As of November 14, 2024, enough of the pending congressional races for the U.S. House of Representatives were called in favor of the Republican Party, allowing the party to retain control of the chamber. Republicans now have won the presidency and control of both houses of Congress.
With the Republican Party retaining control of the House, Republican tax policy preferences will be at the forefront of the legislative agenda. Those preferences may include making some Tax Cuts and Jobs Act of 2017 (TCJA) provisions permanent, a feat that may prove difficult without 60 Republican senators, other than through the budget reconciliation process.
Expiring TCJA Provisions
The TCJA (P.L. 115-97) was enacted during the Trump administration using the fast-track budget reconciliation process, which allows the Senate to avoid any threat of filibuster, subject to significant overall cost constraints. The TCJA reduced corporate and personal tax rates, doubled the child tax credit, and drastically changed the tax rules for U.S. multinationals.
Most of the TCJA’s corporate tax changes are permanent law, including the reduction of the corporate income tax rate from 35% to 21%; conversely, many of the individual tax provisions are only temporary, and are scheduled to sunset at the end of 2025. If these provisions were to expire, individual income tax rates would increase to pre-2017 levels (with a top marginal tax rate of 39.6% rather than the current 37%),
President-elect Donald J. Trump has not released a detailed tax policy document, but he has stated that he would make permanent most of the TCJA’s expiring provisions. Moreover, he has also said he would expand some TCJA provisions.
Extending the expiring TCJA provisions would carry a high cost. The nonpartisan Congressional Budget Office estimated in a May 2024 report that a blanket extension of the TCJA would cost $4.6 trillion over 10 years. President-elect Trump has proposed implementing a universal baseline tariff on imports that would range between 10% and 20%. However, the revenue raised through tariffs would fall well short of what is needed to fully offset the revenue losses that making the TCJA expiring provisions permanent, according to a study by the Tax Foundation.
Business Tax Provisions
The TCJA’s reduction of the corporate income tax rate from 35% to 21% is a permanent change not subject to expiration in 2025. President-elect Trump has floated the possibility of lowering that rate to 20%, or creating an incentive for domestic production that would have the effect of lowering the corporate rate to 15%. The second part of the plan would likely operate along the lines of former Section 199, also known as the domestic production activities deduction.
Other income tax TCJA provisions that may be in play include:
- Section 199A allows a 20% deduction for certain qualified business income. The provision expires after 2025 but may be extended under President-elect Trump’s mandate to extend TCJA provisions.
- Section 461(l), added by the TCJA and extended through 2026 by the American Rescue Plan Act of 2021 and through 2028 by the Inflation Reduction Act of 2022, limits the deduction for business losses for noncorporate taxpayers. A Trump administration would repeal the limitation.
- The TCJA did not introduce the concept of bonus depreciation, but it doubled the bonus depreciation deduction for qualified property from 50% to an initial 100%. The bonus depreciation percentage is expected to be phased out by 2027, unless Congress reinstates it.
- The university endowment tax under Section 4968, as added by the TCJA, imposes a 1.4% Certain private colleges and universities subject to 1.4% excise tax on their net investment income.
Individual Income Tax Provisions
The TCJA reduced most of the individual income tax rates and cut the top marginal tax rate from 39.6% to 37%. Unlike the reduction in the corporate tax rate, these reductions are slated to expire at the end of 2025, with rates reverting to pre-2017 levels, so that unless Congress acts, many American taxpayers will see a tax hike in 2026.
President-elect Trump has said he would extend the current rates or make them permanent, and that he would replace the revenue lost with an increase in tariffs on imported goods.
The TCJA also nearly doubled the basic standard deduction amounts under Section 63. For 2024, the deduction is $14,600 for single filers, $21,900 for head of household filers, and $29,200 for married joint filers. With the expiration of this provision, beginning in 2026, the basic standard deduction would be roughly half of what it is now, adjusted for inflation.
The TCJA made key changes to the child tax credit provisions, including doubling the maximum credit amount from $1,000 to $2,000 per child for children under 17, and increased the phaseout thresholds to $200,000 for single parents and $400,000 for married parents.
President-elect Trump has at times generally mentioned other policy proposals to benefit individuals, including the following:
- Exempting all Social Security benefits from income tax
- Exempting tip income from federal tax
- Exempting overtime pay from income and employment taxes.
Given that these proposals have been outlined only in broad terms, it will be up to Congress and the Trump administration to fill in the details as to how these proposals would work, and whether they would be paid for.
