Editor’s note: This article was finalized prior to President Donald Trump’s imposition of tariffs on Canada, Mexico, and China.
January marked the beginning of the 119th Congress and President Donald Trump’s return to the White House. With full Republican control of the legislative and executive branches of government, Republicans are seeking to take advantage of the momentum from the election to accomplish major legislative goals, and tax policy has emerged as a top priority. Many changes to the tax laws enacted under Trump’s first term will expire at the end of 2025. Although cutting taxes is generally an evergreen policy objective of the Republican Party, the pending expiration of these provisions has created a deadline for Congress to extend some or all of them. Notwithstanding numerous procedural and political hurdles, congressional Republicans are making a strong push for tax legislation early in 2025. Accordingly, taxpayers should be prepared to advocate for their top tax priorities now that the 119th Congress has gaveled into session.
Political Stage Setting
On January 20, Trump was sworn in as the forty-seventh president of the United States after securing what he has called a “mandate” in November’s election. Trump won all seven swing states, the popular vote, and the Electoral College, and the Republicans went on to win majorities in the House of Representatives and the Senate. Senate Republicans took back the chamber by flipping four seats to secure a fifty-three to forty-seven majority.
Meanwhile, House Republicans held on to a razor-thin majority—which is subject to temporary thinning by presidential nominations of members of Congress to serve in the Trump administration.
In the House, the narrow Republican majority creates a correspondingly narrow margin for error when passing legislation. The House requires 218 members for a majority, and although Republicans have met this minimum threshold, their majority is only 220 members strong. However, resignations and departures for the Trump administration have reduced the Republican majority to 217. With a zero-vote margin, Mike Johnson (R-LA), reelected by Republicans to serve another term as Speaker of the House, is at pains to lose the vote of even a single member when seeking to pass legislation on the floor. It is highly unlikely that any significant Republican legislation will receive votes of support from House Democrats, who will continue to be led by Hakeem Jeffries (D-NY) as minority leader. The Committee on Ways and Means (responsible for drafting tax legislation in the House) currently has twenty-six Republican members, led by chairman Jason Smith (R-MO), and nineteen Democratic members, led by ranking member Richard Neal (D-MA). The Republicans added four new members to the committee: Aaron Bean (R-FL), Max Miller (R-OH), Nathaniel Moran (R-TX), and Rudy Yakym (R-IN); representatives Tom Suozzi (D-NY), Brendan Boyle (D-PA), and Stacey Plaskett (D-VI) have re-joined the Democratic side of the dais.
In the Senate, the fifty-three-seat Republican majority makes the votes of moderate Republicans like Todd Young (R-IN), Lisa Murkowski (R-AK), and Susan Collins (R-ME) critical for legislation passed by a simple majority. Majority leader John Thune (R-SD), recently elected by Senate Republicans to replace long-serving former majority leader Mitch McConnell (R-KY), is focused on shepherding a 2025 tax package through the Senate. During his leadership campaign, he highlighted his time on the Committee on Finance (the tax-writing committee in the Senate) and bringing his past tax legislative experience to his leadership role. While Thune keeps his seat on Senate Finance while serving in leadership, Senator Mike Crapo (R-ID) holds the chairman’s gavel. Chuck Schumer (D-NY) continues to lead Senate Democrats, but as the minority leader, and Ron Wyden (D-OR) continues to lead the Senate Finance Democrats as ranking member. The Senate Finance Committee has a fourteen-to-thirteen ratio with Senators Roger Marshall (R-KS), Bernie Sanders (I-VT), Tina Smith (D-MN), Ben Ray Luján (D-NM), Raphael Warnock (D-GA), and Peter Welch (D-VT) joining.
During the 2024 campaigns, Republican candidates for federal office campaigned hard on extending the Tax Cuts and Jobs Act (TCJA), parts of which expire at the end of 2025, making their extension a top Republican priority in this Congress. Trump also campaigned on a number of other tax policy proposals, including further reducing the corporate income tax rate; repealing energy tax incentives enacted under the Inflation Reduction Act of 2022 (IRA); and exempting tips, overtime pay, and Social Security benefits from taxation, among others. Given Republicans’ focus on tax policy during the campaign and Republican control of the White House and Congress, tax directors should expect a tax legislative package to come together in 2025 and should prepare accordingly.
