How TMT companies can prepare for tax changes under Trump administration in 2025

ARTICLE | November 15, 2024

Authored by RSM US LLP

Technology, media and telecommunications (TMT) 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 that TCJA also subject to change, new legislation could significantly alter businesses’ cash flows and tax obligations.

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

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

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.

For TMT companies, greater or more immediate deductions could free up cash to develop software, create other intellectual property, build out their sales force, reinvest in research, and otherwise pursue growth objectives.

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 have to 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) and global intangible low-taxed income (GILTI) provisions. The TCJA established those effective tax rates to encourage U.S. companies to conduct R&D and keep intangible assets in the United States. Together, they aim to balance American competitiveness globally with the federal government’s need for revenue. The FDII and GILTI effective tax rates are scheduled to increase at the end of 2025; extending the lower rates would cost an estimated $120 billion.

R&D expensing under section 174

Foreign-derived intangible income (FDII)

Global low-taxed intangible income (GILTI)

TMT companies should consider:

• 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.
• 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.
• The interplay between the R&D tax credit and tax treatment of R&D costs. While the former is often the more compelling option of the two, the restoration of immediate expensing would improve the comparison.
• 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.
• Whether their global structure for managing intellectual property is tax-efficient, and how streamlining supply chain components could support operational and tax efficiency.

Debt

As growth-minded TMT companies take on debt in the wake of interest rate cuts, the unfavorable limit to deducting interest expense handcuffs their ability to fund research, grow their sales force, develop intellectual property, and otherwise pursue growth initiatives.

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. It remains to be seen whether Republican support is strong enough to result in a change. The cost of more favorable tax treatment will factor heavily in what Congress does.

TMT companies should consider:

• Analyzing how more favorable expensing of business interest would affect borrowing or transactional strategies
• Telecom companies should examine 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.
• Media companies should evaluate whether to electively capitalize interest to certain intangible assets, such as pre-publication costs and other copyrighted content.

Financial reporting

A change in tax laws, such as the corporate income tax rate, would require C corporations to report on their financial statements how the change affects their deferred tax assets and liabilities.

The tax policy crossroads

The corporate income tax rate dropped to 21% from 35% beginning in 2018, as required by the TCJA. Although the rate does not expire, it is subject to change in new tax legislation and is garnering close attention from lawmakers and taxpayers alike.

Several House Republicans have acknowledged a potential need to increase the corporate rate to raise revenue to offset extension of provisions in the TCJA.

Corporate income tax rate

TMT companies should consider:

• Modeling the effects of changing accounting methods or electing to accelerate or decelerate taxable income in order to maximize permanent savings through tax rate arbitrage.
• Determining the need for footnotes or similar disclosures in financial statements, depending on when potential tax law changes, including changes in tax rates, could be enacted.

The tax policy road ahead for TMT companies

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, TMT companies 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 obligations. 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. Companies that are prepared for law changes and their effects will likely experience the greatest benefits.