Business owners face a pivotal year of potential tax changes and fiscal uncertainty. The expiration of key provisions under the Tax Cuts and Jobs Act (TCJA) of 2017 and a shifting political landscape point to significant changes for businesses. Here are the provisions all business owners need to know about: Individual Tax Rates, Standard Deduction for Individuals, Corporate Tax Rates, Qualified Business Income (QBI) Deduction, Alternative Minimum Tax (AMT), and Bonus Depreciation.
Sunset Provisions and the Tax Cuts and Jobs Act of 2017
The TCJA resulted in many favorable and a few unfavorable tax law changes. It introduced sweeping changes to the tax code, significantly altering individual, corporate, and business-related tax provisions. Many of these changes were designed to stimulate economic growth but were implemented with built-in sunset clauses to meet budgetary constraints. As these provisions expire in 2025, businesses should prepare for possible shifts. These changes include adjustments to individual tax rates, the Qualified Business Income (QBI) deduction, bonus depreciation, and the estate tax exemption.
Individual Tax Rates
The TCJA temporarily lowered individual tax rates, reducing the top marginal rate from 39.6 percent to 37 percent. Without legislative action, these rates will revert to pre-2017 levels. This change could affect business owners who file taxes as individuals or through pass-through entities such as S-Corporations and LLCs.
Standard Deduction for Individuals
The TCJA nearly doubled the standard deduction, simplifying tax filings for millions of Americans. If this provision sunsets, individual business owners may need to reconsider itemizing deductions, especially for expenses related to their businesses.
Corporate Tax Rates
One of the most notable changes under the TCJA was cutting the maximum corporate income tax rate to a flat 21 percent. This provision will not expire, ensuring continued lower tax rates for C-Corporations. The new administration has proposed further lowering the tax rate to 15 percent.
Qualified Business Income (QBI) Deduction
The QBI deduction allows eligible pass-through businesses, such as sole proprietorships, partnerships, S-Corporations, and Limited Liability Companies (LLCs), to deduct up to 20 percent of their qualified business income from their federal taxable income. The deduction has been critical for many businesses in their ability to reinvest in operations, hire new employees, or fund capital improvements. This provision will expire at the end of 2025, potentially increasing tax liabilities for many small and medium-sized businesses. The new administration intends to extend and potentially expand the QBI deduction.
Alternative Minimum Tax (AMT)
Before the TCJA, the AMT was a parallel tax system designed to ensure that high-income taxpayers paid a minimum tax. However, it often led to increased complexity and frustration for taxpayers. The TCJA eliminated the corporate AMT and raised individual AMT exemption thresholds. The new administration has proposed making the QBI deduction permanent to continue supporting small and medium-sized businesses.
Bonus Depreciation
Under the TCJA, businesses have benefited from 100 percent bonus depreciation, which allows them to deduct the full cost of eligible property in the year purchased. This tax benefit stimulated economic growth, promoted reinvestment, and fostered job creation. However, starting in 2023, this percentage began phasing down. By 2027, unless extended or modified by future legislation, the deduction will drop to zero percent. The gradual reduction emphasizes the importance of strategic planning for capital expenditures. The new administration intends to reinstate 100 percent bonus depreciation, aiming to provide immediate tax relief to businesses.
Effective Tax Planning Strategies
To thrive amid these changes and mitigate potential impacts, business owners should adopt proactive strategies, including:
Consult with Tax Professionals: Engage professionals to analyze how expiring provisions and new proposals may impact your business.
Accelerate Income and Deductions: Consider timing strategies to optimize tax liabilities before rates increase.
Evaluate Entity Structure: Reassess whether your current business structure aligns with evolving tax policies.
Plan Capital Expenditures: Take advantage of remaining bonus depreciation opportunities.
Monitor Legislative Developments: Stay informed about potential legislative changes regarding tax and trade policies.
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