How the 2024 Election Impacts 2025 Tax Legislative Activity
Expiring and Changing TCJA Provisions
The TCJA was a signature congressional accomplishment during Trump’s first term. However, many TCJA provisions expire at the end of 2025. Although the corporate income tax rate reduction under TCJA was made permanent, provisions such as the reduced individual income tax rates and the Section 199A pass-through deduction are set to expire at the end of 2025.1 Other TCJA provisions have already either begun phasing out, such as bonus depreciation, or expired, such as full expensing of research and development (R&D) costs and using earnings before taxes, interest, depreciation and amortization (EBITDA) for determining deductible interest. Certain international provisions created under the TCJA—GILTI, FDII, and BEAT—do not expire, but the formulas for calculating each will generally become less favorable to taxpayers at the end of 2025.
Section 199A Pass-Through Deduction and Individual Income Tax Rates
The individual income tax rates apply to the taxation of business income of pass-through entities, such as partnerships, S corporations, and sole proprietorships. Under the TCJA, Congress provided a deduction for twenty percent of the qualified business income of a pass-through entity, subject to certain limitations, under Section 199A.
Congress intended this deduction to lower the effective tax rate for pass-through business entities so that income tax rates applied to pass-throughs and C corporations would be comparable. Whereas the corporate income tax rate reduction from thirty-five percent to twenty-one percent under the TCJA was made permanent, the Section 199A pass-through deduction expires at the end of 2025.
Compounding the impact of the loss of the Section 199A deduction for pass-throughs, the individual income tax rate reductions under the TCJA will also revert to the higher, pre-TCJA levels at the end of 2025. The top income tax rate increases from thirty-seven percent to 39.6 percent. If no legislative changes to these provisions are enacted, pass-through businesses can expect a significantly higher tax bill. These two issues are front and center as Congress negotiates a tax package, because Trump wants to make many of the individual TCJA provisions—including the lower individual rates and the Section 199A pass-through deduction—permanent.
Bonus Depreciation
From 2018 through 2022, the TCJA provided for 100 percent bonus depreciation, or full expensing, under Section 168(k). Congress sought to encourage investment and spur economic growth by allowing businesses to immediately recover the full cost of property in the year in which it was placed in service. However, the 100 percent bonus depreciation began phasing down in twenty percent annual increments starting in 2023, until being completely phased out beginning in 2027. Bonus depreciation allowed many businesses to significantly reduce income tax liability, and Trump proposed reinstating 100 percent bonus depreciation while on the campaign trail.
R&D Amortization
While businesses could previously deduct R&D costs fully and immediately under Section 174, the TCJA required R&D costs to be capitalized and amortized over five years (for domestic research efforts) or fifteen years (for foreign research efforts), beginning in 2022. Although reinstating full deductibility of these expenses under Section 174 has been the subject of robust lobbying efforts and multiple legislative proposals, Congress has not yet passed legislation to reflect its long-standing policy of immediate R&D expensing. Continuing the theme of encouraging domestic production, many proposals to reinstate full and immediate R&D expensing have focused on providing the benefit for domestically incurred R&D expenses, while leaving foreign-incurred R&D expenses to be amortized over fifteen years.
EBITDA
Starting in 2022, the TCJA limited the business interest deduction to thirty percent of a company’s earnings before interest and taxes (EBIT) rather than EBITDA. Last year, the House voted to reinstate EBITDA through 2025 as part of broader legislation that also included a temporary extension of immediate expensing for R&D costs. Although the bill ran aground last August on a procedural vote in the Senate, bipartisan support for expensing R&D costs and reinstating EBITDA remains fairly strong in this new Congress. However, cost constraints and competing tax priorities may stand in the way.
GILTI
In 2017, Congress sought to move the United States closer to a territorial system of international taxation. Enacted under the TCJA as part of this initiative, GILTI (global intangible low-taxed income) is a minimum tax on the active foreign earnings of a controlled foreign corporation (CFC) that are deemed to be attributable to exploiting intangibles held abroad. The GILTI statutory rate is 10.5 percent, half of the twenty-one percent corporate income tax rate. However, at the end of 2025, the GILTI rate will increase to 13.125 percent. When accounting for the twenty percent haircut to the GILTI foreign tax credit (FTC), the effective rate is 13.125 percent and will be 16.406 percent following the statutory rate increase. Retaining the lower 10.5 percent rate may be considered in a TCJA extension package; however, Trump has discussed a smaller increase in the statutory rate—to 12.5 percent. The ultimate rate depends on budget constraints under the reconciliation process because the built-in rate increase could raise revenue for other tax policy priorities.
