On November 5, 2024, former President Donald J. Trump was elected to serve as the 47th President of the United States (the “U.S.”). As of today, it is now certain that Republicans will be in control of both the Senate and the U.S. House of Representatives. Unified control of Congress significantly enhances the prospects that many of President’s tax proposals become law.
Although President Trump did not provide a formal tax plan as part of his 2024 campaign, he discussed several tax policy ideas, the primary goals of which are simplification of the U.S. Internal Revenue Code, stimulating economic growth, encouraging business investments, and strengthening U.S. competitiveness in global markets. We will share our preliminary observations regarding some of the tax policy proposals the next Trump administration may pursue for the mentioned purposes.
President Trump’s tax proposals for the year 2025 build upon the foundation laid by the Tax Cuts and Jobs Act (“TCJA”) of 2017, key highlights include:
- Reduction of Corporate Income Tax rate
President Trump has discussed lowering the corporate federal income tax rate from 21% to 20% aiming to enhance global competitiveness of the U.S. businesses.
In the case of domestic manufacturing, President Trump has proposed lowering the effective corporate income tax rate from 21% to 15% which is expected to be achieved through the restoration of the prior domestic production activities deduction set at 28.5%.
- Potential repeal of Inflation Reduction Act (the “IRA”)
In August 2022, the Biden administration introduced IRA, a federal law that aims to invest in domestic energy production while promoting clean energy. Most recently, President Trump has expressed opposition to the IRA, hence the Republicans seek for a full repeal of both corporate alternative minimum tax (“CAMT”) and the stock repurchase excise tax (“Excise Tax”) and would also eliminate certain clean energy tax credits.
On September 13, 2024, the Treasury and IRS issued proposed rules under IRC Sections 56A, 59 and 1502. The proposed rules provide new guidance in many areas, including, but not limited to, related party and CAMT avoidance transactions, hedging, removal from applicable corporation status, depreciable property, and partnership contributions and distributions. The applicable date for each proposed rule varies and some rules do not go into effect until a final rule is published in the Federal Register, providing taxpayers with additional time for compliance. A public hearing is scheduled for January 16, 2025, at 10 a.m. EST.
- Bonus Depreciation
TCJA extended and enhanced the depreciation benefit afforded businesses by increasing the deduction from 50% to 100%, meaning that businesses could immediately expense the full cost of qualifying property. The 100% immediate expensing percentage, however, has been phased down in 20% increments starting in 2023 and will be phased out entirely by 2027. President Trump has discussed reversing the phase out and reinstating the 100% bonus depreciation benefit.
This could attract foreign direct investment but may also lead to increased scrutiny under OECD’s Base Erosion and Profit Shifting (“BEPS”) framework.
- Research and Development (“R&D”) Expensing
TCJA amended IRC Section 1741, by removing the option to immediately expense certain R&D expenditures, instead requiring taxpayers to capitalize and amortize such R&D expenditures over a period of 5 years (attributable to domestic research) or 15 years (attributable to foreign research). President Trump has discussed eliminating the TCJA’s R&D amortization provisions and restore the ability for taxpayer’s to immediately expense such costs as existed under pre-TCJA law. This proposal is consistent with a bipartisan House bill introduced in 2024 that would likewise eliminate the R&D amortization requirement.
- Business Interest Deduction
TCJA modified IRC Section 163(j) to disallow a deduction for net business interest expense in excess of 30% of taxpayer’s adjusted taxable income. Adjusted taxable income was generally a taxpayer’s earnings before interest, tax, depreciation and amortization (“EBITDA”) prior to January 1, 2022, but in the years since, is generally equal to a taxpayer’s earnings before interest and tax (“EBIT”); which, further reduces a taxpayer’s net business interest expense. President Trump has discussed having the business interest deduction once again be based on EBITDA, rather than EBIT.
- GILTI
TCJA imposed a tax on global intangible low tax income (“GILTI”) accrued within foreign affiliates in excess of 10% of the company’s tangible overseas capital investment (less depreciation). Currently, companies can claim a 50% deduction for GILTI, creating a 10.5% effective rate. After 2025, the GILTI deduction declines to 37.5%, resulting in the effective tax rate increasing to 13.125%. President Trump has discussed pushing for a reduction in the GILTI effective rate to 12.5% (down from 13.125% set to take effect after 2025).
- FDII
The TCJA provides a deduction to domestic corporations on their foreign-derived intangible income (“FDII”). The deduction allowed is 37.5% of a domestic corporation’s FDII for any taxable year beginning after December 31, 2017 (resulting in a 13.125% effective tax rate), and 21.875% for any taxable year beginning after December 31, 2025 (resulting in a 16.406% effective tax rate). President Trump has discussed pushing to change the FDII effective tax rate to 15% (down from 16.406% set to take effect after 2025).
- BEAT
The base erosion anti-abuse tax (“BEAT”) is an additional tax that applies to large corporations that reduce their U.S. tax liabilities below a certain threshold by making deductible payments (e.g., interest and royalties) to related foreign entities. The BEAT rate generally is 5% for 2018, 10% for 2019-2025, and 12.5% after 2025. President Trump has discussed retaining the increased rate (12.5%) for BEAT set to take effect after 2025.
- Potential Withdrawal from OECD Tax Framework
President Trump has discussed withdrawing the U.S. from the OECD tax framework, i.e., Pillar Two. While this decision, coupled with other President Trump tax proposals, could increase the U.S.’s attractiveness as an investment destination for multinational corporations, it would necessitate increased tax planning and structuring to combat the heightened uncertainty and compliance costs for companies operating in the U.S. and potential OECD signatory countries.
- Miscellaneous Proposals for Changes
President Trump has discussed making the individual TCJA provisions that are subject to expiration, such as rates and brackets, standard deductions, standard/personal exemptions, alternative minimum tax changes, child tax credit changes and IRC Section 199A pass-through deductions permanent with a few exceptions in these slides.
- Standard deduction: TCJA included a cap on the State and Local Tax (“SALT”) deduction equal to the amount of USD 10,000. Previously, there was no limit. The cap of USD 10,000 is scheduled to expire at the end of calendar year 2025. President Trump has promised to restore full SALT deductions which will have an impact on high-tax states such as New York and California.
- Exempting tips from income taxes.
- Exempting social security benefits from income taxes.
- Exempting overtime pay from income taxes.
- Increasing child tax credit to USD 5,000.
- Creating an itemized deduction for auto loan interest.
- Larger estate tax exemption: President Trump has promised to make the estate tax exemption under TCJA permanent if not higher.
President Trump’s tax agenda is expected to stimulate M&A activity due to enhanced capital mobility and lower tax rates, nevertheless we do not exclude this may lead to aggressive tax planning in cross border deals which in its turn could attract heightened scrutiny from tax authorities worldwide.
