As Indiana CPAs and CFOs navigate the ever-changing tax landscape, understanding the latest federal tax developments is important. This update highlights the status of the Tax Cuts and Jobs Act (TCJA) provisions set to expire this year, potential new tax legislation, transformation at the IRS, and the broader economic strategy behind current policy proposals.

The Fate of TCJA & Proposed Extensions

As we know, the TCJA provisions are set to expire at the end of 2025. The majority seeks to extend key TCJA provisions, such as the lower individual tax rates, doubled standard deduction, expanded child tax credit, the 20% qualified business income deduction, and higher estate gift tax exemption. The majority party has embarked on the long and tedious process of pushing through tax legislation this year using reconciliation. As CPAs we are familiar with bank reconciliations, but reconciliation in Congress is a complicated process that allows tax and budget legislation to pass with a simple majority in the House and Senate and avoid the 60-vote threshold in the Senate. Thus, the majority party can pass tax legislation itself without support from the minority party, but with slim margins now in both chambers, this is a challenge. A handful of members could stall the entire bill.

While most in the majority party are supportive of extending the TCJA, there are some that are also concerned about the cost and impact on the federal deficit. Some Republican lawmakers are arguing that maintaining these current tax provisions should be scored as cost-neutral since they are already in place (known as the “current policy baseline”). The Joint Committee on Taxation (JCT) in Congress, however, estimates that extending the TCJA tax cuts would “cost” $4.6 trillion over ten years, using the current tax law now in place (known as the “current law baseline”). Republican leaders are wrestling now with which of these baseline approaches to follow in constructing their tax bill this year. They need to agree on this approach, and then the House and Senate must adopt a budget resolution.

Despite the stalemate noted above with the baseline approach, House Ways and Means Committee Chairman Jason Smith is moving forward with initial steps in drafting tax legislation that aims to extend much of the TCJA. The budget resolution still must be ironed out, as it will impact the overall scope of the tax bill, but Smith wants to get started drafting the bill. With budget constraints in mind, the Trump administration and lawmakers are also considering spending cuts and “offsets” (tax hikes on certain items) to be part of the overall legislation. Keep in mind, Republican leaders must navigate complex rules, unique to reconciliation, at every step in the process. The road to reconciliation is a rocky one.

Potential New Tax Provisions & Their Viability

Beyond extending TCJA, the new tax bill may include additional provisions aligned with President Trump's campaign priorities. Discussions are underway to eliminate taxes on tips and overtime pay, and additional measures that could benefit lower-income workers such as making auto loan interest deductible (on U.S. manufactured vehicles), eliminating tax on Social Security benefits, and possibly reducing the corporate tax rate to 15% for domestic manufacturers (discussed further below). Few details are available on these provisions at this point.

However, achieving consensus remains a challenge. The final package will likely be shaped by the broader budget negotiations and political trade-offs in the coming months.

Timing: When Might the Tax Legislation Pass?

Given the legislative calendar and ongoing budget negotiations, the House hopes to pass a tax bill in April, with Senate version continuing into early May. Any difference in the House and Senate bills would need to be resolved, and then final votes taken. Leaders are hopeful this tax bill can be completed by Memorial Day, but it might slide into Summer. Delays are possible as both chambers work through budget differences.

If Congress fails to act on a tax bill in 2025, tax increases will automatically take effect in 2026 when TCJA provisions expire. These tax increases include, of course, a lower estate tax exemption which could create stress for many taxpayers and their advisors as the year winds down with no finality on the proposed legislation.

Tax Policy vs. Tariffs

A key aspect of President Trump’s economic strategy is leveraging tax policy to bring manufacturing jobs back to the U.S.  In recent interviews, Treasury Secretary Scott Bessent has emphasized that tax cuts, coupled with deregulation and energy cost reductions, will create an environment conducive to industrial growth in the U.S.

Tariffs are also being positioned to protect domestic industries. The administration's reciprocal trade approach aims to pressure trading partners into lowering trade barriers while encouraging U.S. companies to expand operations domestically, and not necessarily as a strategy to move manufacturing jobs back to the U.S.

Lower Corporate Tax Rates and Global Competition

You may recall that the TCJA cut the corporate tax rate to 21% to promote U.S. global competitiveness. This tax rate is not scheduled to expire in 2026, but will continue at 21%; significantly lower than pre-TCJA levels. This reduction made the U.S. a more attractive destination for businesses, particularly manufacturers considering relocating from high-tax jurisdictions, like France and Germany.

Current proposals being considered have the corporate tax rate being lowered further to 15% for businesses that manufacture their products in the U.S. This lower rate is intended to make the U.S. more competitive with other tax-favored jurisdictions, like Ireland, which has a corporate tax rate of 12.5%. Ireland also provides a significant tax credit for research and development expenditures that lowers that rate even further. Due to the favorable tax regime, many multinational corporations pay an effective tax rate of less than 10% in Ireland. By lowering corporate rates and expanding tax incentives, like Section 1202 Qualified Small Business Stock (QSBS) exemption, the lawmakers hope to encourage additional investment in domestic production facilities.

IRS Overhaul: Staff Reductions & Tech-Driven Efficiency

One of the most significant shifts in tax administration is the restructuring of the IRS. Treasury Secretary Bessent has signaled that the IRS will undergo substantial staff reductions, with a focus on automation and AI-driven compliance measures. Approximately half of the 15,000 new hires from recent expansions were recently cut, as the administration prioritizes efficiency over workforce expansion. We have seen this locally as tax audits led by these newer revenue agents have been suspended until further notice.

More workforce reductions are being planned at the IRS with one report suggesting perhaps a 50% drop in the IRS headcount. It is uncertain what the timeframe is for these staff reductions at the IRS.

The IRS’s future vision includes leveraging AI for audit selection, fraud detection, and other tasks significantly reducing the need for manual enforcement. While concerns exist over the impact on taxpayer service by the IRS, the administration argues that technology will enhance efficiency while maintaining strong revenue collection capabilities.

What CPAs & CFOs Should Watch For

1. TCJA Extension Prospects: Expect continued debate over making tax cuts permanent. Businesses should prepare for possible shifts in tax rates and deductions. Stay engaged. If no tax legislation is passed this year, it effectively means a significant tax increase next year.  If new legislation is not passed by the Fourth of July, contingency plans need to be put in place with clients most impacted by TCJA expiration. 
“One approach we suggest to businesses is to have a dynamic plan in place, one that can be adjusted every five years as the political landscape can change quickly.”
2. New Tax Incentives: Watch for legislative developments regarding deductions for capital investment, tip income exemptions, and other potential tax breaks. One approach we suggest to businesses is to have a dynamic plan in place, one that can be adjusted every five years as the political landscape can change quickly.
3. IRS Transformation: The shift toward AI-driven compliance and a reduced workforce means firms should stay informed on how tax enforcement may change in the coming years. We would expect this transition to cause some short-term service issues, causing practitioners to have to invest more time in meeting clients’ needs. We would also expect that the AI tools and their interpretation will not be perfect, again, causing some short-term challenges. 
4. Tariff Policy Impacts: Manufacturing clients may see cost fluctuations based on evolving trade policies, particularly regarding supply chains. Stay close to your customers and your advisors and be prepared to adjust pricing quickly, as well as look for ways to price risk on raw materials. With higher prices in some industries, perhaps now might be the time to evaluate the LIFO inventory method.

As tax policy unfolds in the coming months, staying proactive will be key for financial leaders in Indiana. Be prepared for potential changes that could impact both corporate and individual tax planning strategies.