Companies Weigh Their Weaknesses to Model 2025 Tax Cliff Impact

Corporations are essentially cramming for a test, reviewing tax proposals that could gain new life during a looming heated debate over the 2017 GOP tax cuts expiring at the end of next year.

Lawmakers are already haggling over tax policy beyond the law, allowing companies to model how different plans may affect them no matter who comes out on top in November, said Jennifer Acuña, a KPMG LLP principal in the federal legislative and regulatory services group and a former Hill tax staffer for Republicans.

“We don’t know who’s going to win the election, but what clients have at their disposal is a treasure trove of legislative proposals that have been released in the tax space,” Acuña said. “My rule of thumb is that if it’s been released and hasn’t passed, then it’s on the table.”

If Republicans get control of both the House and Senate, it’s likely most provisions of the 2017 law will remain, while tax increases for big businesses are more likely if Democrats control both chambers. A divided government makes the contents of the tax package more opaque. For example, Senate Republicans stopped a $78 billion tax package that would have restored some expired business tax breaks and expanded the child tax credit. The package had support from House Republicans and Democrats.

Finding Weaknesses

Companies are first figuring out where their tax weaknesses lie, said Todd Metcalf, PwC principal of tax policy services and former tax staffer to Democrats.

“Taxpayers are thinking, ‘What could Congress do within the realm of possibility that would be actually the most harmful to us?’ ” Metcalf said.

For example, the 21% corporate tax rate enacted by the 2017 law isn’t expiring, but it’s become a political discussion point. Vice President Kamala Harris has said she backsincreasing it to 28% while former President Donald Trump has floated a rate as low as 15%.

Increasing the corporate rate is an easy change for lawmakers to make to pay for other tax cuts, Acuña said. A handful of House Republicans have also supported increasing the rate.

Republicans have set sights on repealing the tax credits from the Democrats’ 2022 tax-and-climate law, though some members of the party are pushing back. Removing some of those credits could be a way lawmakers pay for continuing 2017 tax cuts, Metcalf said.

“Lots of businesses have invested significant amounts of money in these projects,” he said.

Knowing different proposals will allow them to formulate how they lobby lawmakers amid the talks, Acuña said. As soon as executives know who’s in office, they’ll start more specific scenario planning.

Deal Considerations

Some corporate cuts from the 2017 law have already started to phase out.

Bonus depreciation, which was at 100% in 2018, is now at 60%.

Corporations may want to push through purchases of assets like planes or trucks now before the bonus deprecation phases down another 20%, CBIZ Director Nathan Smith said. They should also be more careful about how they categorize asset investments, he added. For example, companies should check if the improvement they’re planning is classified as a repair by the IRS because that means it could be immediately deductible, rather than face the phased-down depreciation schedule.

“For a while we were able to be lazy,” Smith said. “Now that isn’t the game anymore.”

Some companies may hold off on purchases until at least after the election because lawmakers commonly use bonus depreciation as a lever amid tax talks, changing the percentage depending on the state of the economy, Smith said.

The phaseout of the bonus depreciation benefit has led to more corporate modeling needs when considering asset versus stock deals, said Crowe LLP Partner Brianne de Sellier. When the depreciation benefit was at 100%, modeling wasn’t as necessary.

Another consideration in mergers and acquisitions is a deduction expiring at the end of 2025 that lowers tax rates for pass-through businesses.

The uncertainty around whether that will expire has made partnerships and S corporations less desirable to buyers because their tax bills may increase soon, de Sellier said. For sellers, it increases the urgency to close the deal.

“There’s some timing sensitivity we’ve started to pick up on,” de Sellier said.

Global Tax Changes

Regardless of domestic policy, US multinational companies have already started gearing up for tax rate increases because of the new global minimum tax, or Pillar Two, which takes effect in 2025.

Companies with operations in the dozens of countries that have signed on to the Organization for Economic Cooperation and Development deal are expected to see tax increases. That’s on top of international tax cuts from the 2017 law that are set to shrink without congressional action starting in 2026.

The global intangible low-taxed income deduction goes from 50% to 37.5%; the foreign-derived intangible income deduction lowers from 37.5% to 21.87%; and the base erosion minimum tax is increasing from 10% to 12.5%.

With all of these potential changes, multinational companies are gathering data and modeling potential outcomes, said John Kelleher, a tax partner at Crowe. Pharmaceutical and technology companies will likely feel the tax squeeze the most because of the amount of their intangible assets, like patents and trademarks.

PwC’s Metcalf said some companies moved their intellectual property to the US because of the 2017 tax law changes. Upcoming policy changes could cause another shift in 2026.

But companies won’t start changing structures or moving out of certain countries until at least after the election, Kelleher said.

“It’s really too early to make any long-lasting decisions,” he said.