Anticipating Tax Policy Shifts in 2025: M&A Implications

Tax reform is expected to take center stage in 2025, particularly with the scheduled expiration of significant provisions from the Tax Cuts and Jobs Act (TCJA). The stakes are high for mergers and acquisitions, where tax policy directly influences deal structures, valuations and long-term strategy. However, misalignments on approach within the Republican party could slow progress.

Lawmakers are split on how to approach tax reform — some are calling for swift action to extend TCJA provisions and introduce new incentives to boost economic growth, while others want to tie tax reform to broader policy negotiations. At the same time, all are weighing tax cuts against the deficit, underscoring the difficulty of moving legislation forward, even with Republican control of both chambers.

Key Legislation to Monitor for M&A

• Tax Rates: The possible expiration of TCJA provisions on the Qualified Business Income deduction could increase tax burdens on pass-through entities. Conversely, corporate tax rates have been mentioned as a potential area to raise revenue in upcoming legislation. Tax rates for flow-through entities and corporations are both up for a potential significant change.
• Bonus Depreciation: With the phasedown of 100% bonus depreciation already underway, its future remains uncertain. The availability of accelerated depreciation can be a critical factor in capital-intensive transactions as Buyers may not be able to rely on the immediate expensing impact when buying equipment or other bonus eligible property.
• Interest Deductibility: The current limitations under Section 163(j) may be further restricted or revised, impacting leveraged buyouts and transactions relying on debt financing. The result could be cash expense for interest without a related tax deduction.
• State Tax Cap: Asset deals have become more attractive to sellers by utilizing Pass-Through Entity Tax elections where available in an asset sale. This has been a win-win as both Buyers and Sellers obtain tax advantages from an asset deal. However, changes to the state tax deduction limitation could change preferred structure of Sellers and create resulting friction between the parties.

Recommendations for Investors

• Plan for current laws but remain agile: Given the uncertainty, it’s advisable to structure deals based on existing laws while building flexibility in agreements.
• Scenario planning: Work with advisors to develop models that account for various legislative outcomes. This will help identify risks and opportunities, ensuring decisions are well-informed.
• Monitor legislative developments: Stay up-to-date on discussions in Congress and committees. The outcome of these negotiations will significantly shape the business tax landscape.

Tax policy is poised to be a defining theme in 2025, and investors and fund managers must be prepared for a range of possibilities. By planning for current laws and staying alert to possible changes, businesses can confidently navigate this uncertainty. Quick adaptation to new legislation will be key to seizing opportunities and managing risks.