What Your Taxes Could Be Like In 2025

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1:41This episode was produced in partnership with CLA. The day after the election, the phone started ringing over at CLA. They're a professional services firm that provides tax and accounting services, and their clients were all calling with the same basic question. It was this, what do the election results mean for me? Though really, you could break that question up into a million smaller questions like, what's going to happen with the Tax Cuts and Jobs Act? How should my tax strategy change? Should I change the structure of my company? Do I approach estate planning differently? And on and on. Because although nobody can say for sure how taxes will change in a second Trump administration, everyone is sure that change will happen and entrepreneurs want to be prepared.

2:25And what kind of change are we talking about? Well, here's perhaps the most obvious one to start. During Trump's first term, Congress passed the Tax Cuts and Jobs Act, which was set to expire in 2025. And if it had expired, that would mean some serious tax changes for businesses. We are going to see 10 percent tax rate increases for business owners or more. In addition to that, a potential lowering by half of the estate tax exemption. That is Leslie. My name is Leslie Boyd, and I am the managing principal of manufacturing for CLA. So in anticipation of the Tax Act expiring, Leslie and her colleagues had been helping clients prepare, doing things like deferring deductions or looking at accelerating income into 2024 and 2025.

3:12But now it seems pretty certain that the Tax Cuts and Jobs Act will be extended. So really, in the span of just a few weeks, the complexion related to tax planning, I believe, has changed very significantly. And so that's where I think Mike could probably give you an overview and landscape as to what will that look like in the next hundred days after the inauguration? And the Mike she's talking about there is her colleague, Mike. My name is Mike Smith. I am a principal in CLA's National Tax Office. Mike says that in 2025, tax policy may change in two distinct moments. The first will be what we've just been talking about, the extension of the Tax Cuts and Jobs Act, or TCJA, as you may hear it described.

3:58That'll probably happen quickly, given that it's mostly an extension of an existing bill, though perhaps with some modifications. And then there will be a second moment. We might see a second bill come down the pike that might include everything else that Trump talked about on the campaign trail. For example, no tax on tips, no tax on Social Security, etc. So in other words, you're looking at two different kinds of changes. The first change is no change. The tax structure we currently have not expiring. So if you were preparing for it to expire, now you have to update your thinking. And the second change is, well, lots of additional change with outcomes that will impact a wide variety of businesses.

4:42And although nobody can predict exactly what will happen, there's plenty that you can do now to prepare. That's what Mike and Leslie do every day at CLA. They help people prepare. And that's what they're going to do today with us on Problem Solvers. We're going to talk in more detail about the anticipated changes and their anticipated impacts and what you can do right now to start setting your business up for success. So let's start by zooming out for a second. When we started our conversation, I said, look, nobody has a crystal ball here. So how can entrepreneurs start to take action now for events in the future?

5:18And Leslie was the first to pick that up. We always tell people that tax planning is always a great idea for your overall financial health. It is probably more important now to be planning constantly on a monthly basis. And so whereas you might previously have said I'm going to do year-end tax planning, now it's something that I think is a frequent dialogue that you need to be having on a regular basis. And there are elements of tax planning that even though we don't know exactly what is going to happen, you can build flexibility into that tax plan. So there are certain levers when you do tax planning that you can pull even after the end of a tax year that might give you flexibility to change your tax picture and potentially create more deductions after the tax year closes if rates are going to change or stay the same.

6:16And those are the types of things that you can model out and say, okay, if this scenario is going to happen, what can I do after the close of the year to change the picture and really create a different situation? So you don't want to wait to have to really create that situation after the end of the year. That's why that planning proactively is so important. But knowing that there are those levers to be able to pull, whether that's saying I'm not going to pay my year-end bonuses by March 15th, or I can choose to accelerate this depreciation, or I can choose to spread that out over a period of time.

6:54Maybe it's looking at certain accounting methods and saying, do I want to make an automatic accounting method change after the year closes? These are all different tools and tactics that you can use to accelerate and defer certain types of income. But you want to make it part of an overall and holistic plan so that you really know what that's going to look like and you can have that peace of mind to cash flow your business. Let's talk about some of the campaign promises. Of course, like any presidential campaign from any party, there can be a difference between what you hear on the trail and what actually happens.

7:34But let's just imagine putting some of them into action. For example, tariffs and a potential reduction of C-Corp tax rates to 15 % for domestic manufacturing. How would that impact entrepreneurs? Tariffs really impact people who are importing into the US, right? So I think if there's a threat of kind of permanent tariffs or quasi-permanent tariffs, we might start seeing on-shoring of manufacturing operations. When you look at the other carrot there, which you described, Jason, is a reduced corporate income tax rate to 15%. I think that would really be directed at domestic manufacturing, US-based manufacturing.

