If President Trump’s campaign promises hold true, the 2025 tax implications for businesses could be significant. He pledged to extend or make permanent many of the provisions of his 2017 Tax Cut and Jobs Act (TCJA), and with the help of a Republican majority in both the House and Senate, he may be able to get many of those measures passed. Here’s a recap of this topic that Rob Roach, Director of Underwriting at Oak Street Funding, and Steve Blake, Managing Director at CBIZ, discussed recently on our OnPoint podcast.
Given the lightning-fast way President Trump is enacting his policies, it’s likely we’ll see one or more tax bills introduced within his first 100 days in office. It’s not clear whether Republican legislators will try to include all of Trump’s tax provisions in one bill or spread them out, but there’s little doubt that Trump’s desired tax changes will be introduced for debate.
The Big Three provisions President Trump wants most deal with the interest deduction limitation, bonus depreciation, and research and development expensing. Also on the table are changes to deductibility of state and local taxes, overall reduction in tax rates, and changes to the unified exemption for estate and gift tax. We’ll dive further into those topics in this blog.
Trump is seeking a change in how interest deductions are calculated so businesses and individuals can deduct more of the interest on their loans. Under the 2017 TCJA, the maximum deduction for business interest was raised. In 2022, under Section 163(j) of the Internal Revenue Service Code, that limitation became more restrictive. President Trump would like to reverse the changes from 2022 and have interest deductibility return to the levels set forth in the TCJA.
When businesses can deduct more interest expense, they pay lower taxes, which has a positive effect on cash flow and liquidity. If enacted, this tax change may make it more attractive to use debt financing for mergers and acquisitions (M&A) or succession planning.
The bonus depreciation provision of the TCJA allowed businesses to buy capital assets and write off 100% of the cost in the first year. The allowable percentage dropped each year and is set to expire in 2027. Experts think that Republicans will be looking to extend 100% bonus depreciation until the end of 2025, then perhaps allow 20% depreciation in 2026 with no bonus thereafter.
Like the proposed changes to interest deductibility, bringing bonus depreciation back to 100% would reduce tax bills for businesses. This proposed tax provision would make it more attractive for businesses to invest in big-ticket items such as new computers or software systems. It would also free up cash for other expansion activities such as M&A.
The third provision of the Big Three applies to accounting for R&D expenses. Historically, R&D expenses had to be spread out over several years. President Trump is pushing to allow businesses to claim R&D costs as expenses in the year they are incurred. The aim of this change is to lower business taxes and spur innovation.
Businesses that invest in R&D would likely have lower tax liabilities under this proposed policy. Lower taxes mean more cash available for other investments and growth opportunities such as expansion through M&A.
Removal of SALT cap – To help offset the cost of the 2017 tax cuts, the TCJA included a provision to limit the amount of state and local taxes (SALT) taxpayers could deduct on their federal returns to $10,000. President Trump and legislators from both parties are calling for either an increase in the cap or its full repeal.
The implications of increasing (or repealing) the cap are positive for borrowers. A business owner wanting to use debt financing to pay for technology upgrades or as part of an M&A deal will be in a better position with their personal finances if they have a lower tax bill. Lenders look at borrowers’ personal finances in addition to the finances of the business because they want to see that the borrower can inject capital into the company if needed.
Reducing tax rates – The TCJA dropped the corporate tax to a flat 21% for all businesses, regardless of size. That level is the lowest maximum U.S. corporate tax rate since 1939, and the Trump administration wants to make that level permanent. It’s even been suggested that the rate be lowered to 15% for companies who manufacture products in the United States.
Unified exemption for estate and gift tax – With the TCJA, the lifetime exemption for estate and gift taxes was raised to approximately $13 million. At the end of 2025, it is scheduled to drop to about $5 million. The Trump administration hopes to extend or make permanent the $13 million exemption level.
The 2025 tax implications for M&A activity look positive. Companies that are paying less in taxes (from lower rates and higher deductions) and less in interest (from potentially lower interest rates) will have better working capital ratios, a standard measure of liquidity and an indicator of a business’s ability to meet its current financial obligations.
These projected changes can also impact business valuations. The improved accounting ratios strengthen the balance sheet and allow an owner to negotiate more effectively with potential buyers increasing the value of the business.
Some experts suggest that business owners file for an extension rather than submit their final returns by April 15. Their reasoning is that some of the tax changes – which probably cannot be passed until April or May – may be made retroactive. A CPA and tax attorney can provide expert advice on this decision.
This year looks promising for M&A activity. It’s never too early to talk with a CPA, attorney, and trusted lender, such as Oak Street Funding, to begin exploring the landscape and start planning for the future.