheduled complete phase out in 2027.
In addition, an individual’s state and local tax deduction became capped at $10,000, the domestic production activity deduction was repealed, limitations on the ability to deduct interest expense were put into place, and a company’s research and development expenses required capitalization rather than immediate expensing.
On the estate and gift tax front, the lifetime exclusion was doubled to $11 million and, adjusted for inflation, now stands at $13.61 million per person for 2024. However, this was another temporary enactment as it’s due to return to its pre-TCJA $5 million level after 2024.
All of this is relevant in understanding that Trump and the GOP’s intentions are to extend the TCJA benefits that are soon to expire and to remedy some of the provisions that have not been favorable to taxpayers.
With that said, below are some of the tax provisions that we would anticipate being addressed by Congress over the next couple of years:
Permanent Extension of Expiring TCJA Tax Provisions
Trump and the GOP desire to do the following with the below expiring TCJA provisions:
Retain the top individual tax rate at 37% and potentially reduce even lower with additional reduction to the long-term capital gain rates
Make permanent 20% Section 199A Qualified Business Income Deduction
Extend current estate and gift tax lifetime exclusions
Maintain the standard deduction at its increased level
Other areas that he is focused on will be:
Potential Decrease to Corporate Tax Rate
While the 37% individual rate was enacted on a temporary basis and is due to sunset, the 21% corporate rate was made “permanent”. That said, Trump has discussed a desire to reduce the rate further to 20% and potentially reinstitute the Domestic Production Activity Deduction to bring the effective tax rate as low as 15%.
Restoration of 100% Section 168(k) bonus depreciation
As part of the TCJA, businesses were permitted to write off the full cost of qualified capital assets in the year placed in service. The 100% first year write off was only effective through 2022. Beginning in 2023, the first year write off was capped at 80% of the cost with every subsequent year seeing an additional 20% reduction until phased out in 2027.
Return to Section 163(j) Business interest expense limitation to EBITDA
One of the objectives of the TCJA was for businesses to reduce their reliance on debt to fund operations. In an attempt to accomplish this, unless limited exceptions or certain elections were made, section 163(j) of the Internal Revenue Code was expanded to require most company’s interest expense deduction to be limited to 30% of their adjusted taxable income. Any excess interest expense could be carried forward to a future tax year and used when the company had “excess business income”. Many companies were able to avoid a deduction limitation through 2021 as the adjusted taxable income figure was determined prior to a reduction for tax depreciation and amortization expense. However, the calculation changed in 2022, as scheduled by the TCJA, such that the adjusted taxable income threshold became post-depreciation and amortization expense. This change, coupled with rising interest rates, resulted in significantly more suspended interest expense across businesses. Trump has not proposed repealing the Section 163(j) limitation but his intent is to return to its pre-2022 calculation, which was based on EBITDA.
For what it’s worth, the Tax Relief for American Families and Workers Act of 2024, a bill that passed the House with bipartisan support, attempted to accomplish the same thing but ultimately did not make it out of the Senate.
Repeal of the Section 174 requirement to amortize R & E expenditures
Historically, Section 174 of the Internal Revenue Code has permitted an immediate deduction of research & experimentation expenses. However, as part of the TCJA, Section 174 was amended and, beginning in 2022, the ability to deduct was changed to a requirement to capitalize and amortize domestic research & experimentation expenses over 5 years; 5 years for international R&E expenses. The capitalization requirement went into effect regardless of whether a company claimed the Section 41 Research & Development tax credit and led to several small and mid-sized businesses having significantly higher tax bills in 2022 and 2023 than they had seen previously. Trump has proposed returning to pre-TCJA and allowing businesses to expense their R&D costs immediately.
Repeal of State and Local Tax (SALT) Cap Limitation
Prior to the TCJA, individual taxpayers were generally able to deduct the full amount that they paid for state income taxes, real estate taxes and certain personal property taxes as itemized deductions on their personal tax returns. The TCJA placed a $10,000 cap on the amount able to be deducted. Lifting this cap and returning to pre-TCJA is being discussed.
Expansion of the Child Tax Credit
The TCJA doubled the Child Tax Credit to $2,000 per qualifying child but that is yet another provision that is set to expire at the end of 2025. Vice President Elect J.D. Vance spoke on the campaign trail of increasing the credit even further to $5,000 per child and it is believed that Trump is in support of that initiative.
Paying for the Tax Benefits
All of the above comes with a cost and while it doesn’t necessarily have to, and likely won’t, all be offset by tax-related adjustments, there could be some changes to the Internal Revenue Code. For example, Trump has mentioned discontinuing some of the green energy incentives that have become popular in recent years, some of which were introduced as part of the Inflation Reduction Act of 2022. In addition, the proposed tariffs on imported goods can certainly be viewed as a tax.
While EJC is not expecting any significant changes to impact the 2024 tax year, there may still be reason to plan for what may happen in the future. EJC will be actively monitoring the proposed legislation as we head into 2025. Should you have questions with anything contained within Trump’s proposals and how it may impact your personal or business tax situation, feel free to reach out to an EJC partner.