U.S. Federal Income Tax

July 2025

Overview

The first half of 2025 has ushered in a period of change in the United States’ approach to taxing businesses within the U.S. and abroad, and coming years promise more uncertainty. On July 4, 2025, U.S. tax policy underwent a dramatic shift as President Donald Trump signed into law the “One Big, Beautiful Bill Act” (OBBBA), extending tax cuts and passing further reform measures. The Trump administration has adopted an America-first approach to global trade, changing the status quo and incentives for structuring global supply chains and increasing compliance costs. All the while, the Internal Revenue Service (IRS) is reducing headcount and limiting regulatory guidance in this increasingly complicated environment. Proactive monitoring and flexibility will be key to success in this environment.

Issue 1: Tax Reform

The Tax Cuts and Jobs Act (TCJA) was signed into law at the end of 2017 and contained sweeping changes to the Internal Revenue Code (Code). Because of the rules applicable to budget reconciliation bills, that bill had to be revenue-neutral to be passed. Thus, many of the significant provisions of the TCJA were designed to lapse or “sunset” in 2026, to reduce the overall cost of the tax cuts to the government and improve the bill’s chances of being signed into law. With the scheduled sunsetting of provisions just around the corner, Congressional Republicans pushed hard to advance tax reform legislation in 2025 that addresses, at least in part, the expiration of certain provisions of the TCJA and promotes other tax objectives of the current administration.

The result of these efforts was the OBBBA. The OBBBA represents a profound shift in domestic tax policy by retreating from the clean energy incentives passed under the previous administration and expanding depreciation and expensing provisions.

Below are highlights of some of the significant provisions of the OBBBA. We will continue to monitor any regulatory guidance and executive orders as they are published.

Restricting Clean Energy Initiatives

• Repeals investment and production tax credits under Code Sections 45Y and 48E for wind and solar projects that are placed in service after December 31, 2027.
• Investment tax credits under 48E will remain in place for energy storage property located at a solar or wind facility until phased out in 2032.
• Denies investment and production tax credits under Code Sections 45Y and 48E, as well as credits under Code Sections 45U, 45X, 45Z, and 45Q, for taxpayers that are specified foreign entities or foreign-influenced entities, and restricts energy credits from projects receiving material assistance from prohibited foreign entities or foreign-included entities.

Expanding Tax Cuts and Jobs Act Programs

• Increases the deduction limit for state and local taxes from $10,000 to $40,000 (through 2029).
• Makes permanent the deduction for qualified business income earned by non-corporate taxpayers under Code Section 199A.
• Makes permanent the 100 percent bonus depreciation deduction for property acquired and placed in service after January 19, 2025.
• Permanently allows deduction of research or experimental costs incurred after December 31, 2024. Research and experimental costs incurred offshore by foreign subsidiaries of U.S. taxpayers must still be amortized over 15 years.
• Extends and expands the Qualified Opportunity Zone program by increasing the number of zones and amount of potential benefits.

America-First Approach to International Business

• Adopts modest decreases to deductions for foreign-derived intangible income (previously “FDII,” now renamed “foreign-derived deduction eligible income”) and global intangible low-taxed income (previously “GILTI,” now renamed “net CFC tested income” or “NCTI”), thereby slightly raising tax rates for U.S. taxpayers earning income abroad and aligning those rates at 14 percent.
• Slightly increases the base erosion anti-abuse tax (BEAT) rate.
• Reinstates Code Section 958(b)(4), preventing classification of controlled foreign corporations (CFC) due to downward attribution and simplifying the application of CFC identification rules.

Notable Omissions

• The OBBBA does not include any provisions to normalize tax relations with Taiwan. Taiwan’s unique status has prevented the U.S. from entering a treaty for the prevention of double taxation with Taiwan and has led many on Capitol Hill to look for a legislative fix. Legislation introduced as recently as January 2025 received bipartisan support; the omission of such provisions in the OBBBA will be seen by some as a missed opportunity.
• Although initial versions of the OBBBA authorized retaliatory taxes against taxpayers that are residents of countries that have enacted “unfair” or “discriminatory” taxes on the U.S., this provision was not included in the final bill. The omission comes as welcome news to many, as this provision, particularly, alarmed many non-U.S. investors and sparked speculation that its passage would result in a capital flight from investments in the U.S.

We will provide ongoing coverage, updates, summaries, and analysis of the OBBBA. We recommend that businesses monitor these developments so that they may proactively address changes that might impact their operations, organizational structures, and global footprint.