FDII
The carrot to the GILTI stick, FDII (foreign-derived intangible income) provides a deduction designed to equalize the rates on income generated from the exploitation of intangibles held in the United States (FDII) and abroad (GILTI). Currently, the FDII deduction rate is 37.5 percent, which results in a 13.125 percent rate. In 2025, this deduction rate will decrease to 21.875 percent, resulting in a 16.406 percent rate. A renewal of the TCJA may extend the higher deduction rate and lower effective rate, but Trump proposed a slight reduction of the FDII effective rate without extending the current reduced rate, similar to his GILTI proposal. For FDII, Trump has proposed reducing the effective rate from 16.406 percent to fifteen percent. Again, the ultimate deduction rate for FDII will likely hinge on available revenue under reconciliation’s scoring rules.
BEAT
Another TCJA creation, the BEAT (base erosion and anti-abuse tax) is intended to deter the erosion of the US tax base by disallowing deductions attributable to certain outbound payments. The BEAT rate will increase from ten percent to 12.5 percent at the end of 2025. Although a TCJA extension could continue the ten percent rate, Trump proposed maintaining the pending rate increase.
Tax Policy Proposals From the
Campaign Trail
While campaigning, Trump raised tax policy proposals that went beyond extending the TCJA. For example, he proposed further lowering the corporate income tax rate; repealing energy tax credits under the IRA; exempting tips, Social Security benefits, and overtime pay from taxation; and clawing back some of the special allocation of Internal Revenue Service (IRS) funding enacted under the IRA.
Adjusting the Corporate Income Tax Rate
Republicans have long focused on lowering the corporate income tax rate. During his first term in office, Trump sought to lower the rate from thirty-five percent to fifteen percent. Under the TCJA, the corporate rate was permanently lowered to twenty-one percent. Trump has continued to push for his preference for round numbers by further reducing the corporate rate to twenty percent. On the campaign trail, he also proposed reducing the corporate rate to fifteen percent exclusively for domestic manufacturing companies.
There are cross currents at play on the corporate rate. Although the twenty-one percent corporate rate is not set to expire, some House Republicans may be open to increasing it. Specifically, the chairman of the House Ways and Means Committee, Jason Smith, has publicly acknowledged that there are Republican members open to changing the corporate rate when considering a tax package in 2025, stating that “everything will be on the table.” In the Senate, however, it’s hard to find Republican support for increasing the corporate rate. Given this potential for intraparty conflict and ever-present revenue constraints, C corporations should always keep an ear to the ground on potential changes to the corporate tax rate.
Repealing IRA Energy Credits
Since its passage in 2022, the IRA’s various energy tax credits have been under repeated fire from Republicans. While a full repeal of the IRA green energy tax incentives is unlikely, in part because the credits incentivized investment in red congressional districts, certain provisions have drawn particular scorn, such as tax credits related to electric vehicles (EVs). For example, Trump has vowed to “repeal the EV mandate.” The Joint Committee on Taxation estimates that the cost of all IRA green energy tax credits will be $650 billion through fiscal year 2033. Given the substantial cost, the EV provisions are prime candidates for repeal (either in whole or in some combination) to offset the cost of expanding and extending Republicans’ other tax policy priorities.
Exempting Tips, Social Security Benefits, and Overtime Pay From Taxation
The 2024 campaign had no shortage of tax proposals. A few of the tax changes Trump championed include exempting tips, Social Security benefits, and overtime pay from taxation. Directed at individuals and blue-collar workers especially, the populist proposals exempting tip income and overtime pay could affect how employers hire and schedule staff. Specifically, his intention in proposing an exemption for overtime pay from taxation is to encourage increased worker productivity.
Reducing IRS Funding
The IRA initially provided for $80 billion in increased funding to the IRS. Congressional Republicans rescinded $26.1 billion of the funding, and it is unlikely they will stop there. The clawback is expected to continue, potentially affecting customer service and audit activity.
Procedural Hurdles: The Reconciliation Process
Republican control of the House, Senate, and White House paves the way for budget reconciliation, a process that allows legislation to pass the Senate with only a simple majority vote, rather than the otherwise required sixty votes, and no filibusters. However, the reconciliation process comes with important limitations in terms of the content of the legislation and its impact on the national deficit. Generally, the rules require that reconciliation provisions must relate to federal revenues or spending and prohibit reconciliation proposals from increasing the federal debt beyond a ten-year budget window. For a 2025 reconciliation package, the ten-year budget window would be from 2026 to 2035. However, a reconciliation measure generally may not change Social Security or other laws beyond the scope of the federal budget. The Senate Parliamentarian makes the final call on any provisions that violate the budget reconciliation rules. These parameters resulted in the TCJA, passed under reconciliation, sunsetting many provisions inside the ten-year budget window to prevent a long-term deficit increase—resulting in the 2025 “cliffs” associated with the various provisions outlined previously. While the content restrictions placed on reconciliation bills could prevent Congress from including a provision fulfilling Trump’s campaign promise to exempt Social Security benefits from taxation, the deficit-increasing constraints on reconciliation legislation pose a much greater hurdle to passing a tax package.
