The Tax Cuts and Jobs Act (TCJA) of 2017 was the most significant overhaul of the US tax code in more than 30 years, but many of its most important provisions were temporary and set to expire at the end of 2025. While the deadline is still more than a year away and Congress is likely to extend some provisions, it’s not too soon to begin considering and preparing for the possible expiration of key TCJA provisions.
Individual Taxpayer Provisions
Individual taxpayer provisions do not directly address business taxes, but they could indirectly impact the ways business owners structure their companies and implement tax planning strategies in the next few years.
- Individual Tax Rates: The TCJA’s lowered personal income tax rates will sunset at the end of 2025. Individual tax rates will return to pre-2018 levels, with the top rate reverting to 39.6 percent and the current tax brackets changing as well.
- Standard Deduction: The standard deduction nearly doubled under the TCJA, but after next year it will revert to its previous, much lower level plus adjustments for inflation since 2018.
- Itemized Deductions: The TCJA made many temporary changes to itemized deductions including a $10,000 cap on the state and local tax (SALT) deduction, limitations on deductions for home mortgage interest and charitable contributions, and the elimination of many miscellaneous deductions. All those changes are scheduled to end after 2025, but the phase-out of itemized deductions for high income taxpayers will be reinstated. This means some taxpayers may not receive the full benefit of these larger deductions. In addition, many states have enacted elective pass-through entity taxes to allow business owners to bypass the $10,000 cap. It is uncertain how these taxes will be affected if the $10,000 cap is allowed to lapse.
- Personal Exemptions: Personal exemptions, which were temporarily suspended under the TCJA, will resume in 2026, with the exemption amounts adjusted for inflation since 2018.
The TCJA also increased exemption amounts for the alternative minimum tax (AMT) and significantly altered a number of estate and gift tax provisions. These too will sunset at the end of 2025, with potential impacts on businesses and their owners.
Business Tax Provisions
Many—but not all—of the TCJA’s business tax provisions are also due to expire after 2025. Some have already started to phase out. Anticipating these changes and preparing an effective response will require close monitoring of actions in Congress and careful analysis over the coming months.
- Corporate Tax Rate: The TCJA permanently cut C-corporation taxes from a graduated top rate of 35 percent to a flat 21 percent. This is one of the few provisions that will not expire at the end of 2025, but Congress is likely to consider rate changes, especially those targeting large corporations.
- Qualified Business Income (QBI) Deduction: The Section 199A deduction for pass-through businesses is scheduled to expire at the end of 2025. Income from sole proprietorships, partnerships, and S corporations will be taxed at ordinary individual tax rates, without the 20 percent deduction the TCJA granted.
- Bonus Depreciation: The TCJA temporarily allowed full (100 percent) first-year expensing (rather than capitalization and depreciation) of the purchase costs of many types of property used in a business. It also expanded the types of property that qualify for this treatment. This provision has already begun phasing out, dropping to 60 percent this year, 40 percent in 2025, and 20 percent in 2026. For more information see our blog post, Bonus Depreciation Being Phased Out…Consider Phasing In the 179 Expense Deduction.
Other TCJA business tax provisions—such as deferrals for qualified opportunity zone investments and limitations on the amount of business losses individuals can deduct are set to expire in 2025 and 2028, respectively. Some provisions, such as changes to net operating loss carryover rules and limits on business interest deductions, will not expire but may be modified by Congress. Effective 2022 and future tax years, the TCJA required the capitalization and amortization of R&D costs instead of being currently deductible. There is pending legislation in Congress to modify this effective date, but no action has been taken by Congress on this issue since January.
Planning Ahead
Although businesses should not take any permanent actions just yet, it is wise to begin considering possible strategies to offset the expiration of TCJA provisions. For example, in light of declining bonus depreciation over the next few years, businesses might think about accelerating certain equipment purchases or other qualified capital expenditures. Alternatively, some businesses might consider using Section 179 deductions instead, especially as the limits on Section 179 deductions increase annually.
The scheduled loss of the QBI deduction, coupled with the impending increase in personal tax rates, could be particularly costly for sole proprietors, partners, LLC members, and S corporation shareholders. To be prepared in case Congress is unable to agree on some form of relief, these taxpayers might start looking for ways to accelerate pass-through income into 2025 before this provision expires. Others might consider whether the disparity in tax rates would justify converting their pass-through entities to C corporations.
Business taxpayers should also bear in mind that changing personal income tax provisions could affect both the desirability and timing of many financial decisions, such as retirement plan contributions, charitable donations, and Roth IRA or 401(k) conversions.
Congress is almost certain to modify the tax laws affecting individuals and businesses between now and the end of next year, and the November election results obviously will impact how Congress addresses the TCJA’s expiration. While it is still early for business leaders to make decisions about many of these issues, it is not too soon for them to start exploring possible responses with their tax professionals, especially since some strategies could take time to implement.
Please contact us if you have any questions relating to the TCJA expiration or any other tax planning issues.