Issue 2: U.S. Disconnect from Global Tax Deals

The U.S. is adopting an America-first, isolationist approach to global relations. Early in 2025, the Trump administration rescinded U.S. participation in existing global tax deals, and officials with the Department of the Treasury publicly stepped back from multilateral efforts to harmonize global tax systems. U.S. funding of international organizations is currently under review, and 2026 budget proposals would remove U.S. financial support for international organizations such as the Organization for Economic Cooperation and Development (OECD) and the United Nations.

U.S. officials have taken the position that the U.S. tax system should stand alone but be complementary to the model advanced by the OECD Inclusive Framework on Base Erosion and Profit Shifting. The OECD Framework is characterized by a two-pillar approach for taxing authorities to coordinate tax systems within the digital economy. Pillar One aims to establish tax certainty by allocating taxing rights among countries based on where a business taxpayer’s customers are located, even if the business has no physical presence in the country, and to provide mechanisms to eliminate double taxation of income. Pillar Two sets a global minimum corporate tax of 15 percent and provides mechanisms by which countries can impose additional taxes on taxpayers whose overall tax burden is less than the minimum tax. The OECD Statement on a Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy was released in October 2021, and as of 2024, had been signed by more than 140 countries, including every member nation of the European Union and the U.S.

The approach currently espoused by the Department of the Treasury would require recognition of the U.S. existing tax regime as a qualifying minimum tax under Pillar Two, so that other nations would not impose additional taxes on U.S. taxpayers under the Pillar Two framework. The U.S. currently imposes a tax on the global intangible low-taxed income of foreign corporate subsidiaries of U.S. taxpayers. The NCTI regime applies only to income exceeding a stated return and applies an effective tax rate of 12.5 percent. It is not clear that the NCTI regime qualifies as a minimum tax, or that it is consistent with the Pillar Two approach.

Although the move to break from the growing consensus on global taxing rights and rates is not entirely unexpected, it remains to be seen whether this approach will be effective to allow U.S. taxpayers to avoid taxes imposed by other jurisdictions under the Pillar Two framework. Until talks progress and the U.S. achieves more certainty, there is a real risk that this unilateral approach will increase the overall tax burden on U.S. multinationals and could fuel an escalation of financial burdens on global trade. Further, some critics believe the unilateral approach effectively gives up a seat at the table for the U.S. to meaningfully influence global tax policy. On the other hand, loss of U.S. financial support could undermine efforts to create a coherent set of international taxing norms, which supporters of the current administration’s agenda point to as proof of the U.S.’s negotiating power and the international community’s need to incorporate U.S. preferences into future global tax agreements.

Issue 3: Managing Global Supply Chains

The Trump administration has issued waves of executive orders imposing tariffs on goods imported into the U.S. The legality and validity of such executive orders is the subject of debate, and at least one U.S. court (the U.S. Court of International Trade) has shown some skepticism. While the nation awaits definitive rulings from the judicial system, the administration has delayed or suspended applicability of certain tariffs for various periods as part of an ongoing process of negotiating bilateral trade agreements. Concern over additional tariffs, monitoring, and compliance costs have begun to impact global supply chains as profit margins tighten, and consumer demand may be shifting as firms seek to pass these costs to consumers.

The effect of these tariffs is significant, given the volume of goods imported into the U.S. each year and the reliance many domestic industries place on imported inventory or components. Early reports indicate a growing trend of tariffs influencing decisions to diversify supply chains through alternative, lower-cost suppliers or onshoring manufacturing facilities.

The significance of tariffs is not the only factor affecting supply chain and inbound trade decisions. Nearly half of all imports to and exports from the U.S. incorporate components acquired from related parties. All else being equal, the prices charged by offshore subsidiary or affiliated companies for goods sold in the U.S. will generally increase the U.S. taxpayer’s costs, thereby reducing the U.S. taxpayer’s federal income tax liability. Thus, the value of goods entering the country impacts both tariff compliance and U.S. federal income tax liability, albeit in conflicting ways: higher-value goods can increase tariff costs but decrease income tax liability, while lower-value goods can increase income tax liability but decrease tariff costs.

The practice of setting prices for goods, services, intangible goods, and capital between related parties is generally referred to as “transfer pricing.” Because of the possibility that taxpayers may artificially and abusively manipulate prices charged by companies under common control, the Code requires that related parties charge “arm’s length” prices. Further, the IRS emphasizes transfer pricing audits and imposes steep penalties for noncompliance.

