Major tax code changes are expected as early as 2025, creating tax planning challenges for both businesses and investors. Few things are certain about the outlook, but change is one of them. Built-in changes to the tax code could trigger broader tax legislation. Even if legislation fails, the built-in changes themselves would take effect as scheduled in 2026, reshaping major tax provisions in important ways.
Our companion articles explain what is scheduled to change and why it could prompt broader reform; how the election will shape the outcome; and which proposals are part of the tax platforms of the two presidential candidates. This article will discuss how those elements could come together to shape the policy outcome in 2025 and what it could mean for tax planning.
Trends
Elections typically provide the winner with finite political capital to drive policy changes, and the proposals that gain traction on the campaign trail are an important factor in what’s possible. Translating campaign promises into legislation is difficult. Political and practical challenges will force plenty of compromises, and legislation will always differ from the campaign platform in meaningful ways. To assess potential policy changes, it’s often more important to focus on broader themes and priorities rather than details.
This cycle, populism is king. Both Vice President Kamala Harris and former president Donald Trump have increasingly touted new tax cuts for individual constituencies. Trump first proposed exempting tips from income tax, only for Harris to quickly echo the pledge. Trump then discussed exempting Social Security payments from income, while Harris focused on proposals aimed to cap rental increases and make housing more affordable.
The focus on individual relief over corporate and business interests may reflect changes in voter sentiment. Recent polling from Pew shows a large drop in favorability toward large corporations and financial institutions among Republican voters over the last five years, matching the relatively unfavorable views long held by many Democratic voters. A large majority of respondents also said they did not feel that corporations and wealthy individuals were paying their fair share taxes. Small businesses were one of the few business constituencies that remain largely popular.
Grant Thornton Insight:
The focus on populist tax policy represents a shift since the Tax Cuts and Jobs Act was passed in 2017, when cutting corporate rates was the top priority and individuals and pass-through businesses were something of an afterthought. Given voter views and candidate tax priorities, corporations could be playing defense in 2025 on things like the corporate rate and international changes, regardless of the election outcome. Individual tax cuts and provisions like the pass-through deduction under Section 199A could potentially garner more sympathy. Either way, there likely won’t be enough money to do everything everybody wants.
Related election resources
Deficits
The debt picture will force hard choices regardless of who wins in November. For Republicans, large deficits would make it difficult to keep new campaign tax promises while preventing any tax increases from built-in changes to the Tax Cuts Job Act. The latest estimates from Congressional Budget Office show that extending the TCJA as currently written would add $4.6 trillion in debt over the 10-year budget window. That figure doesn’t include the cost of expensive new Trump tax proposals, such as lowering the corporate rate to 15% and exempting tip income and Social Security payments for tax.
A split is emerging between Republicans on whether business tax cuts need to be offset. The traditional Republican view, popular among many Senate Republicans, is that tax cuts grow the economy and don’t need to be offset, particularly when lawmakers are only extending current policy. But growing deficits and the immense cost of the TCJA extensions is straining this view, particularly among many House Republicans. It’s one of the reasons some congressional Republicans have openly discussed corporate tax rate increases.
“Without a doubt one of the biggest challenges that will be discussed, debated, and decided in 2025 is, should (tax cuts) be paid for or should they not be paid for,” said Ways and Means Chair Jason Smith, R-Mo., recently.
Democrats have a long list of tax increases they could use to address the deficit or pay for other priorities, but they will likely also face hard choices. The Build Back Better and Inflation Reduction Act negotiations showed how hard it is to get consensus even among Democrats for major tax increases. In addition, Democrats support extending broad and expensive swaths of the TCJA. They also have their own expensive inventory of new tax priorities, including extending the child tax credit and ACA credit enhancements, exempting tip income from tax, and new tax incentives for housing.
Grant Thornton Insight:
Split government would create an interesting dynamic. Lawmakers could be less likely to strike the kind of expensive tax deal that’s been popular in recent years, where both sides agree to other’s tax cuts in exchange for their own. Democrats and Republicans may instead be wrangling over which tax increases both sides can stomach.
