President-elect Donald Trump and the incoming wave of Republican lawmakers promise sweeping changes to the tax code.
But how the incoming Trump administration will change tax law isn’t clear, and organizations can’t simply cross their fingers and hope for the best. CFOs make decisions based on current tax realities and understand they could pivot if there are drastic changes in the near future, experts told CFO Brew.
First things first. Donald Trump and the Republican Congress want to extend the Tax Cuts and Jobs Act (TCJA). In an interview on CNBC two days after Trump won the election, former Treasury secretary Steven Mnuchin said that extending Trump-era tax cuts should be the party’s “top priority,” which he added should be “easy to pass in Congress.”
Many business-focused provisions of the TCJA are set to expire at the end of 2025 sans Congressional intervention, including the deduction for pass-through business income (aka the “199A Deduction”), according to a report from the Congressional Research Service. A provision allowing bonus depreciation on business properties winds down at the end of 2026, and a deduction for excess business losses that was extended by the Inflation Reduction Act does not expire until the end of 2028.
There’s also “bipartisan support” to scrap a TCJA provision that requires companies to capitalize and amortize research and development costs over five years rather than deduct R&D expenses immediately, according to a report from RSM. Republicans also support reversing another TCJA provision in order to create “a more favorable deduction limit” on business interest expenses, according to the report.
“[Organizations] have to be cognizant of the fact that they need to plan with the law that's in effect now, and right now, at least through the end of 2025 we're dealing with what we have,” with the TCJA, Bob Lickwar, partner and tax managing director at UHY, told CFO Brew.
Lickwar pointed to failed legislation from earlier this year that would have made some of these changes and more. This underscores the importance of having a backup plan—even though “everybody thought” the bill would pass, as Lickwar recalled. “I put so many returns on extension just assuming that it was going to [pass], but by the same token, I built in the fact that it might not, and as it turned out, it didn't,” he said.
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With the GOP running the show, it “fundamentally changes the process” of enacting tax reform than under a divided government, Ray Beeman, a principal at EY, said during a briefing with reporters.
On deck. Republicans will likely pass tax changes under budget reconciliation, a process that requires only a simple majority in the House and Senate, according to the Tax Foundation. Even so, there will still be negotiations among Republicans “all of next year” (let’s not forget 2023’s House Speaker debacle) and the budget reconciliation process itself is “fraught with peril and many procedural steps along the way,” Beeman said.
Martin Fiore, EY Americas deputy vice chair on tax, recommended that organizations understand what each possible tax-reform outcome in Washington could mean for their situations.
“A lot of our clients are very complex, and we've got to make sure they're modeling and they're looking at their scenarios and plugging in different modeling to see what the outcome is,” Fiore said during the briefing. “Probably equally important is advising their stakeholders on what could potentially happen. …It's like telling a story, and you’ve got to keep up with it to make sure that everybody understands the components.”
Lickwar advised that businesses rely on their controller or other tax professionals to keep them informed on the latest tax talks on Capitol Hill. He said things may end up moving quickly and perhaps down to the wire.
Organizations must also weigh the benefits and risks of making certain decisions now or holding off in the hopes that tax reform happens next year, Lickwar said. He used the purchase of a new company vehicle as an example. Buying it this year guarantees the company will get 60% bonus depreciation. Tax reforms may bump the bonus depreciation to a more favorable 100% next year. But if nothing comes to fruition and a company waits, they may be stuck at that lower 40% depreciation bonus in 2025.
“We're putting things out there so that the client can make an informed decision,” Lickwar said, “working with the law that we have now with an eye towards what may potentially happen.”