Tax Planning Through Expiring TCJA Provisions

by | Feb 12, 2025 | ASC 740, Federal Tax, Main Tax Min, State and Local, Tax Minimization, Tax News

The 2017 tax reform package known as TCJA introduced significant changes to the U.S. tax code, many of which are set to expire at the end of 2025. These expiring provisions include the tax treatment of bonus depreciation and foreign income taxes. Businesses can strategically plan for these changes while managing potential increases in tax liabilities and taking advantage of remaining deductions and credits.

By Lindsay Haskell and Lauren Staub

The Tax Cuts and Jobs Act (TCJA) of 2017 brought about significant changes to the U.S. tax code. Many of these changes were temporary and are set to expire at the end of 2025. While we await word on whether TCJA provisions will be extended in the Trump Administration, business leaders have some decisions to make to be prepared. With the U.S. Congress and Administration aligned, the wait for news on extensions may be short.

Here’s a detailed look at some of the key business provisions affected by expiring TCJA provisions.

Bonus Depreciation for Businesses

The TCJA introduced a phased reduction in bonus depreciation for property placed in service after specific dates:

  • 100% for property placed in service after September 27, 2017, and before January 1, 2023.
  • 80% for property placed in service after December 31, 2022, and before January 1, 2024.
  • 60% for property placed in service after December 31, 2023, and before January 1, 2025.
  • 40% for property placed in service after December 31, 2024, and before January 1, 2026.
  • 20% for property placed in service after December 31, 2025, and before January 1, 2027.
  • 0% (bonus expires) for property placed in service after December 31, 2026.

The reduction in bonus depreciation percentages will impact cash flow, as businesses will not be able to deduct as large a portion of their capital expenditures upfront. This means higher taxable income in the earlier years and potentially higher tax liabilities.

While bonus depreciation is phasing out, the Section 179 deduction remains a valuable tool. Section 179 allows businesses to deduct the full purchase price of qualifying equipment and software purchased or financed during the tax year, subject to certain limits. This can help offset the reduction in bonus depreciation.

Businesses, especially those in real estate, can benefit from cost segregation studies. These studies identify and reclassify personal property assets to shorten the depreciation time for tax purposes, which can lead to significant tax savings even as bonus depreciation phases out.

Foreign Source Income Taxes

Global Intangible Low-Taxed Income (GILTI)

Under TCJA, GILTI is designed to tax foreign income from intangible assets held by U.S. shareholders of controlled foreign corporations (CFCs). The effective tax rate on GILTI is currently 10.5%, calculated as a 21% corporate tax rate with a 50% deduction under Section 250.

While the income inclusion provisions related to GILTI will remain unchanged under the TCJA for tax years after 2025, the effective rate at which GILTI is taxed will increase in 2026 due to changes in the Section 250 deduction percentage:

  • Currently: Effectively 10.5% (21% rate with a 50% deduction).
  • 2026 and forward: Effectively 13.125% (21% rate with a 37.5% deduction).

Foreign-Derived Intangible Income (FDII)

FDII encourages U.S. companies to use intangible assets in the United States to derive income from foreign markets by providing a lower tax rate on qualified income.. The effective tax rate on FDII is currently 13.125%, calculated as a 21% corporate tax rate with a 37.5% deduction under Section 250.

Similar to GILTI, the income inclusion provisions related to FDII will remain unchanged, but the effective tax rate will increase in 2026, again due to changes in the Section 250 deduction percentage:

  • Currently: Effectively 13.125% (21% rate with a 37.5% deduction).
  • 2026 and forward: Effectively 16.406% (21% rate with a 21.875% deduction).

Base Erosion and Anti-Abuse Tax (BEAT)

BEAT targets large corporations that make deductible payments to foreign related parties, which can erode the U.S. tax base. It applies to corporations with average annual gross receipts of at least $500 million over the previous three tax years and a base erosion percentage of 3% or more.

BEAT applies to corporations with:

  1. Average annual gross receipts of at least $500 million for the previous three tax years
  2. A base erosion percentage for the tax year of 3% or more (for most industries)

BEAT is an additional “minimum” tax on corporations making certain base-erosion payments (e.g., interest, royalties, and payments for services) to foreign related parties. Net income that falls under the BEAT provisions is taxed as follows, with the rate set to increase again in 2026:

  • 2018: 5%
  • 2019-2025: 10%
  • 2026 and forward: 12.5%

As the effective tax rates on GILTI and FDII increase, and BEAT provisions continue to apply, companies must stay informed of the potential increase to tax liability and adjust their tax strategies accordingly.

Take Action

While the current phase-out schedule is set, future legislation could alter these provisions. As scheduled, these expiring provisions highlight the importance of strategic tax planning to address the potential impact these changes may have on tax liabilities, potentially including:

  • Strategically plan for capital expenditures to maximize the benefits of bonus depreciation before it phases out by year-end.
  • Use strategies for minimizing GILTI impact, including optimizing foreign tax credits, entity restructuring, and shifting income.
  • Implement FDII impact minimization strategies, including increasing FDII-eligible income and cost management.

As sunset dates approach, you could greatly benefit from tax planning with your TaxOps Advisor to stay ahead of change and informed of potential legislative changes. Reach out with questions or concerns.

Disclaimer: This content is for informational purposes only and does not constitute legal or tax advice. Please consult your tax advisor for guidance specific to your situation.

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