Executive Highlights – What Happens if President-elect Trump Extends 2017 Tax Cuts and Jobs Act (TCJA)?

Tax Cuts and Jobs Act

The Tax Cuts and Jobs Act (TCJA) was a major change in tax codes, signed into law by President-Elect Donald Trump in his previous term, and put into effect on January 1st, 2018. The tax reform resulted in various changes for federal individuals and businesses.[1] The goal of the cut was to accelerate economic growth and create a more business-friendly environment in the United States.

S-Corporations versus C-Corporations

S-corporations and C-corporations are tax elections that decide whether the business or shareholders must pay the tax on corporate profit. S-corporations are pass-through entities, which are businesses that are structured so that the shareholders of the company record the company’s net income as personal income according to the pro-rata ownership of the company. Those shareholders then pay personal income tax on their share of corporate profits. Currently, S-corporations are typically more beneficial for smaller businesses with less complicated ownership groups who can distribute profits among shareholders and enjoy lower taxes compared to the standard corporate tax rate combined with a personal income tax on dividends paid to shareholders under a normal C-corp.

Some S-corporations received a specific benefit from the TCJA called the qualified business income (QBI) deduction, which granted a 20% tax deduction on their pass-through taxable business income. Industries that typically qualify for this deduction are typically ones that produce a tangible product such as in the manufacturing and construction industries. Additionally, the tax deduction is typically applied to business owners who fall under the top two tax brackets. For tax year 2025, the top tax rate remains 37% for individual single taxpayers with incomes greater than $626,350 and 35% for incomes over $250,525.[2] The QBI will expire after 2025 unless Congress and President-Elect Trump extend the reform or make it permanent. While we believe the new Trump administration will most likely renew the previous policies, it is still worthwhile for S-corporation shareholders to examine the tax consequences of a potential C-corporation conversion.

The alternative to an S-Corporation would be an old-fashioned C-corporation, which is a tax structure where the company must pay corporate tax on business profits. Then, each individual shareholder will pay taxes at their personal tax rates on any profits that are paid out as dividends. This is referred to as double taxation. Prior to TCJA, the top marginal corporate tax rate was 39%; however, after the 2017 tax reform, the rate decreased to 21% and was made flat. In the case of double taxation, where dividends of C-Corp are paid back to shareholders, the tax rate for an ordinary dividend falls under the owner’s income tax rate, which has a maximum of 37%. However, qualified dividends are taxed at a maximum of 20%. [3] [4]

Trump Administration Plans

Now that President-Elect Trump has secured the 2024 presidential election, along with Republican control of the U.S. House of Representatives and the U.S. Senate, we expect that many of the policies he campaigned for will be put into law by Congress. While campaigning, President-Elect Donald Trump stated that he intends to modify the TCJA, which his party enacted in 2017. Among other adjustments, he claimed that he would intend to further reduce the corporate tax rate to 15% for companies manufacturing their products within the United States.[5] Additionally, President-Elect Trump proposed to reinstate 100% bonus depreciation through 2025 for items in service after December 31st, 2022.

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Which Plans Will be Affected or Expire Come FYE 2025

Corporate Tax Rate:

The corporate tax rate reduction to 21% is a permanent policy that will remain in effect unless modified by a future president and Congress. As noted, changes to the policy are possible, given President Trump's campaign claims of a potential further reduction.

