Anticipating Future Tax Changes for Businesses
Posted by Cory Van Deusen V on August 08, 2024
The forthcoming presidential and congressional elections may bring substantial changes to the tax environment for U.S. businesses. A key factor is the impending expiration of significant provisions in the Tax Cuts and Jobs Act (TCJA), which is slated to end in approximately 17 months. How policymakers in Washington address this expiration could reshape the tax landscape.
Background
The Tax Cuts and Jobs Act (TCJA), effective from 2018, introduced extensive reforms to small business taxation. Many of its provisions are set to expire on December 31, 2025.
As this deadline approaches, business owners should be mindful of potential impacts on their federal tax obligations. The future is uncertain, given the differing perspectives of Democrats and Republicans on the TCJA provisions.
Corporate and Pass-Through Business Rates
Under the TCJA, the maximum corporate tax rate was reduced from 35% to 21%. Additionally, tax rates for individual taxpayers engaged in noncorporate pass-through entities, such as S corporations, partnerships, and sole proprietorships, were lowered. The top individual tax rate currently stands at 37%, down from 39.6% before the TCJA.
Although the individual rate reductions are set to expire in 2025, the corporate tax cut was designated as “permanent,” meaning it does not have a scheduled expiration. However, future tax legislation could still alter the corporate tax rate.
In addition to these rate adjustments, the TCJA introduced several other notable changes. One significant aspect for small business owners is the potential expiration of the Section 199A qualified business income (QBI) deduction, which allows for a write-off of up to 20% of QBI from noncorporate entities.
Another provision at risk is the phaseout of first-year bonus depreciation. The TCJA initially provided for 100% bonus depreciation on qualified new and used property placed in service in 2022. This percentage is scheduled to decrease annually: 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026, and 0% in 2027.
Potential Scenarios
The results of the upcoming presidential election and the composition of Congress will be pivotal in determining the fate of the TCJA provisions. Possible outcomes include:
1. Expiration: All TCJA provisions set to expire will indeed end on December 31, 2025.
2. Extension: All expiring provisions will be extended beyond 2025 or made permanent.
3. Partial Continuation: Some provisions will expire while others are extended or made permanent.
4. New Legislation: Expired TCJA provisions may be replaced with new laws offering different tax benefits or rates.
Your tax obligations in 2026 will be influenced by these potential scenarios, as well as how the TCJA changes impacted your tax situation in previous years. Factors such as business income, filing status, state taxation (especially the SALT limitation), and dependents will play a role.
The tax proposals that ultimately become law will depend on the outcome of the election and the balance of power in Congress. Legislative changes require approval from both houses of Congress and the President, or sufficient votes to override a presidential veto.
Looking Ahead
As the expiration of TCJA provisions nears and the election results become clear, staying informed about potential tax changes will be crucial. We are here to address any questions you may have and will keep you updated on the latest developments.
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Cory has over 20 years of experience providing tax and consulting services to commercial businesses and individuals. His expertise lies in the myriad of business development incentives offered by various federal, state, and local agencies to targeted industries such as Manufacturing, Software Development, Technology Companies and many other in order to encourage regional investment, spur job creation, and foster economic growth. The available incentives include refundable tax credits, tax abatements, grants, and forgivable loans. He has extensive knowledge of Start-Up NY, Opportunity Zones, the Excelsior Jobs Program, Qualified Emerging Technology Companies, and various local incentives such as Industrial Development Agency (IDA) benefits. Additionally, he spends his time providing services to Start-Up Companies ranging from a founder with an idea to multi-national tech companies that have raised hundreds of millions of dollars. Cory has experience in all areas of U.S. federal and NY State taxation. He has been with Lumsden McCormick since 2001, was named partner on January 1, 2015. He is a member of the Firm’s Executive Committee and is head of the commercial services group.