With former President Trump's victory in the presidential race and the Republican party's control of both the U.S. House of Representatives (House) and Senate, the framework of potential tax policy changes is coming into focus. With single-party control of the executive branch and Congress, the Republican party is in a favorable position to shape tax proposals and guide them to enactment. However, their slim majorities and budgetary pressures will complicate the implementation of President-elect Trump's tax agenda.

Below is a summary and analysis of President-elect Trump's proposals on key tax issues.

On the campaign trail, former President Trump's tax proposals included:

• Making Permanent Expiring Tax Cuts and Jobs Act (TCJA) Provisions: Maintaining the top marginal individual income tax rate of 37%, which is set to rise to 39.6% upon expiration of TCJA at the end of 2025; continuing the higher exemption amount for estate and gift tax; and extending the 20% deduction for certain sole proprietorships and pass-through entities;
• Reducing the Corporate Tax Rate: Lowering the corporate tax rate to 20% (from 21%), and 15% for companies that manufacture products in the U.S.;
• Restoring the First-Year Deduction for Research and Development Expenses: Giving U.S.-based manufacturers a first-year tax deduction for all research and development expenses, reversing a key limitation from TCJA;
• Eliminating the $10,000 cap on the State and Local Income Tax (SALT) Deduction: Reinstating the full SALT deduction before the $10,000 cap is set to expire at the end of 2025;
• Exempting Tips and Social Security: Making tips for restaurant and hospitality workers as well as Social Security benefits tax free; and
• Allowing a Deduction for Interest Paid on Car Loans: Introducing a tax deduction for personal car loans for U.S.-manufactured vehicles.

Navigating the Legislative Process

After being elected to office, the prospects for any of President-elect Trump's tax proposals becoming law depends on the extent to which each party controls Congress. The Republican party controls both the House and Senate by small margins after the 2024 elections. This puts the Republican party in a position to use the budget reconciliation process to bypass any potential attempts by the Democratic party to defeat tax policy proposals. Available only for fiscal matters, the budget reconciliation process allows legislation to be passed with a simple majority, whereas 60 votes are needed under the regular legislative process. The budget reconciliation process also prevents the opposing party from implementing delay tactics by prohibiting filibusters and setting a time limit on debates and amendments.

As Republicans move forward with budget reconciliation, they will negotiate a maximum budget deficit increase that they are willing to tolerate to extend TCJA items and advance other priorities. The debate within the party will weigh tax cuts against deficit concerns. Tax cuts may spur economic growth which leads to additional tax revenue, but the impact of additional economic growth on the revenue estimates tends to be small relative to the amount of tax revenues lost from tax cuts.

For all of President-elect Trump's advantages, the Republican party's slim majorities in both the House and Senate will make this a challenging process. For example, President Biden's Build Back Better Act stalled in Congress even though the Democratic party controlled both the House and the Senate. The bill passed the House but failed in the Senate after the Democratic party was unable to muster the simple majority needed to pass the law.

Expiring TCJA Provisions

TCJA was hailed by the Trump administration and the Republican party as a major achievement and remains a cornerstone of President-elect Trump's tax proposals. Even though the Democratic party unanimously opposed the measure, Democrats have supported extending the individual tax rates for those with income under $400,000, as well as research expensing and other business extenders.

A potential obstacle to extending the TCJA provisions is the so-called TCJA fiscal cliff approaching at the end of 2025 when temporary provisions such as the individual income tax rates will revert to pre-TCJA levels (the maximum rate of 39.6% from 37%). The Congressional Budget Office estimates that extending the temporary individual income tax rate cuts without budgetary offsets would increase deficits by almost $5 trillion from 2025 to 2034. President-elect Trump has not indicated how the temporary individual income tax provisions or other tax breaks included in TCJA could be permanently extended without dramatically increasing the deficit. Possible solutions include opting for shorter-term extensions, cherry-picking items, or including other revenue raisers.

Important Business Tax Provisions

The fate of other TCJA provisions that limit important deductions is being closely watched by business taxpayers. These include:

• The requirement to capitalize and amortize Sec. 174 research and experimentation (R&E) expenditures for five years for domestic research and 15 years for foreign research. This provision took effect for tax years beginning on or after January 1, 2022. It is an open question as to whether future legislation would apply the capitalization requirement to foreign research;
• The requirement to exclude depreciation and amortization from adjusted taxable income for the business interest expense limitation under Sec. 163(j) for tax years beginning on or after 2021(see this article); and
• The phase down of 100% bonus depreciation, which is at 60% for the 2024 tax year.

While removing these limitations appears to have bipartisan support, a key question is whether the fuller deductions would be reinstated retroactively or applied on a prospective basis.

Summary of President-elect Trump's Positions

Below is a summary of the key tax law changes proposed by President-elect Trump.

The Takeaway

With former President Trump retaking office and the Republican party gaining control of both the House and Senate, the tax proposals shaping the debate are coming into sharper focus. The Republican party has the upper hand in crafting the proposals and enacting them. However, potential obstacles remain. These include the significant cost of extending TCJA's tax breaks during a time of mounting deficits and the slim majorities by which the Republican party controls the House and Senate. The tax changes on the table are sweeping in nature and it is never too early to prepare. Andersen can help you analyze your tax positions and consider options for mitigating the risk of increased tax exposure as a result of major policy changes.