The dynamic produced by unpredictable and high-cost tariff regimes has created new pressures for businesses:

• Setting prices at arm’s length is increasingly difficult if market forces and new tariff costs change demand and purchasing decisions in rapid succession.
• Tariff costs are paid at the time of import, while sales may not recover those costs for days, weeks, or months. This timing difference can cause cash flow shortages and require monitoring to ensure businesses plan their treasury and cash management appropriately.
• Cost pressures create incentive for some affiliated groups to reduce tariff exposure by setting prices for foreign tangible goods at the lowest plausible rate, while simultaneously reducing U.S. federal taxable income by increasing prices for use of foreign services, intangibles, and capital to the highest plausible rate.

In the face of market and international trade uncertainty, taxpayers should closely review global supply chain structures and identify opportunities to improve stability, flexibility, and cost efficiency by (a) diversifying their supplier base, (b) evaluating transfer pricing strategy and coordinating transfer pricing and tariff compliance strategies, (c) improving transfer pricing compliance, and (d) evaluating treasury and cash management practices.

Issue 4: Turnover and Regulatory Priorities at the Department of Treasury

The beginning of 2025 has seen turnover, opacity, and uncertainty at the nation’s tax administration agency.

Leadership

President Trump nominated former U.S. Representative Billy Long (R-Missouri) to lead the IRS. He was confirmed by the Senate on June 12 and sworn in on June 16 but has proven to be a controversial figure. Congressional Democrats have publicly doubted his credentials to lead the IRS, highlighting his connections to companies that promoted non-existent tax credits and assisted taxpayers in making fraudulent Employee Retention Tax Credit claims. Prior to his swearing in, the IRS had a revolving door at its head under the current administration. No fewer than four persons served as acting Commissioner of the IRS in the four months following President Trump’s inauguration.

Staffing

In 2020, the U.S. Treasury Inspector General for Tax Administration (TIGTA) issued a report related to ongoing efforts to consolidate IRS tax return processing operations, finding that hiring shortages and the inability to adequately hire personnel will be of concern to the IRS in the future. Similar recruiting, staffing, and technology-related issues have been highlighted in subsequent years, culminating in a significant increase in the IRS budget with the passage of the Inflation Reduction Act.

Early in 2025, President Trump ordered a hiring freeze for federal employees, including the IRS. Subsequently, the U.S. Department of Government Efficiency and Office of Personnel Management began executing a plan to reduce the size of the federal government workforce and have been instrumental in spurring the voluntary and involuntary departure of IRS staffers.

TIGTA determined that, as of March 2025, the IRS had been reduced by approximately 11,000, representing around 11 percent of its total workforce. In April, the IRS offered an additional deferred resignation option to employees, resulting in over 13,000 additional departures. Further, the budget request for fiscal year 2026 includes significant IRS budget and staffing cuts of up to 20 percent from 2025 levels.

Regulatory Priorities

President Trump signed an executive order entitled “Unleashing Prosperity Through Deregulation” on January 31, 2025. The executive order requires the termination of 10 regulations for each new regulation promulgated. The Department of Treasury responded by withdrawing existing regulatory guidance, including proposed regulations relating to partnership basis-shifting transactions. Although the ultimate impacts of the executive order are unclear, it is likely to result in a slowing of guidance and less certainty for taxpayers.

It also isn’t clear at this point what regulatory and enforcement priorities will characterize the upcoming years, or who will enforce them. Generally, taxpayers should expect enforcement efforts to be selective and highly focused on specific programs, such as partnerships, transfer pricing, and tax credits.

Recommendations

Seemingly overnight, the nation's crystal balls went dark, and an already murky future has become even less clear. Level heads will stay abreast of ongoing changes while taking a proactive approach to maintaining compliance with tax laws, modeling global tax compliance requirements, and actively seeking to improve supply chain efficiency and stability.

Here are a few ways to be prepared for whatever the future may bring:

• Stay tuned for updates and explanations of the OBBBA.
• Determine whether existing organizational structures and global customer base may result in additional tax liability by modeling the effects of the OECD Framework (with and without U.S. participation).
• Evaluate whether existing organizational structures allow enough operational flexibility to react to changes in consumer demand, preferences, and geographic concentration.
• Evaluate whether existing supply chain structures are likely to result in increased tariff costs and cash flow shortages and if a change in treasury management is required.
• Consult with tax counsel to determine whether a change in transfer pricing strategy is appropriate or necessary.
• Identify high-risk tax positions and invest in best practices for documenting those tax positions to be prepared for an audit or an unexpected position taken by the IRS.