With the Republicans in control of the White House and Congress, business owners are looking ahead to possible tax changes. Key parts of the Tax Cuts and Jobs Act, passed in 2017, are set to expire after December 31, 2025. While former President Donald Trump aimed to make these provisions permanent, achieving this may be difficult given the slim Republican majority and high deficits.
One way Republicans might extend tax provisions is through the budget reconciliation process. This allows certain bills to pass with a simple majority, avoiding the need for a 60-vote margin in the Senate. This strategy gives Republicans a chance to push tax legislation through without needing Democratic support. However, Republicans will face challenges in balancing the legislation’s costs and complying with procedural rules.
Here are some key tax provisions that business owners should pay attention to:
1. Gift and Estate Tax Exclusions: In 2024, individuals can pass on up to $13.61 million without paying gift or estate taxes. This amount will increase slightly in 2025. After that, it’s set to drop to pre-TCJA levels, which is about half of the current exclusions. Business owners should consider reviewing their estate plans before these limits potentially decrease. Gifting wealth to future generations can be advantageous, as future gains on these assets would not incur estate tax.
2. Bonus Depreciation: Many business owners have benefited from bonus depreciation, which allows them to write off a large portion of the cost of qualifying assets immediately. In 2024, that percentage drops to 60%. It will continue to decrease by 20% each year until it is phased out entirely by 2027. Business owners should evaluate whether it makes sense to acquire qualified property now to take advantage of higher depreciation rates.
3. Qualified Business Income Deduction (QBI): This deduction offers a 20% reduction on qualified business income for pass-through entities like partnerships and S corporations. This effectively lowers the top tax rate on this income from 37% to 29.6%. However, eligibility is complicated and may depend on various factors, including income levels and the type of business. Many hope Republicans will extend this provision to help mitigate tax increases for these business owners.
4. SALT Deduction Cap: The state and local tax (SALT) deduction cap currently limits deductions to $10,000 for single filers and married couples. Many states have created workarounds, allowing pass-through entities to pay SALT at the entity level, effectively circumventing the cap. If the SALT deduction cap is lifted, taxpayers could once again deduct more than $10,000, but changes to the Alternative Minimum Tax (AMT) could complicate matters.
In addition to these provisions, there may be broader tax legislation on the horizon. Former President Trump has suggested eliminating taxes on overtime pay and tips for hospitality workers, among other proposals. If enacted alongside extensions of the TCJA provisions, these changes could significantly affect government revenue. There are also discussions around possible tariffs on imports to compensate for potential revenue losses.
Finally, it’s important for business owners to stay informed about potential changes in legislation regarding research and development tax breaks and other deductions. As the landscape shifts, being adaptable will be crucial for managing financial strategies effectively.
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Federal Issues,Small Business,Taxes