8:19So when you couple the two together between the tariffs and the reduced corporate tax rate for domestic manufacturing, it's quite possible that might motivate some companies to start migrating their operations to the US. We're starting to see some of that happen already. That's really helpful. Is there any kind of second concentric circle to be thinking about for businesses? For example, let's say that I do not directly import something or I am not directly in manufacturing. Is this an irrelevant conversation to me or is there a way in which the tax changes here will in some way impact me? It's a loaded question, Jason, because certainly I think as tariffs become a bigger issue, and we saw this last time, they create a lot of impact overall on a lot of different industries.

9:11So if we start to reshore more manufacturing into the U.S., that can have an impact on industries beyond just manufacturing. For example, that can provide a positive uplift potentially on the construction industry because they have to then expand and build more facilities to be able to support that. It can have an impact on retail and the consumers because think about all of the product that is imported and sold in low-cost retailers like the Walmarts of the world. So suddenly that is a hidden tax that a lot of consumers don't necessarily factor into their day-to-day lives, but certainly can become more expensive.

9:55Even from a manufacturing perspective, I think tariffs can be a complicated subject because while it sounds easy to reshore, from a supply chain perspective, quality and supplier reliability is complicated. And it takes a really long time sometimes to requalify a new supplier and to really figure out how are you going to rework your supply chain. So whether or not those tariffs come to fruition, I think really starting to think about what do alternative supply chains look like and starting to understand how you could be retooling that supply chain. What could it look like to reskill your workforce here?

10:41How do you build efficiencies in your workforce here to be competitive, whether that's through robotics, AI, automation, and then understanding what state and local incentives might be there to support that, whether that's property tax abatements, whether that is different incentives to support you upskilling your workforce to support that. I think those all come into the conversation to help you be competitive, to help offset the cost of tariffs. And then certainly thinking about price increases alongside that and how do you help pass that along so that you don't have margin erosion. So it's a multifaceted conversation, but it's an important one.

11:22Yeah, what it reminds me of, as you were talking, was how the day after the election, it was pretty interesting to see which stocks went up, which stocks went down. It was, in some ways, an insight into the way in which people anticipate that the proposed policies of the Trump administration are going to shift the economy. And one of the things that went down was the stock of Dollar Tree, because I think there's an anticipation that possibly as you raise tariffs on cheap imports, that can impact the price of extremely low cost imported goods. And then we can start to think about what kind of impact does that have on a consumer, but also what kind of competition does that create among brands and founders who were competing against those goods?

12:13Exactly. What further complicates tariffs, Jason, is are they going to take the form of kind of a permanent tax increase, maybe a little bit more broad based, which I think would probably involve more congressional approval? Or are they going to be really more targeted, which would be maybe the president actually directing punitive targets towards specific industries? And I think not knowing what that looks like just yet makes things a little bit tricky in the tariff space. All right, let's move on to another subject, which is the lower C-Corp rate. So if the lower C-Corp rate is permanent and may go lower, should entrepreneurs consider switching to a C-Corp?

12:54Or are there still benefits to being a path-through entity, especially if the QBI deduction is extended? Take me through all that because I know that this is going to change the way people think not just about their taxes, but about their structure. This is such a great question, Jason. And we are getting a lot of questions related to the fact that, first and foremost, the top rate, even with the QBI deduction, is 29.6%. We're at 21 % right now for the C-Corp rate. And if people are doing domestic production, could that go down to 15 %? So it's really something that people are saying, should I consider legitimately changing my structure?

13:33I will tell you, this is a very complicated analysis that a company should embark on and consider. And so here's the talking points that I think companies need to consider. First and foremost, I think overarching, no tax rate is ever permanent. And that is really important to remember. I often tell people that C-corporations are like a roach motel or Hotel California, they are super easy to get into. And once you're in them, they're very difficult to get out of. So you have to remember that because rates, like anything, can change over time, just like we're talking about right now. The second consideration that you have to think about is that flow-throughs are a single tax regime.

14:19So you're only taxed on that income once, whether it's 29.6 % right now with what we're in with the QBI deduction, or even if it were to go up. Whereas if you compare that to a C corporation, you are taxed at that inside the C corporation at 21 % right now. And then if you choose to distribute and extract money as a dividend, you're taxed again at a dividend rate. So you have a double taxation. And many small businesses and entrepreneurs do pull money out of the business because that is part of how they sustain their lifestyle. So that's another consideration that you have to model is how much earnings do you plan to pull out of the business and what form is that going to look like?

15:05Is that in the form of rent? Is it in the form of wages? Is it in the form of dividends? And just know that if you have unreasonable rent, unreasonable W-2 wages, the IRS is going to certainly scrutinize that. Or if you're just not pulling wages out of the business, that certainly can raise scrutiny. Probably, though, one of the most significant considerations is what is your long-term game with the company? So are you planning to sell the business? Oftentimes, that can be a significant consideration because if you're going to sell, and oftentimes businesses sell in the form of an asset deal, If you sell in a corporate structure like a C corporation, you definitely need to consider that double taxation structure.

