Tariffs and Tax Uncertainty Threaten Business Strategies in 2025

This year, businesses are keeping watch on major economic policy changes that could significantly affect supply chains and tax strategies. The potential expiration of key Tax Cuts and Jobs Act (TCJA) provisions, potential corporate tax rate adjustments, and proposed new tariffs all introduce uncertainty. In response, companies must adopt a proactive approach to mitigate financial risks and implement strategic adjustments.

Higher Tax Bills Ahead?

The TCJA introduced significant tax cuts in 2017, many of which are set to expire unless extended. Key provisions at risk include:

• Corporate Tax Rate – Remains at 21%, but enhanced bonus depreciation deductions are phasing out.
• Pass-Through Deduction (199A QBI) – Set to sunset, impacting small businesses.
• Estate Tax Exemption – Could revert to pre-TCJA thresholds, affecting generational wealth transfers.
• State and Local Tax (SALT) Deduction Cap – Its expiration could relieve taxpayers in high-tax states like New York and California.

While President Trump has expressed interest in extending individual tax cuts, eliminating the SALT cap, and making the estate tax exemption permanent, political roadblocks make passage uncertain. With a slim Republican majority in the House and a divided Senate, passing such legislation through reconciliation will be a challenge, particularly given concerns about adding trillions to the national debt. Without an extension, many taxpayers could see substantial tax increases.

Rising Supply Chain Costs and Tariff Risks

Another major concern is Trump’s 25% tariffs on imports from Canada and Mexico, along with a 10% tariff on Chinese imports (announced on Feb. 1 to take effect on or after Feb. 4, 2025). Additional tariffs could also target Taiwan, Europe, BRICS+, and Colombia. In response, Canada swiftly announced retaliatory tariffs on nearly $125 billion worth of U.S. imports.

If implemented, these tariffs could disrupt global supply chains, increase manufacturing costs, and contribute to inflationary pressures. Businesses must prepare for:

• Supply Chain Resiliency – With 20% of U.S. manufacturing inputs currently sourced from abroad, companies must assess the reliability of their foreign suppliers. (See the chart below.)

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• Tariff Mitigation Strategies – Strategies such as tariff engineering (modifying products to qualify for lower duty rates), duty drawback programs, and foreign trade zones (FTZs) could help offset cost increases.
• Impact on Trade Agreements – The United States-Mexico-Canada Agreement (USMCA) faces review in 2026, with possible earlier adjustments.

Despite protectionist trade policies, the share of foreign manufacturing imports continues to rise. IBIS World projects that by 2025, imported manufactured goods will make up an estimated 33% of U.S. market share, growing at a steady 0.3% annual rate, per the chart below.

New Income Tax Disclosure Rules

Starting in 2025 for public business entities (PBEs) and 2026 for all other businesses, ASU 2023-09 expands income tax reporting requirements:

• PBEs must now provide a tabular rate reconciliation with percentages and currency amounts.

• Non-public entities, non-profits, employee benefit plans, and community banks are also included.

• Required disclosures include, among other items, state/local taxes, foreign tax effects, tax law changes, tax credits, valuation allowances, and unrecognized tax benefits.

Disaggregation is required by nature (e.g., tax credits, cross-border tax laws) and jurisdiction (e.g., foreign tax effects by country). Unrecognized tax benefits (UTBs) can be reported on a net basis if consistent across jurisdictions.

Both PBEs and non-PBEs must now disclose income taxes paid (net of refunds) annually, broken down by federal, state, local, and foreign taxes. Further breakdown is required for jurisdictions where payments exceed 5% of total taxes paid. Comparative prior-period information is not required.

Income and Deduction Timing Strategies

With potential tax rate fluctuations, businesses must reconsider tax accounting methods:

• If tax rates decrease: Pull deductions forward and defer income → convert timing differences to permanent tax savings.

• We do not know that tax rates will decrease, but it’s notable that President Trump has proposed lowering the corporate tax rate to either 20% or 15% from the current 21%.

Considerations for Mergers & Acquisitions (M&A)

Tax accounting methods also impact M&A transactions, particularly with changing ownership:

• Stock Sales: Buyer inherits the seller’s tax accounting methods, risking liability for improper methods.

• Asset Sales: Methods may reset, but seller’s methods may still impact tax basis of assets and liabilities acquired.

Companies engaging in M&A should review tax accounting methods as part of due diligence to avoid unexpected liabilities.

Preparing for an Uncertain Future

With shifting tax policies and trade uncertainties, businesses must prepare for multiple scenarios:

1. Tax Strategy Adjustments: Work with advisors to assess TCJA changes, accelerate income, maximize deductions, and restructure entities as needed.
2. Supply Chain Diversification: Identify alternative sourcing, implement tariff mitigation strategies, and explore domestic production options.
3. Legislative Monitoring: Stay informed on policy developments and trade negotiations to anticipate risks.

Act Now to Stay Ahead

With so much uncertainty, businesses can’t afford a wait-and-see approach. Elliott Davis can help you develop tax-efficient strategies and mitigate supply chain risks. Download our comprehensive PDF on the topic, watch the full webinar replay below, or contact our team today to discuss how you can prepare for the changes ahead.

The information provided in this communication is of a general nature and should not be considered professional advice. You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change.