The Tax Cuts and Jobs Act (TCJA) of 2017 is currently scheduled to sunset at the end of 2025, meaning significant changes are on the horizon for taxpayers. Businesses need to be aware of a number of changes to current tax laws and take advantage of ways that they can maximize tax savings and minimize future tax liabilities. Taxpayers should note changes to the qualified business income (QBI) 20% deduction (Sec. 199A), and plan to maximize bonus depreciation and estate and gift tax exclusion benefits.
What This Means For Your Business
Currently, small business owners with pass-through income are eligible to deduct up to 20% of their QBI on their tax returns. In general terms, QBI can be defined as the business’s net profit, excluding capital gains, dividends, interest, and foreign income.
Starting in 2026, the QBI deduction will no longer be available. It is in the best interest of eligible businesses to accelerate income from 2026 into 2025 and 2024. To the extent revenue can be accelerated in 2024 and 2025 or expenses can be deferred into 2026, the business will be able to benefit from the deduction provided by QBI.
Businesses are strongly encouraged to maximize bonus depreciation before the provision expires on December 31, 2026. Certain fixed assets, including computer equipment and software, office furniture, machinery, some vehicles, and qualified property, can be deductible expenses.
For tax year 2024, 60 percent of eligible purchases can benefit from bonus depreciation. For the years 2025 and 2026, the percentage of bonus depreciation declines to 40 percent and 20 percent, respectively. From an income tax perspective, it would be best to accelerate tax deductions as much as possible.
Finally, married business owners filing jointly should take estate and gift tax exclusions into thoughtful consideration. They will need to determine whether it makes sense to top off their lifetime gifts above the expected post-2025 exemption amount of approximately $7 million before they lose the excess exemption between $7 million and $12.92 million. Any difference between the current higher exemption amounts and the post-2025 reduced amounts will be lost if not used.
On the bright side, one of the few TCJA provisions that will not expire at the end of 2025 is the corporate tax rate, which is a flat 21% regardless of amount of corporate taxable income. The permanent change to the corporate provisions positively impacted economic growth by increasing jobs and business investment, and is expected to continue.
Other Strategies to Consider
In addition to the above, there are several strategies that businesses can use to minimize future tax liabilities and offset the changes coming with the end of the TCJA.
For example, businesses can consider investing in research and development (R&D) activities. The R&D tax credit is a dollar-for-dollar reduction in income tax liability that is available to businesses that engage in qualified research activities. The credit can be used to offset regular tax liability or alternative minimum tax (AMT) liability.
Businesses can also consider investing in energy-efficient equipment and facilities. The Energy Policy Act of 2005 provides tax incentives for businesses that invest in energy-efficient equipment and facilities.
Another option is to look into state and local tax incentives. Many states and localities offer tax incentives to businesses that invest in their communities. These incentives can include tax credits, tax exemptions, and tax abatements.
Don’t Put Off Assessing Your Tax Strategies
Now is a critical time to assess your strategies for maximizing tax savings and minimizing future liabilities. By implementing strategies like accelerating income, maximizing bonus depreciation, and taking advantage of estate and gift tax exclusion benefits, you can put your business in a much more advantageous position ahead of the coming changes. If you choose to wait, you will find your options much more limited, and you run the risk of seeing your tax liability increase dramatically year over year.
Consult With Your Tax Advisor
The best course of action to offset the changes coming with the end of the TCJA will vary from business to business. The most important step you can take is to consult with your tax advisor as soon as possible, so that you can start implementing the strategies necessary to minimize the negative impact of the coming tax code changes.
