Seeking Ways to Accelerate Deductions Opens Door to Tax Benefits

Preserving or lowering the corporate tax rate and renewing full expensing for qualified assets are emerging as Republicans’ key priorities in Congress. If a 2025 tax plan adjusts rates, any anticipatory tax planning done now may yield permanent tax benefits that far exceed the cost of being prepared.

Any proposed legislation must address provisions that are scheduled to expire or change at the end of 2025, such as:

• The 20% qualified business income deduction for pass-through entities
• US international tax provisions: specifically the foreign-derived intangible income, or FDII, deduction; the global intangible low-taxed income, or GILTI, rate; and the base erosion and anti-abuse tax, or BEAT, rate
• Overall individual income tax rates and brackets

Companies can prepare by reviewing tax accounting methods and seeking ways to accelerate deductions or reduce income. Certain timing items can be adjusted through annual elections, such as reviewing de minimis safe harbor election for expensing tangible property, capitalizing prepaid expenses, or capitalizing carrying charges. Reviewing and tweaking bonus plans or reward programs before the end of the year can also affect deductibility.

However, planning shouldn’t focus solely on the corporate income tax rate. Any legislative planning will require companies to consider the broad impacts of changes rather than focusing on any proposal in isolation.

Changes to US international tax provisions, such as FDII, GILTI, and BEAT, are another piece of the puzzle. If the FDII deduction decreases or the GILTI rate increases, that could compel a company to increase foreign-derived income in a higher income tax rate year. This could maximize benefits of the higher deduction rates for those provisions.

Companies structured as flow-through entities must pay close attention to any corporate and individual income tax rate proposals. A change in the qualified business income deduction, along with a change in overall individual income tax rates, could make structuring an enterprise as a C corporation more attractive. A conversation now about entity selection will allow a company to implement changes faster than reacting to enacted legislation.

Fiscal year taxpayers should be advised that a tax year straddling the effective date of any legislation changing the income tax rate will have a blended tax rate under Section 15 of the federal tax code.

Accelerated Depreciation

Any new Republican tax plan will likely include the 100% accelerated depreciation deduction, commonly known as bonus depreciation. This deduction, which House Republicans supported earlier this year in the in the ill-fated Tax Relief for American Families and Workers Act, allows a company to deduct 100% of the cost of qualified equipment and other assets in the year of acquisition.

Companies should consider three key points regarding accelerated expensing.

• Asset depreciation starts when the asset is ready and available for its intended use. This determination can be factual, and any significant assets placed into service near any accelerated depreciation date should be reviewed closely.
• The cost and timing of the tax bill will determine whether the extension of 100% bonus depreciation applies retroactively. While some of the expiring provisions would generate revenue, it may already be offset by extending other expiring provisions. As a result, retroactivity of 100% bonus depreciation could be off the table.
• Even if not fully retroactive, the provision may have a different effective date than the enactment date.

Companies should review the timing of any large purchases for which bonus depreciation could have a significant impact on taxable income—and consider the potential impact of any proposed tariffs—to determine if deferring a purchase to 2025 is worthwhile.

R&D Costs

Industry groups and businesses have expressed concerns to us about the required five-year capitalization and amortization of expenditures (including software development) under Section 174 of the tax code. Their view is that the rule is a challenge to their operations, inconsistent with sound tax policy, and administratively complex.

Similar to bonus depreciation, the cost of full expensing could affect any retroactivity of a provision deferring or eliminating the requirement to capitalize such costs. Many companies are interested in both retroactivity and flexibility in implementing any changes to the law.

To prepare for any potential amendments to Section 174, companies should review IRS guidance in Notice 2023-63 and identify any costs that could be excluded from Section 174. Software companies especially should review project data to determine whether an item is an upgrade or enhancement that must be capitalized, or a maintenance activity that can be expensed immediately.

If Section 174 were amended retroactively, that could spare businesses the need to perform a detailed analysis of costs already incurred. Companies also should model the effects of retroactivity because any change to full expensing could reduce taxable income to a level where some foreign provisions may lose their benefits. Analyzing expenses for immediately deductible items according to the amendment could benefit companies by accelerating cost recovery.

Companies can prepare for 2025 tax legislation by reviewing their taxable income projections, accounting methods, and entity structures to model and take advantage of potential changes.

They can enact some strategies by the extended due date of their 2024 tax return, but others may require action before the end of 2024. Preparing now will help companies adapt as legislation progresses and will realize long-term benefits.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Ryan Corcoran is partner in RSM’s Washington National Tax office.

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