In the merger and acquisition (M&A) landscape, it is crucial to consider factors beyond the transaction itself, as the 2025 calendar year is already underway. Evaluating how potential 2025 tax changes and any changes beyond that might impact transactions can help prevent unforeseen challenges and liabilities.
As the IRS continues to accept 2024 tax returns, signaling the ongoing tax season, congressional lawmakers are already looking ahead to 2025—a year anticipated to mark a significant U.S. federal tax overhaul. This follows the enactment of the Tax Cuts and Jobs Act (TCJA) in 2017, which brought sweeping changes to the tax code under President Donald Trump's first administration.
Let us rewind: The TCJA was a significant overhaul of the U.S. tax code. The legislation was aimed at stimulating economic growth by reducing tax rates for individuals and businesses. Key features included lowering the corporate tax rate from 35% to 21%, revising individual tax brackets, increasing the standard deduction, and eliminating personal exemptions. The TCJA also introduced a new deduction for qualified business income for pass-through entities and made changes to international taxation to encourage repatriation of overseas profits. Although the corporate tax changes were made permanent, numerous tax provisions are slated to expire after 2025. As the expiration of key elements of the TCJA approaches at the end of 2025, Congress is preparing for discussions on which provisions to renew and what new tax reductions to propose.
Trump and most Republicans in Congress, who hold a narrow majority in both chambers, are anticipated to support extending the law. On February 25, 2025, the House narrowly passed a fiscal year 2025 budget resolution with a 217 to 215 vote, instructing the House Ways and Means Committee to implement net tax cuts totaling $4.5 trillion over the next decade. Reaching a consensus on which areas to cut could be challenging, particularly given the slim Republican majorities in Congress.
Consequences of Targeted Tax Law Adjustments
- The TCJA introduced significant changes to Section 168(k). It
allowed businesses to immediately expense 100% of the cost of
eligible property acquisitions placed in service after September
27, 2017, and before January 1, 2023. Unless the law changes, the
bonus percentage is 40.0 percent in 2025, 20.0 percent in 2026, and
completely phases out by December 31, 2026, for property placed in
service after December 31, 2022. This could lead to a decline in
asset acquisitions as well as investments in new construction. By
reinstating or extending immediate expensing, companies would have
stronger incentives to invest in new assets, thereby potentially
increasing the volume of asset acquisitions and new construction
that could drive economic activity.
- The Qualified Business Income Deduction (QBID), introduced as
part of the TCJA, provides eligible pass-through entities, such as
S-corporations, partnerships, and sole proprietorships with a
deduction of up to 20 percent on qualified business income. This
deduction was designed to offer tax relief to small and
medium-sized businesses, thereby encouraging investment and growth
within these sectors. However, the QBID is set to expire at the end
of 2025 unless Congress acts to extend it. The potential expiration
of this deduction could significantly impact the tax liabilities of
pass-through entities, making it imperative for business owners to
consider this upcoming change in their long-term financial planning
and M&A strategies.
- Section 174 of the Internal Revenue Code, originally introduced
as part of the Internal Revenue Code of 1954, deals with the
treatment of research and experimental expenditures. A significant
change was introduced under the TCJA effective for tax years
beginning after December 31, 2021, mandating the capitalization and
amortization of research and development (R&D) expenses over
five years (15 years for foreign research), shifting from the
previous ability to immediately deduct these costs. This change
increased short-term tax liabilities for companies engaged in
R&D. Revisiting this requirement to allow immediate deduction
of R&D expenses could encourage more domestic investment in
innovation. Such a move would be particularly beneficial for
M&A activities in research-intensive industries.
- Section 163(j) limits the deductibility of business interest
expenses, which has implications for companies relying on debt
financing. These restrictions can make leveraged transactions less
attractive by increasing the after-tax cost of debt. Easing these
limits could make debt financing more appealing, providing
companies with greater flexibility to pursue leveraged buyouts and
other M&A activities that rely heavily on borrowed funds. This
change would be especially advantageous for private equity firms
and other investors that use leverage as a key component of their
acquisition strategy, potentially leading to an uptick in leveraged
M&A deals.
- Corporate Tax Rate – While the 21 percent corporate tax
rate does not expire at the end of 2025, President Donald Trump has
introduced the idea of reducing the corporate income tax rate to 15
percent, but only for companies that make their products in
America.
- Effects of decreasing the tax rate – A reduction in the
U.S. corporate tax rate to 15 percent would significantly boost
after-tax profits for companies, leading to higher valuations and
increased capital available for reinvestment. This decrease in the
tax rate would also enhance cash reserves, encouraging companies to
pursue acquisitions as a growth strategy and making U.S. firms more
globally competitive by creating a more attractive tax environment.
Additionally, the lower immediate tax burden on asset sales could
reduce the attractiveness of tax-deferred M&A structures,
potentially altering deal structures and negotiations.
- Effects of increasing the tax rate – Potential increases in the U.S. corporate tax rate could significantly impact M&A activity, as companies may rush to complete transactions before the rate hikes, resulting in a surge in M&A activity ahead of any adjustments. An increase in the tax rate would also enhance the value of securing an asset basis step-up during acquisitions, potentially justifying a higher purchase price to offset the seller's additional tax liabilities from an asset sale versus a stock sale. Furthermore, a higher corporate tax rate could make tax-free transactions, such as spin-offs, more appealing compared to taxable sales.
- Effects of decreasing the tax rate – A reduction in the
U.S. corporate tax rate to 15 percent would significantly boost
after-tax profits for companies, leading to higher valuations and
increased capital available for reinvestment. This decrease in the
tax rate would also enhance cash reserves, encouraging companies to
pursue acquisitions as a growth strategy and making U.S. firms more
globally competitive by creating a more attractive tax environment.
Additionally, the lower immediate tax burden on asset sales could
reduce the attractiveness of tax-deferred M&A structures,
potentially altering deal structures and negotiations.
Global M&A Growth Amid U.S. Tax Shifts and Economic Trends
Navigating the evolving M&A landscape in 2025 requires a comprehensive understanding of both tax changes and broader economic conditions that could impact deal-making dynamics. As potential tax reforms loom in the U.S., companies must strategically prepare for shifts that could alter the financial landscape. However, companies are under increasing pressure to adapt and expand in order to maintain competitiveness.
Under the new Trump administration, a more lenient stance on M&A enforcement by federal antitrust bodies is expected, potentially easing regulatory hurdles. However, the Committee on Foreign Investment in the United States (CFIUS) remains a critical gatekeeper, particularly for companies from countries not aligned with current U.S. policies. This, coupled with the unpredictable nature of political influences on federal antitrust measures, requires dealmakers to exercise caution and strategic foresight.
Interest rate cuts by the Federal Reserve and the European Central Bank have enhanced liquidity and improved conditions for deal-making, have drawn optimism from bankers and dealmakers regarding a surge in M&A activities. Yet, challenges such as valuation expectation gaps between buyers and sellers persist, underscoring the need for careful negotiation and planning. As companies navigate these complexities, aligning tax strategies with anticipated regulatory landscapes will be crucial to capitalizing on growth opportunities in the global M&A market.
Conclusion
As the M&A landscape evolves in 2025, businesses must remain vigilant and adaptable to capitalize on emerging opportunities while mitigating potential risks. The anticipated tax changes and economic shifts present both challenges and prospects for growth. By strategically aligning their tax and regulatory strategies with the evolving policy environment, companies can enhance their competitive edge and drive successful transactions. In this dynamic environment, proactive planning and strategic foresight will enable companies to thrive and achieve their M&A objectives, ensuring long-term success in an increasingly competitive market.
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