How Consumer Products Companies Can Prepare for Tax Changes Under Trump in 2025

15 Nov 2024 How Consumer Products Companies Can Prepare for Tax Changes Under Trump in 2025

Authored by RSM US LLP, November 15, 2024

Consumer products companies have more clarity about the direction of tax policy in 2025 now that Donald Trump has been elected president and Republicans have flipped control of the Senate while retaining control of the House of Representatives.

The unified Republican Congress will be able to quickly pursue broad legislation that remakes the U.S. tax landscape before dozens of provisions in the Tax Cuts and Jobs Act (TCJA) are scheduled to expire at the end of 2025. With nonexpiring provisions and provisions outside of the TCJA also subject to change, new legislation could significantly alter consumer products companies’ cash flows and tax obligations.

Ahead of any tax changes in 2025, businesses can equip themselves to make smart, timely decisions by understanding how different tax policy scenarios would affect their cash flow projections and tax profile.

Below, we highlight for consumer products companies several key business issues that tax legislation in 2025 could affect.

Cost of capital

Consumer products companies face pricing pressures and tight margins that put a premium on strategic investments. When it comes to acquiring fixed assets and placing them into service, more favorable deductions can widen avenues for companies to expand their product mix, consumer segments or new sales channels.

The tax policy crossroads

Companies’ ability to deduct the entire cost of qualified assets the year they are acquired and placed in service—a provision known as bonus depreciation—began to phase out in 2023, under the TCJA. Trump and congressional Republicans support restoring this notion of bonus depreciation as a tax incentive for capital expenditures that drive infrastructure and business growth.

However, the nonpartisan Congressional Budget Office (CBO) estimated in May that reinstating full bonus depreciation retroactively to 2023 would cost the federal government $378 billion through 2034. That estimate would likely invoke a broader discussion around the need for revenue raisers.

Bonus depreciation

Consumer businesses should consider:

• Performing a cost segregation study and repairs study concurrently with any planned improvement projects in order to properly classify shorter-lived property.
• If 100% bonus depreciation is extended, it may be prospective only. Properly identifying asset classes and deductible repair costs is the best way to ensure the fastest recovery of capital expenditures.
• Making various depreciation-related elections (e.g., an election not to claim bonus depreciation) that can be used to increase taxable income in one year without imposing similar treatment in a future year. If used correctly, these types of elections can provide a permanent benefit if tax rates change.

Debt

As growth-minded consumer products companies take on debt in the wake of interest rate cuts, the unfavorable limit to deducting interest expense handcuffs their ability to pursue crucial initiatives, such as fix equipment, manage inventory, enhance automation capabilities, improve products, update commercial space, hire talent and more.

The tax policy crossroads

The business interest deduction limitation under section 163(j) became less favorable in 2022, as required by the TCJA. The current limitation does not expire.

There is some Republican support for a more favorable deduction limit, but it was not a top priority for either party in negotiations that produced the ill-fated Tax Relief for American Families and Workers Act early in 2024. The cost of more favorable tax treatment will factor heavily in what Congress does.

Consumer businesses should consider:

• How more favorable expensing of business interest would affect their borrowing or transactional strategies
• Opportunities to electively capitalize interest expense to inventory or shorter-lived tangible or intangible assets. By capitalizing interest to property with a short turn, the interest expense is no longer subject to the deduction limits and is instead recovered through cost of goods sold or depreciation.

Consumer behavior

As inflation moderates, interest rates ease and consumers respond, tax policies that increase households’ after-tax income would be a boon to retailers, restaurants and other consumer businesses. This is especially true for companies whose customer bases feature lower-income families, many of which have struggled with inflation’s impact on everyday necessities ranging from gasoline to eggs to clothing.

The tax policy crossroads

The child tax credit boosted household spending after it was substantially expanded temporarily as part of pandemic relief legislation. For each $100 of credit, families spent $75—mainly on food, housing and child-related goods and services, according to the U.S. Bureau of Labor Statistics in 2023. Lower-income families spent 85% of the credit.

There is some Republican support for an expanded child tax credit, but disagreements between the two parties about specific elements of the credit stymied the tax relief bill earlier in 2024.

Before that, the TCJA lowered most individual income tax rates, and those reductions are scheduled to expire on Dec. 31, 2025. Extending those individual income tax rate brackets would cost $2.2 trillion through 2034, the CBO estimated.

Child tax credit

Individual income tax rates

Consumer products businesses should consider:

• Develop a unified data strategy that allows your business to establish transparency from start to finish—focusing on supply chains, demand forecasting and customer engagement.
• Create an engaging and seamless customer experience to drive revenue growth and create customer loyalty.

Research and development

The U.S. tax system incentivizes innovation and promotes global competitiveness through credits and cost recovery mechanisms intended to reduce the financial burden companies take on when they invest in new products and technologies.

Greater or more immediate deductions, for example, could free up cash for producers and resellers of consumer goods to fund new product development, technology innovation—including automation and artificial intelligence—and efficiencies to widen their operating margins.

The tax policy crossroads

The tax treatment of R&D expenses under section 174 became less favorable, as required by the TCJA. Beginning in 2022, companies are no longer able to fully deduct R&D expenses in the year they are incurred; instead, they must capitalize and amortize them over five years (15 years for R&D conducted abroad.)

There is bipartisan support for reinstating immediate R&D expensing. But it’s uncertain how much it would cost the government to implement more favorable R&D expensing rules and how that cost would factor into a broader tax package.

Notably, in some prior attempts to restore full expensing for R&D expenditures, Congress has also reinstated a requirement for taxpayers to either take a reduced R&D credit or include the credit into income, reducing its value.