Reconciliation
If either party wins control of the White House and both chambers of Congress, reconciliation will be a key factor. Reconciliation is a special budget process that allows lawmakers to bypass 60-vote procedural hurdles in the Senate. It was used to pass both the IRA and the TCJA. Neither party is expected to get close to 60 votes in the Senate, putting reconciliation in play again regardless of which party controls either Congress or the White House.
Republicans have already signaled they would use reconciliation aggressively and expansively to address not only tax policy but potentially other areas. Reconciliation, however, comes with key limitations. Reciliation bills generally cannot lose revenue outside of the 10-year budget window. This restriction is the main reason why so much of the TCJA is expected to expire after 2025, and it could again prevent Republicans from making permanent tax policy even if they sweep back into power.
Reconciliation rules may pose less of a problem for Democrats because they propose many tax increases that could prevent revenue loss outside the 10-year budget window. If Democrats were to retain the Senate, however, it would likely be by only the slimmest majority. This could result in a repeat of the IRA negotiations, in which one or two holdout senators wield enormous power to kill or reshape any tax bill.
Split government
With the structural advantages this cycle for Republicans in the Senate and Democrats in the House (see our prior story), there is a strong chance of split government regardless of who wins the White House. Split government would lead to heated tax negotiations where leverage would be important.
Grant Thornton Insight:
When gauging potential future possibilities, it can be instructive to look at similar scenarios on the past. In 2012, Democratic President Barack Obama faced a Republican House with the 2001 and 2003 tax cuts scheduled to expire. Because the tax cuts were enacted by Republicans using reconciliation, Obama appeared more willing to just let them expire. In order to secure extensions, Republicans ultimately had to agree to phase them out at the $400,000 and $450,000 income thresholds. For 2025 negotiations, if Republicans are more invested in retaining the TCJA while Democrats are more willing to let it expire altogether, it could give Democrats more leverage.
Split government could also prompt whoever wins the White House to turn aggressively to the regulatory process if legislation is stymied by the opposition party. For Democrats, this could mean tax regulations targeting various areas, especially partnerships. The Biden administration recently proposed rules aimed at partnership basis transactions and has discussed new rules aimed at self-employment tax.
A Trump administration would be expected to explore tariffs as a policy tool, perhaps even in place of tax legislation. Congress has delegated significant authority to the president to unilaterally manage trade policy with tariffs. Trump has proposed a 10% tariff on all imports generally and 60% on China, though it is not clear whether presidential authority goes far enough to allow for such sweeping tariffs without congressional action.
Grant Thornton Insight:
The recent Supreme Court decision in Loper Bright Enterprises Inc. v. Raimondo (No. 22-451) reversed the long-held Chevron standard for deference to agency rule-making, and could make it harder for either incoming administration to stretch the bounds of tax statutes with aggressive rule-making.
Key proposals
One of the challenges in planning for future tax changes is determining which aspects of a campaign platform are just political talking points and which have a realistic chance at enactment. Past legislative attempts, technical considerations, congressional reactions, and deficit realities can offer some insight.
The following considerations may be important for key aspects of the Republican platform:
- Corporate rate: It is hard to see Republicans raising corporate rates if Trump wins the presidency and they control both chambers of Congress. At the same time, deficits and the cost of other priorities would make it very difficult for Republicans to cut the corporate rate any further despite Trump proposing a 15% rate for some domestic activities. Under split government, there may be some Republicans willing to concede a moderate corporate rate increase to secure other priorities from Democrats. Top Republican tax writers have said openly that the corporate rate may be on the table.
- TCJA extensions: Congressional Republicans have made it clear that they want to re-examine the TCJA rather than blindly extend it, but Trump and many Republicans would be expected to support extensions of much of the policy. Section 199A could emerge as top priority to help small and private businesses. Cost could become an issue, especially as some Republicans will be reluctant to extend aspects of the TCJA that actually would raise revenue, such as the cap on state and local tax (SALT) deductions.
