What Is the Future of the TCJA?

What did the TCJA do?

The goal of the TCJA was to stimulate economic growth and simplify the tax code for businesses and individuals.

By lowering the corporate tax rate to 21% from 35%, Republican lawmakers argued that a more favorable tax environment would incentivize businesses to expand U.S. operations and make them more competitive in the global market.

For individuals and families, the standard deduction and maximum child tax credit were doubled, which was intended to lower their tax burden.

However, the Joint Committee on Taxation (JCT) estimates that the TCJA will add $1.5 trillion to the federal deficit over the next 10 years. If further extended post-2025, the law will cost $4.6 trillion over a decade, according to the Congressional Budget Office (CBO).

Will the TCJA be extended?

With a Republican-led Congress and White House, GOP lawmakers are aiming to once again to use the reconciliation process to extend the TCJA. Reconciliation bills bypass typical filibuster rules and require only a simple majority of 51 votes in the Senate.

Provisions must comply with the Byrd Rule, which prohibits reconciliation legislation from raising the deficit beyond a 10-year budget window or making changes to Social Security.

Since lawmakers have not yet adopted a budget resolution for FY25, congressional leaders could turn to the 2025 and 2026 budget frameworks to prepare for reconciliation packages in the first year of the 119th Congress.

What would a reconciliation bill look like?

In this clip, tax experts discuss budget reconciliation do’s and don’ts and what a reconciliation bill could look like in 2025. Watch the full replay.

What will be the source of funding for TCJA extensions?

President-elect Trump has called for 60% tariffs on Chinese imports and 20% on imports from other nations – a move that most economists say would hike up consumer prices. Trump’s tariff proposals have received lukewarm response from Republicans in Congress who remain wary of the potential economic repercussions.

Green energy tax credits from the 2022 Inflation Reduction Act may be eyed as offsets to extend the TCJA’s provisions. Yet, that approach could be a tough sell among Republicans representing districts where these energy tax credits fueled big projects.

House Democrats will push for more of the bill to be offset, alongside some GOP budget hawks. But many lawmakers subscribe to the refuted notion of pay-fors – that provisions will pay-for-themselves with economic growth.

How does the TCJA affect businesses?

Businesses of all sizes have been impacted by the TCJA. Large corporations benefit from a lower corporate tax rate of 21% from the former 35%. Certain small and medium-sized businesses can claim a 20% pass-through deduction to reduce their owners’ effective tax rate on the business’ net income.

With Republicans securing legislative control, lawmakers are likely to extend many provisions. However, some concessions will need to be made in order to balance tax cuts with deficit concerns and spending needs. The following sections discuss key business provisions in more depth.

Corporate tax rate

The TCJA reduced the corporate tax rate to 21% flat from a maximum of 35%, a rate it had been since 1993. This rate is not subject to expiration, unless Congress makes an affirmative change.

While on the campaign trail, Trump stated that he intends to further lower the corporate tax rate to 15% for companies that make their products in America. Although this idea is meant to bolster jobs in the U.S. and stimulate economic growth, a lower corporate tax cut would further contribute to a $4.6 trillion added deficit if the TCJA is fully extended.

Lowering the corporate tax rate was meant to fuel U.S. investment and boost wages for U.S. workers. But after the TCJA was enacted, the majority of workers – those within the 90th percentile of a firm’s income distribution – didn’t see a change in earnings, according to a joint study from JCT and Federal Reserve economists.

With lowered tax liabilities and increased cash at hand, many corporations have instead bought back stock, which has largely benefited shareholders and investors.

S&P 500 annual buyback executions

This graph shows a rising trend of S&P 500 stock repurchases YOY. Source: Bloomberg.

Barring the 2020 recession, there has been an incremental rise in S&P 500 annual buybacks since the TCJA was enacted. By 2025, U.S. corporate buybacks are projected to hit $1 trillion, according to Goldman Sachs Global Investment Research.

Some argue that stock buybacks are not necessarily a bad thing, if the cash returned to shareholders is reinvested elsewhere, or if the company makes simultaneous investments in capital and research and development (R&D). Others contend that this practice favors wealthy individuals and widens the equity gap.

Pass-through income deduction

The TCJA enacted section 199A, which provides individuals a deduction of up to 20% of qualifying business income (QBI) from domestic businesses operated in a pass-through form, such as partnerships, sole proprietorships, S-corporations, trusts, and estates.

There are some limitations, including:

• The deduction phases out above certain income levels for specific trades or businesses, such as health, law, accounting, consulting, and financial services.
• The deduction is limited based either on wages paid or wages paid plus certain capital expenditures.
• These limitations do not apply to owners whose incomes are below a certain threshold – and they phase in above that threshold.

The purpose of the deduction was to grant tax relief to pass-through businesses owners in the same way that the TCJA reduced the tax burden for C-corporations. While the corporate tax cut was made permanent, the section 199A deduction is temporary and will expire at the end of 2025, unless Congress extends or alters this provision.

199A qualified business income deduction formula

The formula below illustrates the allowable qualified business income (QBI) deduction for tax years beginning after Dec. 31, 2017, and before Jan. 1, 2026.

Business expensing deductions

R&D amortization

Beginning in 2022, businesses must amortize domestic R&D expenses over five years and foreign R&D expenses over 15 years. They used to be able to deduct the full amount of R&D expenses each year, which is something many industry groups hope to return to.

The Wyden-Smith bill aims to restore immediate expensing. But to date, the legislation is languishing in the Senate due to a child tax credit “lookback” provision. The amortization requirement will remain in effect unless Congress modifies or repeals it.

Section 163(j) interest expense limitation

The TCJA included a provision to tighten adjusted taxable income (ATI) calculations, which went from earnings before interest, taxes, depreciation, and amortization (EBITDA), to earnings before interest and taxes (EBIT).

Since 2022, taxpayers can no longer add back depreciation and amortization to ATI, so interest deductions are currently limited to 30% of EBIT. Many have advocated for restoring the EBITDA measurement retroactively, especially those in industries such as manufacturing and real estate, which carry heavy debt loads and have high depreciation and amortization expenses.

Section 168(k) bonus depreciation

The TCJA raised the rate and established a phase-out schedule for bonus depreciation, under which businesses were able to claim a 100% depreciation deduction on qualifying property in the first year the asset was placed in service. Unless the law changes, the phase-out schedule, for qualified property other than long production period property and aircraft, is:

Bonus depreciation phase-out schedule

[Exclusive report: Gain access to our complimentary report on all of the TCJA’s expiring provisions, with links to relevant code sections. Download your free copy.]