How financial services companies can prepare for tax changes under Trump in 2025

Over the past year, various factors have challenged financial services companies' ability to generate desired returns, including higher interest rates, elevated costs of capital, increased market volatility, high regulatory compliance costs, and the need for capital expenditures to implement productivity-enhancing technologies.

The tax policy crossroads

Tax policy discussions in recent years have commonly included the question of whether to tax carried interest and long-term capital gains as ordinary income or at more favorable rates. A unified Republican government is likely to favor maintaining preferential tax treatment for these types of income. 

In addition to tax rates, various deduction limitations are subject to change. The TCJA introduced a cap of $10,000 on the deduction for state and local taxes (SALT), significantly impacting taxpayers in high-tax states. This cap, along with other changes to itemized deductions, is set to expire after 2025. General partners should plan accordingly with their tax advisors.

The tax policy crossroads

The TCJA limited the itemized deduction for state and local taxes to $10,000. Before that, there was no limit. Since the TCJA was enacted, the SALT cap has remained unchanged despite scrutiny by both major political parties.

The Republican-controlled government might aim to either extend the SALT cap and other itemized deduction limitations, or modify them in some way going forward. For example, the SALT cap could be increased but not eliminated. The CBO estimated that allowing the sunset of TCJA changes to itemized deductions, including the SALT cap, would cost $1.2 trillion. 

Fund partners should:

• Factor in SALT deductions when evaluating their investment structure and future acquisition plans.
• Model their tax projections for various scenarios, including scheduled expiration of the SALT cap on Dec. 31, 2025; an increase in the SALT cap, or a permanent $10,000 SALT cap. 
• Evaluate alternate strategies, such as making a pass-through entity election.
   

As interest rate cuts release pent-up demand for deals, institutional lenders can expect an uptick in loan applications from businesses and individuals. Meanwhile, specialty lenders can appeal to borrowers with unique needs by offering more flexible terms and innovative products. This dynamic can lead to a more competitive lending environment, fostering growth and potentially driving economic activity as more deals are financed and executed.

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. 

Financial services firms should consider:

• How more favorable expensing of business interest would affect their lending or transactional strategies