- Energy incentives: Trump has been very critical of the IRA’s energy incentives, particularly the electric vehicle credit. Repealing these incentives could be a source of revenue for other priorities, but repeal could be difficult. Republicans typically have been reluctant to rescind tax cuts, and there is a group of House Republicans who openly support many of the energy measures for the investment it has brought to their districts.
- New tax cuts: Trump’s proposal to exempt tips from income quicky picked up traction, even among some Democrats like Harris. Its popularity could translate into serious consideration in 2025, though there may be concerns over cost and administrability. The proposal to exempt Social Security payments from income seems less likely based on the reaction so far. It would be very costly and could accelerate the insolvency of Social Security and Medicare.
Key considerations for the Democratic platform include:
- Rate increases: Democrats are certain to resurrect proposals to increase the corporate, individual, and capital gains rates. It is worth noting that although these proposals were ultimately stripped from the IRA, they enjoyed widespread support among nearly all Democrats. Even Sen. Joe Manchin, I-W.V., was largely supportive of the tax increases in the Build Back Better platform; his biggest concerns mostly targeted other issues. It was ultimately Sen. Krysten Sinema, I-Ariz., who refused to accept them. If Democrats gain control in November, the balance of power and the views of its more centrist members will be important.
- Targeted tax increases: The objections of Sinema ultimately led to broader rate increases being replaced with more targeted proposals that initially seemed more like political talking points, such as the stock buyback tax and the new corporate alternative minimum tax. The Biden administration has proposed increasing the rates on both these taxes. If centrists in their own party or Republicans in a split government make broad rate increases difficult again, Democrats may get more traction raising rates on these targeted taxes that have already survived the political gauntlet once.
- TCJA extensions: Harris has repeated Biden’s pledge to avoid any tax increases on taxpayers earning less than $400,000, which should encompass extending many aspects of the TCJA for individuals. Democrats will face hard choices on the SALT cap and Section 199A. Extending the SALT cap would raise significant money for other priorities, but it is very unpopular among many Democratic members. Democrats have criticized the Section 199A deduction for benefiting very high-income taxpayers too much, but it may be hard to repeal something viewed sympathetically by some voters as helping entrepreneurs and small businesses. Democrats have in the past proposed an income cap on Section 199.
- Political proposals: Some of the more ambitious proposals, such a “billionaire’s tax” that would target unrealized gains are controversial even among many Democrats and don’t appear likely to gain real traction even in a Democratic sweep.
Timing
Lawmakers will be under tremendous pressure to enact legislation in 2025 before the TCJA provisions expire, but there is no guarantee they will act in a timely manner. Congress has become increasingly tardy addressing expiring tax provisions in recent years, often acting retroactively to reinstate provisions even after taxpayers have filed returns. Many businesses are still hoping Congress will retroactively address Section 174 and other changes that took effect in 2022.
The major TCJA changes will not take effect until 2026, meaning it will be early 2027 before they impact most tax returns. Political stalemate could delay action until then, particularly if one party thinks they could gain leverage in the 2026 midterm elections. Pressure could also force action much sooner. Unlike many of the other tax provisions Congress has reinstated retroactively, the TCJA changes will affect individual withholding and could reduce paychecks immediately in 2026. This may be enough to prompt action. When the 2001 and 2003 tax cuts were scheduled to expire at the end of 2010 and 2012, Congress addressed them both times before they could affect withholding.
Grant Thornton Insight:
Kicking the can down the road is a real possibility. If lawmakers are having trouble striking a deal, they could simply enact a short-term extension of current TCJA policy for one or two years to extend negotiations. This is what occurred in 2010, when lawmakers passed a two-year “clean” extension of those tax cuts and deferred negotiations into 2012.