Pass-Through Income Deduction (QBI):

The QBI deduction is set to expire at the end of 2025. Typically, the Republican party and the Trump administration tend to prefer policies that aim to boost small and medium-sized American businesses; therefore, we expect this policy to be extended, as it would be very unlikely that the Trump Administration would propose tax cuts for C-corporations yet remove tax benefits for S-corporations. Additionally, the QBI deduction is extremely popular in the business world, and many groups, such as the National Association of Manufacturers (NAM), have continuously pursued lobbying efforts to ensure that the deduction is renewed at the end of 2025.[6]

Bonus or Accelerated Depreciation and Section 179:

The bonus depreciation credit allows businesses to take an immediate tax deduction on depreciable assets such as equipment and vehicles rather than depreciating the assets over time. This deduction allows businesses to more easily invest in company growth through assets such as vehicles and machinery without having to worry about a large expense. The tax deduction percentage in 2022 was 100% of the asset value and gradually decreased by 20% annually. Starting in 2025, 40% of the asset value can be deducted immediately. ?Additionally, in 2024, the IRC Section 179 tax code also allowed businesses to deduct up to $1.22 million on first-year depreciation of newly purchased assets. However, California tax code Section 179 is limited to only $25,000, a much smaller deduction relative to the federal tax credit given. California does not fully conform to the federal tax code Section 179.

Other Notable Changes:

Further changes introduced by the TCJA that remain relevant include the repeal of the corporate alternative minimum tax, net operating loss carryovers limited to 80% of taxable income, individual state and local tax deductions capped at $10,000, mortgage interest deductions limited to the first $750,000 for used to buy, build, or improve a home, and an increase in the Unified Credit for Estates, which rose to $13.6 million per individual in 2024 due to inflation adjustments. “There are a lot of moving parts to the TCJA that have far-reaching effects from Corporate Tax, Individual Tax, as well as Estate Tax. Be sure to work with your trusted advisors when making decisions that involve TCJA provisions.” says Dan Boele , Partner at leading San Francisco Bay Area accounting firm, Johnston Gremaux & Rossi, LLP .

Scenario Analysis:

Get alongside your accounting and finance team, financial advisor, or CPA, and project taxable income for different scenarios including if the corporate tax rate decreases to 15% or stays the same. This will help strategic planning as businesses will know if they have extra capital to invest in the business for items such as machinery, computers, new hires, or bonuses.

Consider changes in corporate structures:

In addition to planning for potential changes in the corporate tax rate, we recommend looking at the impact of conversion to a C-Corp from an S-Corp should the corporate tax rate be reduced. If the QBI deduction is expanded, it may be worthwhile for qualifying businesses that are currently C-Corporations to examine what the tax liability for their shareholders would be if the business was an S-Corporation.

Wait and See Approach for Capitalization of Fixed Asset Purchases:

As the law is written today, fixed asset purchases like vehicles, machinery, and equipment made in 2025 will still have a 40% bonus tax deduction. We recommend that businesses take a wait-and-see approach to making major capital investments in 2025, since the new administration may renew bonus depreciation for fixed assets at a 100% level for 2025 or 2026.

Not sure where to start? Contact us today.

Author: Youseph Abu-Hajar

About ClearPath Business Advisors:

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[1] U.S. Congress. (2017). H.R.1 - Tax Cuts and Jobs Act. Actions. https://www.congress.gov/bill/115th-congress/house-bill/1/actions.

[2] IRS. (2024, October 22). IRS releases tax inflation adjustments for tax year 2025. https://www.irs.gov/newsroom/irs-releases-tax-inflation-adjustments-for-tax-year-2025.

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[3] Internal Revenue Service. (2023). Topic No. 404 Dividends. https://www.irs.gov/taxtopics/tc404.

[4] Internal Revenue Service. (n.d.). Forming a Corporation. https://www.irs.gov/businesses/small-businesses-self-employed/forming-a-corporation.

[5] S&P Global. (2024, November 12). Credit FAQ: How President-Elect Trump’s tax proposals could affect U.S. companies in 2025. https://www.spglobal.com/ratings/en/research/articles/241112-credit-faq-how-president-elect-trump-s-tax-proposals-could-affect-u-s-companies-in-2025-13319346.

[6] National Association of Manufacturers. (2023). Small Manufacturers: Save the Pass-Through Deduction. Retrieved from https://nam.org/small-manufacturers-save-the-pass-through-deduction-31655/.