Preparing for the Expiration of the TCJA in 2025

What happens when the TCJA expires in 2025?

The TCJA was originally implemented as a temporary measure, with key provisions scheduled to expire by the end of 2025. Beginning in January 2026, unless Congress enacts legislation to extend or amend its provisions, several tax benefits and deductions will sunset or undergo significant changes. Understanding these upcoming changes is essential for corporate tax and accounting teams to prepare effectively and mitigate potential impacts.

Key implications for corporations include:

• Increased tax liabilities: The expiration of certain deductions and tax credits may result in higher overall tax obligations.

• Additional compliance challenges: Reverting to pre-2017 tax policies could lead to additional compliance burdens and operational complexities.

• Financial planning adjustments: Changes in tax policy may affect profitability forecasts, impacting financial decision-making and investment opportunities.

Federal budget negotiations and corporate tax reform

The Republican-led Congress is expected to preserve and extend as much of the 2017 tax law as possible. However, as Congress works to adopt a budget resolution for 2025 and 2026, legislators will need to balance the loss of corporate tax revenue with concerns about a ballooning federal deficit.

The Joint Committee on Taxation (JCT) estimates that the TCJA will add $1.5 trillion to the federal deficit over the next 10 years. Extending its provisions past its 2025 expiration date is estimated to cost $4.6 trillion over the next decade, according to the Congressional Budget Office (CBO).

TCJA impact on business tax credits

House Democrats have pushed for TCJA extensions to be offset, alongside some Republican budget hawks. Repealing the green energy tax credits that were created as part of the 2022 Inflation Reduction Act could be an approach to offsetting an extension of TCJA provisions, however it could be a tough sell among Republicans representing districts where these energy tax credits have fueled manufacturing investments and job growth.

Understanding the TCJA corporate provisions

At its core, the TCJA aimed to make the U.S. corporate tax system more competitive by lowering the corporate tax rate and incentivizing domestic production and innovation.

Its key provisions include:

• Corporate tax rate reduction: The corporate tax rate was lowered from 35% to a flat 21%. While this reduction is permanent, potential policy changes tied to the TCJA could change that rate in the future.

• Pass-through income deduction: Through TCJA’s Section 199A, eligible pass-through entities were able to deduct up to 20% of their qualified business income (QBI), offering substantial tax benefits. This QBI deduction was intended to provide tax relief to pass-through entities in the same way that the lower corporate tax rate reduced the tax burden for C-corporations.

• Bonus depreciation: The TCJA raised the bonus depreciation rate to allow businesses to claim a 100% depreciation deduction for qualifying assets in the first year the property was placed in service, incentivizing immediate capital investment and promoting business growth.

• International tax provisions: Prior to 2017, the U.S. had the third-highest effective corporate tax rate of G-20 countries, which led many companies to shift profits overseas to countries with lower tax rates. The TCJA implemented three new international frameworks to combat erosion of the U.S. tax base and ensure multinational corporations pay their fair share of taxes: the global intangible low-taxed income (GILTI) tax, foreign-derived intangible income (FDII) tax, and the base erosion anti-abuse tax (BEAT).

These provisions are subject to significant changes after 2025, requiring careful consideration for long-term planning.

Expiring TCJA tax benefits

Corporations need to be aware of several expiring provisions that could significantly impact their future tax liabilities:

• Interest expense deduction limitations: The TCJA limited the amount of business interest expense that could be deducted to 30% of adjusted taxable income (ATI). Since 2022, taxpayers can now include depreciation and amortization in their ATI calculations, lowering their ATI and further limiting deductible interest. If the TCJA provision expires, these deduction limits will become stricter, giving companies fewer options for deducting interest expenses and increasing their effective tax liability. This provision may further constrain highly leveraged industries in particular, such as manufacturing and real estate, that carry heavy debt loads and have high depreciation and amortization expenses.

• QBI deduction: Unlike the corporate tax rate provision, the 20% Section 199A deduction for qualified business income – available to certain pass-through entities such as partnerships, S-corporations, and sole proprietorships – will expire, resulting in higher tax burdens for affected businesses.

