Following the Republican victory in the 2024 election and the reelection of President Donald Trump, tax reform and political changes are at the forefront of every accountant's agenda.
The inauguration of Trump signals a dramatic shift in the tax landscape, with significant reforms expected to impact businesses and individuals. Accountants must remain vigilant, understanding how proposed changes may affect their clients and their own advisory strategies.
Tax considerations for construction project timing
Accountants must carefully evaluate how potential tax reforms under Trump's presidency could affect the timing of taxpayer construction projects. Trump has expressed potential intent to cut Inflation Reduction Act spending and to roll back President Biden's climate and energy policies. Changes to IRA credits, particularly those tied to renewable energy and infrastructure investments, may alter their availability or size, prompting the need for accelerated project completion to maximize benefits before credits phase out.
Potential tax change: For qualified assets, 100% accelerated bonus depreciation may return. Currently, the ability to claim a full depreciation deduction is being phased down and will be eliminated for most properties placed in service starting in 2027.
Adjustments to the bonus depreciation rates could provide further incentives to change the timing of construction projects, allowing taxpayers to take advantage of expanded accelerated depreciation for such projects in the future. Additionally, accountants should help clients weigh the trade-off between immediate cash tax savings from deductions, such as accelerated depreciation, and the long-term value of tax credits.
Accountants and taxpayers should weigh the potential for changes to existing credits and future depreciation rates and model these scenarios when considering the timing of substantial construction projects.
Considerations for business entity selection and pending tax reform
Proposed changes, including a reduced corporate tax rate, raise critical questions about entity selection and tax structure.
Potential tax change: Trump has proposed decreasing the corporate tax rate from 21% to 20%, and potentially to as low as 15% for companies that manufacture in the U.S.
The possibility of a flat 15% corporate tax rate has significant implications. Accountants should evaluate the tax impact of potential changes to the corporate tax rate when reviewing current pass-through entity tax structures and consider the total effective tax rate and other compliance issues. For example, lower corporate federal rates may offset the complexity of state taxes with varying pass-through entity tax regimes. Additionally, pass-through owner capital gains rates — including the net investment tax, potential limitations on deductions such as pass-through owner health insurance expenses, and payroll taxes, among other tax considerations — may necessitate a closer look at current tax entity selections.
The tax rate implications above also must factor in Section 199A, which offers a 20% deduction for qualified business income. Personal rate adjustments could affect the overall value of the deduction. Clients engaged in specified service trade or business activities generally are excluded above certain income thresholds. Those businesses that are not included in the SSTB category still must satisfy certain W-2 wage and or basis in property metrics to claim the deduction.
Tax reform hurdles: Political and policy challenges
The path to tax reform is full of obstacles that could shape the timing and substance of the legislation. A single comprehensive bill may face greater political resistance but offers holistic reform, while dividing reform into smaller bills could address priorities piecemeal but delay broader implementation.
Potential tax change: Trump indicated that he would reverse a provision of his 2017 tax cut package that limited Americans' ability to deduct state and local taxes on their federal returns.
Negotiations around the state and local tax deduction are an example of policy differences that could shape both the legislation but also the timing. Beyond the political debate, reconciliation rules limit provisions to those directly affecting the federal budget as well as other limitations. Certain items on the tax reform agenda could be limited by the budget reconciliation process. Lastly, shifts in Congressional Budget Office scoring methods may impact tax reform dynamics.
Tax planning for a decreasing rate environment
A reduction in corporate tax rates offers planning opportunities and challenges. Accountants should model scenarios to recommend strategies to defer income or accelerate expenses to take advantage of rate reductions. Timing differences, such as accelerated deductions or deferred income recognition, can create permanent tax savings in changing rate environments.
Accountants must consider the impact of these adjustments on financial statements. Accountants should prepare for the reevaluation of deferred tax assets and liabilities under new tax rates and communicate potential impacts on earnings and disclosures to stakeholders. Additionally, timing considerations will be at the forefront as the enactment date of potential future legislation will need to be considered for financial statement purposes.
Opportunities for accountants
The shifting tax landscape following the presidency of Trump presents numerous opportunities and challenges for tax professionals. By adopting a proactive, advisory-focused approach, accountants can add significant value to their clients. By not only understanding the intricacies of new tax laws but also providing strategic tax planning that aligns with clients' financial goals.
