Prepare for Tax Changes: Navigating the Expiration of the Tax Cuts and Jobs Act

The Tax Cuts and Jobs Act (TCJA), passed in late 2017, has reshaped the U.S. tax landscape for businesses and individuals alike. With its seventh anniversary approaching, many of the TCJA’s most influential provisions are set to expire at the end of 2025. This creates an urgent need for taxpayers to reassess their financial strategies to adapt to potential tax increases and shifting opportunities. Here’s a comprehensive overview of the changes, their impact, and strategies to mitigate potential challenges.

Expiring Provisions: A Double-Edged Sword for Businesses and Individuals

Several of the TCJA’s temporary provisions brought significant benefits but are slated to sunset in less than two years. These changes will primarily affect individual taxpayers, small businesses, and pass-through entities.

1. Lower Individual Tax Rates
One of the hallmark features of the TCJA was the reduction in individual tax rates. For example:

  • The top tax rate was lowered from 39.6% to 37%.
  • Marginal rates across income brackets were also reduced.

However, without legislative action, the pre-TCJA tax rates will return after 2025. This means a top marginal rate of 39.6%, as well as higher rates in lower brackets. Upper-middle-income earners, who already straddle narrow thresholds for higher tax rates, will feel the pinch the most.

What to Do Now:

  • Consider accelerating income into lower-tax years where possible, such as through Roth IRA conversions or bonus payouts.\
  • Review your tax brackets with a professional to project the impact of higher rates and plan accordingly.

2. Qualified Business Income (QBI) Deduction
Small business owners and self-employed individuals currently benefit from the QBI deduction, which allows a 20% deduction on qualified pass-through business income. This provision effectively reduces taxable income, providing a substantial tax savings for millions of entrepreneurs.

The expiration of the QBI deduction will raise the effective tax rate for pass-through entities significantly, making business tax planning more complex.

What to Do Now:

  • Maximize QBI deductions in the next two years by ensuring your business structure and income qualify.
  • Explore alternative ways to shelter income through retirement contributions, charitable giving, or other deductions.

3. Bonus Depreciation
The TCJA’s expanded bonus depreciation rules have been a boon for businesses, allowing them to write off 100% of the cost of qualifying assets in the year of purchase. This rule has encouraged investment in machinery, equipment, and other capital assets.

However, bonus depreciation began phasing down in 2023. By 2025, the first-year depreciation allowance will drop to 40%, and it will disappear entirely after 2026 unless Congress extends it.

What to Do Now:

  • Invest in eligible assets before the phaseout accelerates.
  • Consider combining bonus depreciation with Section 179 deductions for maximum benefits.

Permanent Provisions: Long-Term Opportunities for Taxpayers

Not all of the TCJA’s changes are temporary. Several provisions were made permanent, creating stable opportunities for financial and tax planning well into the future.

1. Flat Corporate Tax Rate
The TCJA replaced the progressive corporate tax system with a flat 21% federal tax rate for C corporations, including personal service corporations. This has made the C corporation structure more attractive for many businesses, particularly those with significant retained earnings or reinvestment goals.

Planning Tip:

  • If your business operates as a pass-through entity, explore whether converting to a C corporation could lower your overall tax burden.

2. Section 179 Expensing
Enhanced Section 179 expensing rules, including higher deduction limits and expanded eligibility, remain in place. For 2024, businesses can deduct up to $1.22 million in capital expenditures, with phaseouts beginning at $2.73 million.

Planning Tip:

  • Leverage Section 179 to offset taxable income and reinvest in your business.

3. Repeal of the Corporate Alternative Minimum Tax (AMT)
The elimination of the AMT for corporations simplified tax compliance and removed a potential tax trap for businesses with substantial deductions or credits.

Planning Tip:

  • Focus on long-term planning without worrying about triggering AMT liabilities.

Winners and Losers: The TCJA’s Uneven Impact

The TCJA introduced provisions that created clear winners and losers among taxpayers.

Winners:
1. Businesses with Significant Capital Investments:
Faster depreciation rules and expanded Section 179 limits have incentivized capital investments, such as equipment and vehicles.

2. Vehicle Owners:
Liberalized depreciation rules for passenger vehicles have made it easier for businesses to claim larger deductions on company cars.

Losers:
1. Businesses Relying on 1031 Exchanges:
The TCJA restricted 1031 exchanges to real property only, eliminating a once-popular deferral mechanism for personal property transactions.

2. Companies with High Interest Expenses:
Limits on the deductibility of business interest expenses have increased tax burdens for leveraged businesses.

3. Entertainment-Heavy Businesses:
Disallowance of entertainment expense deductions has hurt companies that rely on client entertainment as a core business strategy.

How to Prepare: Proactive Tax Planning Tips

The combination of expiring provisions and legislative uncertainty makes it imperative to start planning now. Here are actionable steps to consider:

1. Anticipate Higher Individual Tax Rates

  • Defer deductions to future years when they may provide more tax savings under higher rates.
  • Accelerate income into lower-rate years where feasible.

2. Maximize Expiring Benefits

  • Take full advantage of the QBI deduction by ensuring your business income qualifies under the current rules.
  • Invest in capital assets before bonus depreciation phases out.

3. Evaluate Your Entity Structure

  • Analyze whether your business would benefit from converting to a C corporation under the flat 21% tax rate.
  • Consider the implications of potential tax law changes on pass-through entities.

4. Plan for Legislative Uncertainty
While Congress may extend certain provisions, relying on speculative extensions is risky. Focus on utilizing known opportunities and planning for worst-case scenarios.

The Road Ahead: Tax Planning in a Post-TCJA World

The expiration of key TCJA provisions marks a pivotal moment for taxpayers. By acting now, businesses and individuals can prepare for higher taxes, optimize their deductions, and adapt to the evolving tax landscape.

Consult with a tax professional to develop a personalized strategy, and stay informed about potential legislative changes. With careful planning, you can navigate these challenges and seize opportunities for growth and stability.

As 2025 approaches, the clock is ticking—are you ready?