15:56That's where that tax can get really expensive. So I think it all comes down again to truly modeling out all those factors. And that's not to say that you can't maybe be a C corporation for a period of time, particularly if you're not going to draw out a lot of earnings and then consider maybe changing that structure again down the road. But there are some implications related to that too. The most important thing you need to do is model out your facts and circumstances and consult your tax advisor. Let's go through some of the other big questions that you guys are being asked about. First one is bonus depreciation.

16:34So this is an accounting strategy and especially beneficial to save on equipment and facility purchases. I know there's some potential changes here coming. Can you break this one down for me? I would say it's definitely a complicated scenario because it certainly is challenging for clients who, you know, do you want to place a piece of equipment into service now and maybe get a lower percentage of depreciation today? Or do you want to wait till next year, hoping that the full expensing might come back and take that deduction one year from now? It's a tricky game to be playing. I think a lot of it probably should be dealt with through business drivers.

17:15How badly do you need to utilize that piece of equipment this year versus next year? Can you wait? I definitely think you're right. So I think that you can always choose if you're going to place that into service now to look at can you also take$179 full expensing or bonus depreciation. You can also look at the ability to push that off if you think you're going to get a higher write-off under bonus depreciation. And one overarching thing that I often tell business owners who are certainly chasing tax write-offs and they're just asking, should I buy this equipment now to get that tax write-off?

17:53I say, that's a great question. Do you need that equipment? Because if you're going to spend a dollar to get, let's say, a 29.6 % write-off, economically, is that worth that to you? So the question I always say is, let's not let the tax tail wag the dog here. First of all, is that a good business decision? So one part of the Tax Cuts and Jobs Act that did not benefit most businesses is related to capitalization of R &D expenses. Can you explain this and tell me if you see any changes coming? Yes, this was a very unpopular and sneaky piece of the Tax Cuts and Jobs Act. And when we talked a little bit ago about just balancing the budget, this was a side effect of balancing the budget from the last bill that came out.

18:40So it was a revenue raiser that nobody ever intended to stay in the law. So they said, okay, we need to raise some money. So in 2022, we're going to start capitalizing research and development tax expenses and amortizing them over five years. And the thought process when the Tax Cuts and Jobs Act was initially enacted was that was never going to stay in place. Certainly somebody would come along and fix it before that happened. And guess what? We had to split Congress and they weren't able to fix that. So while there has been for a long time bipartisan support to fix this and say you can deduct and expense research expenditures and there have been bills proposed related to that, Congress for a majority and a lot of different reasons has not been able to pass this bill to extend this.

19:35So So here we sit right now with capitalization of these costs where you have to amortize them over five years. It's expensive. To add to that, if we do see an extension of immediate deductions for R &D expenditures, I think keeping with the so-called America First policies that the Trump administration supports, I think we'll probably see that immediate expensing really only apply to domestic research and development expenses. I think you'll probably see some type of amortization expense being allowed for offshore R &D expenses, but it won't be an immediate deduction, most likely. Another big one, estate planning.

20:19Leslie, you had referenced this at the beginning of the conversation, but let's dig into it a little bit more. So another TCGAA, Tax Cuts Jobs Act, the planned expiration was the lifetime gift tax exclusion, which was set to go from$14 million to an estimated$7 million. So it's a big jump for people who have a lot of money to pass down. Do you still think that this change will happen? And what should entrepreneurs be considering with it related to succession planning? It's a great question. I really think that it has become probably less of an urgency now that we have a Republican trifecta. Clearly, there's support amongst Republicans in the House, Senate and the White House for extending the estate tax, estate and gift lifetime exemption.

21:10Personally, I think this one is easier than it looks as far as the extensions go. So when you look at how much revenue this would raise if they cut the exemption in half, it's not a big revenue raiser. It's a few hundred billion dollars versus several trillion dollars. When you look at other provisions like the reduced individual income tax rates, those are much more expensive than the estate tax. So I honestly think that probably we'll see the estate and gift tax lifetime exemption extended. So this one is especially interesting just for people who immerse themselves in the nuances of policy, because if you just followed the campaign trail, Trump talked all the time about doing away with some green energy tax credits, including some included in the Inflation Reduction Act.

22:02But what he was not talking about there was how a lot of those green energy tax credits benefits red states and are actually quite popular with Republican lawmakers. So what do you see changing to these credits and how can entrepreneurs prepare for that? That's a great question, Jason. Again, difficult to predict the future, but you're hitting it spot on. I think on the campaign trail, Trump indicated that he wanted to repeal the IRA as a means to pay for some of his TCJA extensions. When you look under the hood on this one, number one, you're absolutely right. A lot of red states are benefiting from the green energy jobs that are coming to their states.