U.S. multinationals should also monitor the foreign-derived intangible income (FDII) provision. It was enacted as part of the TCJA and designed to incentivize businesses to conduct R&D in the U.S. by offering lower tax rates on income from U.S.-held intellectual property used abroad.

R&D expensing under section 174

Foreign-derived intangible income (FDII)

Consumer products businesses should consider:

• How their approach to R&D would change if Congress reinstated immediate expensing of R&D costs, including whether it makes financial sense to outsource R&D.
• Their future R&D spending and whether it makes sense to conduct R&D in the U.S. or abroad. Costs for R&D conducted outside of the U.S. are currently subject to a 15-year recovery period instead of five, regardless of whether the taxpayer is located in the U.S.
• The completeness and accuracy of their reporting for R&D tax credit claims and R&D expenses. The IRS is requiring additional detailed project reporting on future tax returns and is heavily scrutinizing R&D tax items.

Entity structure

Entity choice directly affects enterprise value because it determines how a business is taxed. Business owners should be sure their priorities align with the cash flow and tax implications of being structured as a C corporation versus a pass-through entity (S corporation or partnership).

The tax policy crossroads

As corporate and individual tax rates change for both domestic and global entities, so does the tax-efficiency of different entity types. These rates are subject to change in new tax legislation and are sure to garner close attention from lawmakers and taxpayers alike.

One provision worth watching, in particular, is the 20% deduction for qualified business income—which applies to income from pass-through entities but not C corporations. Extending the 20% deduction would cost the federal government $684 billion, the CBO estimated.

Corporate income tax rate

Individual income tax rates

Deduction for qualified business income

Global intangible low-taxed income (GILTI)

Consumer products businesses should consider:

• Accounting method changes and/or elections to accelerate or decelerate taxable income, in order to maximize permanent savings through tax rate arbitrage.
• Whether potential rate changes, including loss of the qualified business income deduction, make a particular entity type more attractive. In conjunction with this, businesses should consider the impact of structural changes on the business’s ability to change or adopt new methods of accounting in the year of the rate change.
• U.S. multinationals should examine how an increase in the effective tax rate for GILTI would affect their overall tax liability. Model how restructuring their legal entities might minimize adverse tax consequences.

Global footprint and supply chain

Events and market factors in recent years have exposed vulnerabilities in global supply chains, prompting companies to rethink their sourcing and manufacturing strategies and diversify their suppliers and manufacturing locations. In addition, ongoing trade tensions, potential shifts in U.S. tariff frameworks, and changes in industrial policies across jurisdictions are leading to a realignment of global trade flows.

Making decisions about where to locate new distribution centers or factories, or how to optimize global footprint, is a complex and multidisciplinary process. The tax and tariff impacts on existing models and new scenarios are key to business strategy and decision-making.

The tax and trade policy crossroads

• American competitiveness: The TCJA established tax rates for FDII and GILTI to encourage U.S. companies to keep intangible assets within the United States. Together, they aim to balance American competitiveness globally with the federal government’s need for revenue.
• Profit shifting and base erosion: The base-erosion anti-abuse tax (BEAT) is a minimum tax introduced by the TCJA to prevent large multinational corporations from avoiding U.S. tax liability by shifting profits abroad. It applies a 10% tax on certain payments made to foreign affiliates. Relatedly, the United States has not adopted the Organisation of Economic Co-operation and Development’s GLoBE Pillar Two rules, including a global minimum tax. However, many other OECD member countries either have implemented Pillar Two or have committed to doing so.
• Tariffs: Trump favors steep, broad increases in tariffs, which would have profound implications for U.S. importers specifically and the economy in general. Depending on the details, increased tariffs could increase companies’ sourcing costs, impact export revenues in case of retaliation measures by trading partners, and compel companies to further reconfigure their supply chains.

Foreign-derived intangible income (FDII)

Global intangible low-taxed income (GILTI)

Base erosion and anti-abuse tax (BEAT)

Consumer products companies should consider:

• Potential U.S. international tax changes and the corresponding implications on their global footprint. Manufacturers of consumer goods should pay particular attention to their supply chain and economic presence in foreign jurisdictions, as tariffs could significantly limit their cash flows. Additionally, they should be mindful of the global minimum tax.
• Although the United States has not adopted Pillar Two rules, U.S. multinationals operating in countries that have adopted Pillar Two are subject to the GLoBE rules. They need to assess their exposure to the top-up tax and establish a robust reporting process. Compliance with Pillar Two will necessitate the aggregation of extensive global data and the execution of complex calculations.
• Importers may be able to capitalize on several well-established customs and trade programs to mitigate the effects of increased tariffs.
• Manufacturers that source certain machinery from China should consider filing for a tariff exclusion.
• Importers should confirm the tariff classification codes they use are precise, as imprecise codes commonly result in unnecessary costs.

The tax policy road ahead

Expect the path to new tax legislation in 2025 to be unpredictable, difficult to follow at times and lined with conflicting claims by lawmakers, think tanks, news media and other analysts. However, consumer products businesses have a guide.

Those that work closely with their tax advisor to monitor proposals can model how tax changes would affect their cash flows and tax operating model. This can equip companies to stay confidently on course and make smart, timely decisions once policy outcomes become clear.

In recent years, many tax law changes have become effective on the date a bill was introduced rather than the date it was signed into law or later. Businesses that are prepared for law changes and their effects will likely experience the greatest benefits.

This article was written by Karen Galivan, Michael Giannettino, Ayana Martinez, Ryan Corcoran, Ty Doggett, Christian Wood and originally appeared on 2024-11-15. Reprinted with permission from RSM US LLP.
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