President-elect Trump's campaign promises included lowering the corporate tax rate to 15% for domestic production and making permanent the TCJA deductions for interest, research and development (R&D), and bonus depreciation. Also proposed was the elimination of the green energy tax credits put in place by the Inflation Reduction Act (IRA). We believe all of these measures--especially addressing the expiring TCJA tax deductions--will be considered in 2025 (see table).

Questions And Answers

How would a lower corporate tax rate of 15% for domestic production affect U.S. corporations?

During the campaign, Republican leaders discussed passing tax reform using reconciliation, which would allow them to enact changes to the corporate tax rate without a single Democratic vote, if there was a red wave in November. Specifically, there was talk of a 15% corporate tax rate for U.S. companies with domestic production. This could be enacted by reinstituting a domestic production activities deduction of 28.5% to lower the effective corporate rate for domestic production and leaving the 21% corporate rate for other companies.

While it's too early to determine effective dates, a lower corporate tax rate won't likely be effective until 2026 unless the rate change is retroactively applied. Naturally, a lower corporate tax rate, where applicable, would reduce a company's taxes paid. The effects on credit ratios would appear most directly from improvements to funds from operations (FFO) and, as a result, FFO-to-debt ratios and FFO-to-interest coverage. Lower cash outflow would also boost the cash available to service debt, all else being equal. On the flip side, a lower corporate tax rate could also affect our adjusted debt from higher tax-affected liabilities (such as pensions).

In 2018-2019, the cash tax benefits from the lower 21% corporate rate enacted by TCJA 2017 were largely used for share buybacks and dividends rather than debt repayment. However, interest rates were lower then. Higher interest rates might spur certain companies to use cash for debt repayment, depending on their financial policies. If this were to occur, it would be moderately positive for credit metrics, all else being equal.

Overall, a corporate tax rate shift to a lower 15% for domestic production will be moderately positive for cash flows for such companies and could incentivize other companies to reduce their business activities overseas. The second- and third-order effects from any tax cuts--for example, on the U.S. deficit and the impact on long-term corporate borrowing rates--are very difficult to predict at this stage because the rely on many other variables.

Is there a plan for the TCJA corporate tax deductions--like interest deductibility--to be extended under the Trump tax proposals?

The fate of some of the TCJA's corporate tax deductions--such as interest deductibility, R&D expense deductibility, and bonus depreciation--will be a key topic in 2025.

For tax years that began after Dec. 31, 2021, the calculation of adjustable taxable income for interest deductibility will be based on EBIT rather than the previous EBITDA calculation, which decreases the amount of interest deductible and raises the tax liability for companies. Another provision that went into effect in 2022 and is attracting legislative proposals is the tax deduction for R&D expenditure taken over a five-year period (starting in 2022) rather than being fully deductible in the year incurred. In addition, a 100% deduction of tax depreciation, also referred to as bonus depreciation, began phasing out in 2023. This gave companies the full benefit of the tax depreciation expense for the year.

There has already been a legislative proposal to permanently extend the tax treatment that expires in 2025. This passed the Republican-controlled House of Representatives but failed to pass the Senate prior to the elections. Given the election outcome, we believe these tax deductions will be made permanent in 2025.

From a corporate standpoint, making permanent the TCJA corporate tax deductions beyond 2025--particularly if done retroactively--will generally benefit net income and boost post-tax cash flow. The 100% bonus depreciation could boost capital expenditure to the degree there are corresponding decreases in taxes payable or cash taxes paid. Moreover, changes in deductibility of interest expense and R&D expense would lead to lower outflow for taxes, thereby increasing FFO. Lower cash outflow will also boost the cash available to service debt, all else being equal.

How would the new Trump administration deal with the IRA tax credits for green energy that benefited sectors like utilities?

The IRA 2022 included tax incentives for renewable energy to allow companies to monetize their tax credits. The IRA allows for the one-time sale of certain renewable energy tax credits to third parties. Under the IRA, a company can benefit from the tax credit even if it doesn't have sufficient taxable income to fully utilize the tax credits themselves. The transfer of the tax credits temporarily boosted FFO, a key metric for sectors like utilities.

In our view, the potential red wave will likely result in eliminating these corporate tax benefits under the IRA and bring FFO back to pre-IRA levels for sectors that previously benefited from these tax credits.

Are the international tax provisions under current tax law aligned with OECD and the Trump tax proposals?

GILTI, FDII, and BEAT are taxes under the TCJA to incentivize domestic activities by moving IP back to the U.S., especially for companies in the technology and health care sectors. Essentially, it's a form of international taxation to discourage foreign business activities. These are unlikely to the be reversed given the election results. However, companies are unlikely to face higher foreign taxes proposed under the Biden budget proposal for 2025, in our view.

In addition, the OECD had issued its model for a 15% global minimum tax (known as Pillar Two), with the support of the Biden administration and with more than 130 countries agreeing to implement it. Some countries have enacted the rules as of Jan. 1, 2024, while others expect to enact the rules in 2025. The U.S. hasn't yet enacted the OECD agreement; instead, it enacted its own minimum tax rules: FDII, GILTI, and BEAT. The outcome of the U.S. elections indicate that the U.S. will likely not adopt a minimum tax consistent with the OECD. If the U.S. doesn't ultimately align with the global agreement or otherwise changes its international taxation rules, some multinational income could be subject to double taxation. As a result, multinational companies with global revenues exceeding €750 million (approximately $800 million) could begin to face higher tax rates on their international income, some beginning this year and others starting in 2025 and beyond.

Will the CAMT and share buyback excise tax under IRA 2022 continue under the new Trump administration?

The CAMT at 15% and share buyback tax of 1% during the campaign weren't mentioned during the campaign. However, if the IRA 2022 provisions are brought to the table for repeal of the IRA green energy tax credits, the CAMT and share buyback excise tax could be eliminated as well, especially given the potential red wave. Nevertheless, these taxes have limited reach and didn't deter corporations from moving forward with their financial plans, and so their reversal likely won't either.

Related Publications

• U.S. 2024 Elections: How Dueling Tax Plans Could Matter For Corporates Post Election, Sept. 24, 2024
• Corporate Methodology: Ratios And Adjustments, April 1, 2019