Planning
The lack of certainty can make planning difficult, but taxpayers should not be sitting idle. It may be prudent hold off on some actions until the election makes the outlook more clear, or even later when policy priorities begin to emerge in the legislative process. But long-term business and tax planning should account for the potential for change, and there are several important considerations taxpayers can start assessing now, including:
- Interest and research expense planning: The prospects have dimmed for retroactive legislation restoring research expensing under Section 174 and the more favorable calculation for the limit on interest deductions under Section 163(j). Taxpayers have already had to implement these unfavorable changes, but early returns were focused mostly on compliance. There may now be opportunities to explore proactive elections and accounting methods to help mitigate the impact of the changes. Taxpayers facing a limit on their interest deduction, for example, could consider options to capitalize interest to other assets to remove the interest from the Section 163(j) calculation.
- Pillar 2 implementation: Regardless of what happens legislatively in the U.S., other countries are moving ahead with the implementation of the model GLoBE minimum tax rules under Pillar 2. Multinationals with global consolidated financial statement revenue of 750 million euros or more will face a variety of compliance, reporting, and planning challenges. It is past time to begin assessing potential changes to accounting systems and procedures needed to comply (see our recent Tax Insights for more information).
- International arbitrage: The rate under Section 250 for the deduction for foreign derived intangible income (FDII) and the tax on global intangible low-taxed income (GILTI) is scheduled to decrease in 2026. Taxpayers affected by these provisions could consider timing changes and accounting methods that could effectively leverage the increased deduction before the rate change. Taxpayers should be cautious with mechanisms that will accelerate income, however, as there can be downside risk if the rate changes don’t occur as scheduled. Some efforts to accelerate income ahead of expected rate increases backfired when the IRA ultimately did not change the corporate, individual, or capital gains rates.
- Transfer tax planning: Unless lawmakers act, the $13.61 million lifetime exclusion for the estate, gift, and generation skipping transfer taxes are set to be cut in half in 2026. With the prospects of legislation uncertain, taxpayers with large estates should consider leveraging the higher threshold before it potentially disappears. The IRS has issued helpful guidance allowing taxpayers to use the current exemptions without fear of future changes clawing back the benefit. Taxpayers who do not take advantage of the increased exemptions with gifts before 2026 could forfeit the benefit of the increased exemptions.
- Fixed assets: The phaseout of bonus depreciation could resurrect popular planning strategies that were less important in recent years when taxpayers could immediately deduct 100% of most fixed assets. With hopes for restoring 100% bonus depreciation flagging, taxpayers can consider other options to accelerate cost recovery. There are many accounting method and fixed asset strategies that can help, including identifying costs that can be deducted as repairs under the tangible property regulations.
- Energy incentives: Republican criticism of the IRA energy credits has many taxpayers wondering whether it is safe to embark on long-term projects. There are no guarantees in the legislative process, but as discussed above, there are several reasons to believe a Republican election victory might not threaten current projects. In addition, lawmakers are generally averse to changing tax rules after taxpayers have already made investments based on them. Energy credit phaseouts in the past have been tied to “beginning of construction” deadlines, so projects already underway may not be affected by any repeal attempts.
- Entity choice: The TCJA gave corporations a much bigger rate cut than pass-through businesses taxed at the individual level, changing the math on entity choice. If the TCJA expires as scheduled, rates would further increase on pass-throughs, with the top individual rate increasing from 37% to 39.6% and the Section 199A deduction disappearing. If the corporate rate remained 21%, the rate differential would force pass-through businesses to at least consider whether it would be more tax efficient to convert to a C corporation (see table). It’s important to keep in mind, however, that that there are many other possible rate scenarios, as well as other considerations when choosing an entity, including exit plans, state taxes, accounting methods, loss usage, alternative minimum tax, estate planning, legal considerations, and financial statements.
Next steps
Taxpayers should monitor the election outlook carefully and consider the potential for changes as part of their long-term planning. There may be valuable planning opportunities after the election clarifies the outlook.
Contacts:
Dustin Stamper
Tax Legislative Affairs Practice Leader
Managing Director, Tax Services
Grant Thornton Advisors LLC
Dustin Stamper is a managing director in Grant Thornton’s Washington National Tax Office and leads the tax legislative affairs practice for the firm.
Washington DC, Washington DC
Service Experience
- Tax
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