• Bonus depreciation: The 100% bonus depreciation benefit will be incrementally phased out starting in the 2024 tax year and will be fully eliminated by 2027. Beginning in 2026, businesses will no longer be able to immediately deduct the full cost of qualifying assets, affecting cash flow and tax planning strategies.

These upcoming changes make the “tax cliff” a pressing concern and highlight the importance of proactive tax planning. Businesses should assess the potential impact of these provisions now to mitigate the risk of higher effective tax rates and ensure compliance with evolving regulations.

How TCJA affects corporate tax rates

The TCJA reduced the corporate tax rate to a flat 21% from 35%, which had been the maximum corporate tax rate since 1993. The 21% corporate tax rate isn’t subject to expiration and is therefore unlikely to change immediately post-2025, unless Congress makes an affirmative change. However, businesses should monitor ongoing discussions about rate adjustments depending on evolving economic and political priorities.

During the 2024 presidential campaign, Trump said he intends to further lower the corporate tax rate to 15% for companies that manufacture their products in the U.S. Although this policy is meant to bolster domestic jobs and stimulate economic growth, an additional corporate tax cut would further contribute to the projected $4.6 trillion deficit that would result from fully extending the TCJA. Without offsets, Trump’s proposed tax plan would increase the national debt by $7.75 trillion through 2035, according to the U.S. Budget Watch.

Lowering the corporate tax rate was intended to fuel U.S. investment and boost wages for U.S. workers. But since the TCJA was enacted in 2017, most workers haven’t seen a change in earnings, according to a joint study from the JCT and Federal Reserve economists. Instead, with lower tax liabilities and increased cash on hand, many corporations have instead bought back stock, which has largely benefited shareholders and investors.

Global tax provisions under the TCJA

GILTI and FDII tax rates are scheduled to increase, while deductions tied to these provisions will decrease, further raising the tax burden for multinational corporations:

• GILTI is a global minimum tax that U.S. multinational corporations pay on certain foreign net income. Unless modified by Congress, the current 10.5% GILTI tax rate will increase to 13.125% for tax years after 2025.
• FDII is a counterpart to GILTI, aiming to incentivize U.S. corporations to derive income from foreign sales by providing a tax deduction. Under the TCJA, FDII income is currently taxed at a 13.125% rate. If Congress doesn’t extend the TCJA provision, the FDII effective tax rate will increase to 16.4% for tax years after 2025.
• BEAT is a 10% additional tax – 11% for bankers and dealers – over a 3% limit on base erosion payments. Under the current TCJA regime, several tax credits – such as the R&D and production tax credits – can be used to offset tax liability. Unless Congress takes legislative action, the BEAT rate will increase to 12.5% for businesses and 13.5% for dealers for tax years after 2025 – and credits will no longer apply.

If the TCJA’s three international provisions are extended at their current rate, the CBO projects that it will reduce federal tax revenue by $120 billion for GILTI and FDII and $21 billion for BEAT. Lawmakers might let all of some of these global TCJA provisions expire to increase revenue and offset other TCJA provision extensions, or they could implement broader tax reforms. For example, some lawmakers have discussed either revising the expense allocation within GILTI, reducing the foreign tax credit, or allowing carryforwards of the foreign tax credit.

SALT deduction limits under TCJA expiration

The TCJA introduced a cap on state and local tax (SALT) deductions to $10,000 annually for individuals. While this provision primarily affects high-income earners in high-tax states, its expiration will have significant implications for partnerships and pass-through entities that operate on both the individual and organizational tax level.

If the SALT deduction cap is repealed or modified, pass-through entities and partnerships may need to reevaluate their state-level tax strategies to optimize deductions. However, this aspect of tax policy has become highly politicized and therefore remains uncertain. Businesses should monitor developments closely to adapt their planning accordingly.

[Tax Policy Perspectives in 2025: Watch a replay of critical updates and insights from leading experts on what these tax policy developments mean for the near future.]