Don’t Rely on a Crystal Ball for Your 2025 Tax Budgets

At a glance

• The main takeaway: In today’s evolving tax landscape, it’s important to not lose sight of current tax law as you prepare for your 2025 tax budgets.
• Impact on technology companies: Despite continuous speculation, tax changes under the new administration are inevitable. However, proper planning can put you on the right path to maximize benefits and minimize liability.
• Next steps: Aprio’s Technology Tax advisors can help you navigate the opportunities and complexities of new tax legislation.

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The full story:

While speculation continues on what tax policy will look under the current administration, such as the potential expansion of key provisions enacted by the Tax Cuts and Jobs Act (TCJA), there is no crystal ball to predict the future. However, what we do know, is that several important tax laws were enacted as of January 1, 2025.

Don’t lose sight of 2025 tax laws

While the Trump administration proposed several tax law changes, whether any of those changes will be enacted remains unclear. For now, it is important to not lose sight of the notable and existing tax laws poised to impact tax budgets across sectors.

1. Corporate Tax Rate – The TCJA permanently reduced the corporate tax rate to a flat 21%, with no expiration date. However, the Trump administration has proposed lowering this rate even further, which would benefit C corporations. Businesses should reevaluate their entity type as the facts and circumstances change, both in their growth and in the economy.
2. Pass-Through Business Income Deduction – The 199A deduction helps owners of S corporations and partnerships lessen their tax burden in a manner similar to the lower corporate income tax rate for C corporation owners. The deduction, enacted by the TCJA, is set to lapse after 2025, which will ultimately force business owners to look more closely at their entity classification for tax purposes. With a lower corporate tax rate, it’s encouraged for small business owners to assess their current structure to ensure their tax footprint is advantageous.
3. GILTI and FDII Deductions
   • Global Intangible Low-Taxed Income (GILTI), enacted by the TCJA, resulted in a taxation on worldwide income in the U.S. in the year it was earned, rather than when the cash is repatriated to the U.S. For profitable C corporations, a deduction was available to take up to 50% of your includable foreign income. It was then common for C corporations to have foreign tax credits to cover any additional tax burdens. However, as we entered 2025, the deduction is reduced to 37.5%, leaving a higher likelihood for more out-of-pocket taxes in the U.S. due to this inclusion.
   • Foreign-Derived Intangible Income (FDII) incentivizes U.S. C corporations to export their goods, services, and intellectual property to foreign countries. Profitable C corporations were eligible for a 37.5% deduction on the gross profit of their foreign-sourced income. However, in 2025 this deduction will be reduced to 21.875%
4. Section 174 and Amortization of R&D Expenses – Section 174 expensing has drastically decreased R&D spend, which has negatively impacted businesses. No one expected the amortization of R&D expenses to stick around as long as it has, which is why there continues to be significant buzz around Section 174. The law, as it stands, says that incurred R&D expenses are not able to be expensed, but instead must be capitalized over a 5-to-15-year period, depending on where the research is performed. Yet, it remains critical for tech companies, and other industries that are developing a new product or process, to remember the R&D tax credit, analyze their R&D expenses, and understand that maintenance costs and bug fixes do not qualify for Section 174 capitalization.
5. 163j Interest Limitation – At the onset of the TCJA, the calculation for 163j was your tax-adjusted earnings before interest, taxes, depreciation, depletion, and amortization (EBITDA), which was helpful for many taxpayers. Beginning in 2022, interest was limited to 30% of your tax-adjusted earnings before interest and taxes (EBIT). If the current administration makes no changes to that provision, businesses must work with a potentially smaller-adjusted taxable income. Taxpayers that no longer qualify for the small business exception in 2024 and beyond should plan for this reduction of their interest deduction. The impact of this limitation can be quite significant for companies so it is essential that you are only limiting true interest, per the definition under §163(j).

Strategies for effective tax budget planning in 2025

Navigating the 2025 tax landscape for tech companies will come with complexities. It will be essential for businesses to adopt various tax planning strategies to optimize their tax benefits effectively. With uncertainty looming, it’s important to plan now using what you already know, including the following four considerations.

1. What made sense for your business last year, may not make sense today. Much has changed in the tax landscape and the economy over the last five years. It’s best to not assume that the structure of your business at inception is still the best structure for it today. Ensuring that you are including founders and owners within the conversation is crucial. Technology companies, for example, may have certain considerations and priorities that don’t align with their founders’ personal objectives, so all parties should be represented.
2. Certain tax laws are set to expire. Specifically, those that were enacted under the TCJA in 2017, which have been influential in business decisions, are due to sunset in 2025. Be proactive and understand the implications of these expirations and what that will look like on your tax liability.
3. Technology companies should still be investing in R&D activities. The addback and capitalization of these expenses may appear to be detrimental in the short term, spreading out an expense over five or 15 years, but remember that this is simply a matter of timing. The R&D credit that you can establish from these expenditures is a permanent dollar-for-dollar reduction of taxes that will lower your effective tax rate. For companies that are not in an income position, and are less than five years old, there is an opportunity to turn these credits into immediate cash savings through payroll taxes. Remember to think big picture.
4. Be mindful of what you consider interest in your books and records. The IRS issued guidance that debt modification costs, loan commitment fees, guaranteed payments for the use of capital, or hedging income and expense are NOT interest for §163(j) purposes. It’s important to provide your tax advisor with a breakout of what is included within interest expense on the trial balance.   

The bottom line

While it is likely that the Trump administration will accomplish most, if not all, of its proposed tax goals, the timing and details remain uncertain. Nonetheless, proper tax planning can put your business on the right path to maximize tax benefits and minimize liability.

Aprio’s Tax advisors are closely monitoring the evolving tax landscape and are prepared to help you react to any potential changes. If you have any questions on how you and your business may be impacted, please contact your Aprio Tax advisor.

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