22:46And it's largely due to the fact that those are high paying jobs, just as mandated by the Inflation Reduction Act, you have to pay Davis-Bacon level wages, which is a pretty good rate compared to what you might otherwise might see. As far as looking into the crystal ball, When you look at Trump's nominees, Doug Burgum is the North Dakota governor. He's going to be coming in as the chairman of the North Energy Council and Chris Wright, CEO of Liberty Energy and a longtime fracking advocate. He's going to be coming in as the U.S. Secretary of Energy. I think that tells us that we're probably going to see more support around fossil fuel type credits.

23:30So when you look at the current menu of tax credits that are available, credits that are likely safe, carbon oxide sequestration, clean hydrogen and nuclear are likely not going to be repealed. I'd say areas that are at risk, which is no secret, the EV credits, the electric vehicle credits. And then to be determined is probably solar and wind. Trump has gone on record saying he's not a big fan of wind. But when you look at John Thune, who's going to be the Senate majority leader, incoming Senate majority leader, he's from South Dakota. South Dakota gets 55 percent of their electricity generated from wind sources.

24:13So looking ahead to answer your question more directly, I think probably 2025 most likely we'll see some kind of transition. For example, it might be for deals placed into service after 2025. They're no longer eligible, for example. So I don't think it'll be just a quick rug pull when it comes to credits on a retroactive basis. As we land this, we've talked about a lot of different deductions, existing deductions, and how they will stay, possibly new deductions, all sorts of ways in which taxes get lower, but it's come up a few times that these things have to get paid for in some way. Something else will also happen as a result to offset tax increases as these new changes get implemented and then the new government grapples with what it actually means for the federal deficit and how to address that.

25:10What kind of follow-on effects might entrepreneurs want to anticipate and how does that possibly come home to them in the form of impact to their businesses? So far in this conversation, we've been talking about what are really the first things to happen, but the first things lead to the second things. And so as experts, not just in taxes, but in helping people prepare and think multiple steps ahead, I'm curious where you drive your clients to be thinking as they think not just what is going to happen next, but what's going to happen next to next. One of the things we have to look at with tax and with policy in general is that it's oftentimes meant to drive a certain behavior to get a certain result.

25:52So sometimes if you see an incentive related to, for example, writing off equipment, that could be that they want you to purchase that equipment because it's overall thought to spur economic growth or economic behavior. The same thing is true for lowering tax rates. Perhaps that is thought that will drive more revenue, more GDP. And so by doing that, you have a bigger overall tax base. And by doing that, you drive more growth, which drives more revenue for the federal government. So I think that's an overall just thing to keep in mind is that's part of the thought process. Sometimes when you create policy is that it drives a behavior to drive a result.

26:39When we look at some of the revenue raiser proposals that Trump had out on the campaign trail, we've talked about a couple of them already, IRA repeal or green energy tax credit repeal, as well as tariff implementation. I can tell you just looking at some of the revenue forecasts that have come out over recent months, neither one of those revenue sources would be enough to pay for these tax breaks. So what are the other alternatives? Number one, we could perhaps forego some of the Trump proposals. I think it would be tough to ratchet back on the TCJA extender. So what could be sacrificed here are some of the no tax on tips, no tax on social security pledges that Trump had on the campaign trail.

27:26It's also possible that a reduced corporate income tax rate, which has received some mixed feedback, even within the GOP, may not go down to 15 % as planned. Keeping it up at 21 % might be a good way to offset revenue. So that might be another avenue. Another aspect of this, which is starting to come into the conversation, is, as you might know, any bill that comes out next year will likely be passed under what's called budget reconciliation, which is a real technical procedure, which I won't get into in a lot of detail. But usually when you pass a bill under budget reconciliation, there's an expiration date on the bill itself.

28:06It usually doesn't go any further than 10 years. So rather than having a seven or 10 year extender bill, one thing they could do to reduce the cost of the overall tax outflows, what could be to reduce the time period when the bill expires two to four years instead of, say, seven to 10. What does that do to our clients? In addition to what Leslie said, every time you have sunsets, we're going back to the drawing board trying to figure out what tax policy is going to be next year. And it really puts a lot of volatility into tax planning. So we're hoping that we see a long dated extension, or frankly, we're hoping to see some of these proposals become permanent part of tax law.

28:48Mike, Leslie, this has been so helpful. If people are listening right now and want to follow up with you directly to ask you more questions, how can they do that? Yeah, thank you so much for asking. You can go to www.claconnect and you can search for myself, Leslie Boyd, or Mike Smith there and connect with us directly as well. Leslie, Mike, thank you so much for your time. It is going to be, I think, a very interesting coming year. It'll keep you guys very, very busy. And my prediction is that in the coming year, you guys are going to be very, very busy. Thank you. Thanks for having us.