International Tax Provisions
The TCJA’s overhaul of the U.S. corporate international tax regime had three primary components:
- Section 951A of the Internal Revenue Code, which introduced a new tax on global intangible low-taxed income (GILTI) Intended to prevent U.S. multinationals from shifting profits to low-tax foreign jurisdictions. It imposes a minimum tax of 10.5% on certain foreign earning of U.S. corporations, with the rate slated to increase to 13.125% after 2025.
- Section 250 allows U.S. corporations a deduction for their foreign-derived intangible income (FDII), defined as income from exporting products, services, or intangibles from the U.S. The deduction reduces the tax rate on FDII to as low as 13.125% of eligible income but is increasing to 16.4% after 2025.
- Section 59A, the base erosion and anti-abuse tax (BEAT), was intended to prevent large multinational corporations from eroding the U.S. tax base through deductible payments (interest, royalties, etc.) to related foreign affiliates. The BEAT operates essentially as an alternative minimum tax of 10% (rising to 12.5% after 2025) on modified taxable income, calculated by disallowing deductibility of base erosion payments made to certain related foreign parties. In addition to an increase in the rate to 12.5%, moreover, the current beneficial provisions that permit the BEAT to be reduced by R&E tax credits and 30% of various general business credits will also expire, thus making those credits detrimental when determining the BEAT liability of relevant U.S. corporations.
President-elect Trump has not specifically addressed these provisions but has generally expressed support for extending the TCJA expiring provisions, which could preserve the current rates under all three Code sections if these are wrapped up into the extenders legislation.
OECD Pillars One and Two
Apart from the expiring TCJA provisions, the new Congress may address the U.S. position on the Organization for Economic Co-operation and Development (OECD)’s international tax reform initiatives, known as Pillar One and Pillar Two.
Pillar One is two-pronged: Amount A calls for a reallocation of taxing rights of the largest multinationals to market jurisdictions to ensure that businesses pay tax where they have significant customer bases, irrespective of physical presence. Amount B sets fixed profit margins for the distribution of goods.
Global implementation of Amount A requires the U.S. to formally adopt the concept through legislation, regulations, or treaties, but the consensus is that there is little chance that a Republican-controlled Senate will act.
The OECD guidance on Amount B has been incorporated into the OECD’s Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, and the IRS is expected to issue guidance before the end of 2024 to implement Amount B on a safe harbor or voluntary basis. The Biden administration has been working with the OECD on a mandatory version of the guidance, but it is now unclear whether a Republican administration would continue that work.
Pillar Two calls for a 15% global minimum tax in each of the jurisdictions in which multinational enterprises operate. The minimum tax must be adopted into domestic legislation in each jurisdiction; the U.S. has not moved in that direction, and a Republican Congress has expressed no interest in pursuing this.
Estate and Gift Tax Provisions
The TCJA doubled the estate tax exemption to $11.18 million for individuals and $22.36 million for married couples; indexed for inflation, it reaches $13.61 million in 2024 ($27.2 million for married couples). The taxable portion of the estate is then subject to a flat 40% tax rate. However, this provision expires at the end of 2025, so that the exemption amount would revert to approximately $7 million in 2026. The 40% rate is permanent unless changed through legislation.
Renewable Energy Tax Provisions
The Inflation Reduction Act (IRA) of 2022 introduced a series of tax incentives and credits that have spurred a wave of investment in clean energy manufacturing.
The list of tax credits introduced by the IRA includes:
- The clean vehicle credit (Section 30D)
- The clean electricity production credit (Section 45Y)
- The production tax credit (Section 45X)
- The clean fuel production credit (Section 45Z)
- Energy investment credit (Section 48)
Before the election, President-elect Trump indicated interest in rolling back some of these credits. However, some of the credits are popular and stimulated investment, which may favor a more nuanced approach to the potential repeal of some of these credits.
Tariffs
President-elect Trump has made the imposition of a wide range of tariffs on imports a central plank of his economic agenda. He has proposed replacing the income collected from the individual income tax with revenue from tariffs, and more specifically, has called for a universal baseline tariff on all U.S. imports of 10%, possibly increasing to 20%, as well as a 60% tariff on all U.S. imports from China, and a 200% tariff on products from companies that relocate production outside the U.S.
Economists have estimated that such a broad imposition of tariffs would cost the typical U.S. household over $2,600 a year, according to an analysis from the Peterson Institute for International Economics.
For a more detailed description of the expiring TCJA provisions and Trump’s tax priorities, see What Another Trump Presidency Means for Tax Policy in 2025 and Beyond.
Written by Todd Simmens, Jeff Bilsky and Michael Masciangelo. Copyright © 2024 BDO USA, P.C. All rights reserved. www.bdo.com
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