Deficit concerns will play a crucial role in a 2025 reconciliation process. When passing legislation under reconciliation, the House and Senate must agree on the amount of deficit financing the legislation will allow. For that reason, deficit hawks in Congress will likely be a tough but crucial voting bloc for any reconciliation bill. Extending the TCJA’s expiring provisions alone before accounting for any of Trump’s other tax policy proposals from the campaign trail is estimated to cost $4.6 trillion over ten years. (By comparison, the TCJA was written to a budget reconciliation instruction limiting its cost to $1.5 trillion.) Moreover, the US debt-to-GDP ratio is expected to surpass 100 percent, and the Congressional Budget Office has estimated debt-servicing costs will exceed $1 trillion in 2025. To mitigate the debt burden, Congress may consider increasing the corporate income tax rate, raising tariffs statutorily, repealing at least some of the IRA energy tax credits, allowing the tax increases in the TCJA’s international tax title, and reducing IRS funding. Every percentage point increase in the corporate rate is estimated to raise $125 billion over ten years, but even a ten-percentage-point increase would raise only roughly a quarter of the estimated cost of a straight TCJA extension. And such a large revenue offset is unlikely, given Trump’s preference for further reducing the corporate income tax rate. Any revenues raised by imposing tariffs could be used to offset spending in a reconciliation bill, but only if included as statutory language therein, an option reportedly under consideration. Congress has not passed legislation to raise tariffs in almost 100 years, leaving it to presidents to determine tariff rates. Removing that flexibility may cause longer-term concerns about the ability of Congress to adjust future tariff schedules in a timely manner. Some Republicans—including Trump, Crapo, and Smith—have taken the position that extending TCJA provisions does not have to be paid for if the proposed change simply extends current law. Republican also hope for a revenue boost if legislation is dynamically scored—that is, if it accounts for anticipated economic growth and resulting greater tax revenues as a consequence of the TCJA extension.
Under reconciliation, Republicans can pass legislation in the House and Senate without Democratic support, but there will be significant intraparty negotiations to develop legislation that can pass. For example, Thune and Smith continue to clash over procedure and strategy with regard to whether Republicans should pursue one or two reconciliation bills. The default option now appears to weigh heavily in favor of one massive reconciliation bill that includes taxes, border security, and energy development and production. Slim majorities in each chamber require a unified Republican Party, which has not been a given in recent years. The new three-seat Republican majority in the Senate could be sufficient to pass a reconciliation bill with a few Republican defectors. In the House, the Trump “mandate” may keep Republicans together despite their narrow majority. At the same time, the House members whom Trump tapped to serve in his administration have narrowed the margin of the Republicans’ majority in the House until appointments and special elections can be held to replace the departing members. Strength lies in numbers, and the narrow majority in the House makes full support from each member of the Republican conference that much more critical to the passage of tax legislation via reconciliation in 2025.
Preparing for Upcoming Tax Legislative Activity
The many areas of tax policy and the attendant procedural and political issues highlighted here do not encompass all of the individual and business tax legislative proposals that the 119th Congress will consider, but those discussed here represent some of the most significant in terms of potential impact. As a result, tax directors should work to narrowly identify one or two top priority tax issues. Additionally, some key Republicans in the House have expressed a desire to act quickly and move tax legislation “in the first 100 days.” Regardless of the timeline, tax directors should expect legislation in 2025. Tax reform is almost inevitable in 2025. Not only does the pending expiration of key TCJA provisions provide an impetus for swift legislative action, but an unfavorable electoral map for Senate Republicans in the 2026 midterm elections creates further urgency for passing legislation before Republicans risk losing unified control of Washington, D.C. Whereas the House Republicans’ Q1 2025 timeline may be jeopardized by other must-pass legislative priorities early in 2025 such as the debt limit and government funding, tax directors should nonetheless prepare as if congressional Republicans will take immediate and quick action on tax legislation. This translates into identifying top priorities and preparing now. Meaningful early preparation on a business’ most critical tax policy objectives will allow businesses to maintain focused, consistent, and tailored messaging when advocating before Congress and the Trump administration.
Katherine Lewis is an associate in the tax department at Miller & Chevalier. Patrick Holten is a government affairs specialist at Miller & Chevalier.
Endnotes
- All section references are to the Internal Revenue Code of 1986, as amended.
