As we approach the expiration of the tax reforms enacted under the Trump administration, private businesses must brace for significant changes. The sunsetting of these tax laws will have profound implications on tax planning, business valuations, and overall financial strategies. From the perspective of a valuation professional, here’s a detailed look at what businesses can expect and how to navigate the impending changes.
Overview of Trump’s Tax Reforms
The Tax Cuts and Jobs Act (TCJA) of 2017 introduced several key changes aimed at reducing tax burdens for businesses and individuals. Major provisions included:
- Corporate Tax Rate Reduction: The corporate tax rate was lowered from 35% to 21%.
- Immediate Expensing: Businesses could immediately deduct 100% of the cost of eligible property.
- Pass-Through Deduction: A 20% deduction for qualified business income from pass-through entities.
- Increased Estate and Gift Tax Exemption: The exemption amount was nearly doubled, allowing individuals to transfer more wealth without incurring taxes.
These changes provided substantial tax savings and spurred growth and investment within the private sector. However, many of these provisions are set to expire at the end of 2025, reverting to pre-TCJA rules unless new legislation is enacted.
Anticipated Impacts on Private Businesses
- Increased Corporate Tax Rates:
- Impact: The corporate tax rate will likely revert to 28%, increasing the tax burden on corporations.
- Valuation Consideration: Higher tax expenses will reduce net income, potentially lowering business valuations. Companies should reassess their financial projections and adjust valuation models accordingly.
- Phased-Out Immediate Expensing:
- Impact: The 100% bonus depreciation will phase out, requiring businesses to revert to standard depreciation methods.
- Valuation Consideration: The change will impact cash flow projections and capital expenditure plans. Management teams and CFO’s need to adjust discounted cash flow (DCF) models to reflect the reduced tax shields from depreciation.
- Elimination of Pass-Through Deduction:
- Impact: The 20% deduction for pass-through entities will expire, leading to higher effective tax rates for these businesses.
- Valuation Consideration: Pass-through entities will see a reduction in after-tax income, affecting their valuation. Businesses should re-evaluate their tax planning strategies to mitigate the impact.
- Reduction in Estate and Gift Tax Exemption:
- Impact: The estate and gift tax exemption will decrease from roughly $13.6 million to approximately $7 million per individual on 12/31/25.
- Valuation Consideration: Higher tax liabilities on transferred wealth may necessitate revised estate planning and business succession strategies. Business owners should consider gifting or transferring ownership interests before the exemption reverts.
Strategic Responses for Private Businesses
- Tax Planning Adjustments:
- Businesses should consult with tax advisors to develop strategies that minimize the impact of higher tax rates and reduced deductions. This may include accelerating income, deferring expenses, or restructuring operations.
- Reassessing Capital Investments:
- With the phase-out of immediate expensing, companies should re-evaluate their capital investment plans. Prioritize essential investments and consider timing adjustments to maximize tax benefits.
- Reviewing Valuation Models:
- Companies and their management teams need to update financial models to reflect the anticipated tax changes. This includes adjusting discount rates, cash flow projections, and terminal value calculations to account for higher tax expenses.
- Estate Planning Revisions:
- Business owners should revisit their estate planning strategies to take advantage of the current higher exemption levels before they decrease. This may involve gifting shares, setting up trusts, or other tax-efficient transfer methods.
To Recap
The sunsetting of Trump’s tax laws will bring about significant changes for private businesses. As a business owner, it’s crucial to understand these impacts and make strategic adjustments to mitigate adverse effects. By proactively addressing these changes, businesses can better position themselves for a smooth transition and continued financial health.
If you need further guidance or have any questions on this topic, we are here to help. Please do not hesitate to reach out to discuss your specific situation.
This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.
