Corporations are no longer just competing in their own geography. With the growth of digitalization and innovation, the world is coming closer. While access to global markets and talent, ability to pursue business round the world has become easier, large nations with important economies like United Nations are face limitations because of the international competition. There are large variations in the tax rates when they operate globally and this increases the tax burdens. There is a constant pressure on the governments to seek tax competitiveness as a policy goal. This helps prevent loss of tax base.
The declining corporate tax rates result in stagnant or falling tax revenues, despite the increasing profits. In the US, the corporate profits have increased as sharply as a share of the GDP over the past two decades.
In 2025, poilicymakers will lay their focus on the expiring policies. Most of the reforms will come from the Tax Cuts and Jobs Act of 2017. TCJA’s changes to business taxes are projected to reduce revenues by $919 billion from FY2018 to FY2027. This will lower the corporate income tax rate from 35% to 21%.
The TCJA Reform – In Details
Since 1986, this is the first most significant corporate tax reform. Before TCJA was implemented, the tax structure was:
- 15% for taxable income un to $50000
- 25% for income between $50001 and $75000
- 34% for income between $75001 and $10 million
Under TCJA, the rate that applies to all income groups in 21%.
What is the TCJA reform all about?
TCJA remains an important tax legislation in the US. However, many of the provisions are about to expire in 2025. This has sparked discussions about extensions and potential reforms. Details here:
- Expired provisions: Several provisions under TCJA are set to undergo changes. This includes reduced individual tax rates, higher standard deductions and limits to state and local tax deductions. They are all scheduled to expire in 2025.
- 2024 tax legislation: A new tax legislation has been proposed to revive and extend some TCJA provisions. This proposal includes a $70 billion tax package that is aimed at expanding the child tax credit and boosting the low-income housing tax credit.
- Committee tax teams: A “Committee Tax Teams” has been set up to review the expiring provisions and propose legislative solutions. Such teams will be focused on ensuring the new legislation. This helps a range of taxpayers and addresses the key areas from the original TCJA.
What does it mean for the large corporations?
Rate of Corporate Tax:
The TCJA has reduced the corporate tax rate from 35% to 21% permanently. For large businesses, this impacts their profitability and cash flow of large businesses. This lower tax rate will remain in effect and provide adequate tax savings for big corporations.
The TCJA has allowed 100% bonus depreciation on qualified property acquired and placed in services after 27th September 2017 and before 1st January 2023. This provison will expire completely in 2026, unless extended. Large businesses will need to plan for the phase-out that began in 2023 and should consider the timing of their capital investments.
Deduction of the interest expenses:
The TCJA has limited the deduction for net business interest expenses to 30% of adjustable taxable income. This cap can impact highly leveraged companies. In 2022, this was made further restrictive as it is now calculated on the basis of EBITDA.
International Tax provision:
Global intangible low-taxed income(GILTI) was introduced by TCJA to tax foreign income earned by controlled foreign corporations. The GILTI was subject to a 10.5% effective tax rate, which will be increased to 13.125% after 2025. This will encourage large corporations to reassess their global tax strategies and bring changes in the international structure.
Research & Development:
The TCJA retained the R&D tax credit, which is critical for large companies investing in innovation. Since 2022, research and experimental expenditures must be amortized over five years rather than being spent immediately. This change will impact the cash flow and tax planning for large corporations who invest heavily in R&D.
Potential reforms and uncertainties:
Many provisions of the TCJA, especially those impacting individual income taxes and some business-related items are set to expire after 2025. Large corporations need to monitor these developments to understand the potential changes and prepare for a new tax environment. The Commitee Tax Teams have been formed to address these impending expirations in a seamless manner.
Want to stay on top of the changing tax regulations while making taxation manageable? Consider outsourcing. Write to us at connect@finsmartaccounting.com to know more.
Director Growth Strategy & Alliance
Maanoj Shah is a finance and outsourcing expert with strong Business Strategy and Scaling-up experience. Over the last 20 years, he has incubated multiple businesses and helped build global enterprises in verticals as diversified as hospitality, technology, and healthcare.
