The Tax Cuts and Jobs Act (TCJA) of 2017 introduced significant changes to the U.S. tax code, offering tax savings, reductions, and other benefits to individuals, businesses, and families. The more popular provisions included an immediate reduction in the business tax rate, a new pass-through entity deduction (Section 199a), Net Operating Loss carrybacks, and changes to the annual estate tax exclusion. However, several of these provisions are scheduled to expire at the end of 2025, creating uncertainty for businesses. As the deadline approaches, it is important to be aware of the changes and how to prepare. To help clients, prospects, and others, Wilson Lewis has provided a summary of the key details below.
Provisions to Watch
- C Corporation Tax Rate – The TCJA permanently reduced the corporate tax rate from 35% to 21%, a change designed to make U.S. corporations more competitive on the global stage. While this lower rate remains permanent, future discussions in Congress may include revisiting the rate as part of broader revenue negotiations. Although no immediate changes are expected, corporations will want to evaluate how a higher tax rate may impact profitability. Business owners can mitigate potential tax increases by maximizing current deductions or adjusting revenue recognition.
- Qualified Business Income (QBI) Deduction – The 20% QBI deduction, a key TCJA provision for pass-through entities such as S corporations, partnerships, and sole proprietorships, is scheduled to expire at the end of 2025. This deduction has provided substantial tax savings for small and medium-sized businesses. If the QBI deduction expires, businesses may face higher effective tax rates, especially those in higher income brackets, where the marginal tax rate could increase from 29.6% to 39.6%. To mitigate the impact, business owners will want to consider tax planning strategies, such as restructuring business entities or deferring income.
- Bonus Depreciation – Bonus depreciation, which allows businesses to immediately deduct a portion of the cost of qualified property, was expanded under the TCJA to offer a 100% write-off for eligible property placed in service between September 27, 2017, and December 31, 2022. However, this percentage has started to phase out, dropping to 80% in 2023 and 60% in 2024, with a full phase-out scheduled for 2027. For businesses planning capital investments, the phase-out of bonus depreciation may lead to higher tax liabilities. Companies can consider accelerating purchases to take advantage of higher deduction rates and explore alternatives like Section 179 expensing or other tax credits to offset capital expenses.
- Net Operating Loss (NOL) Deduction – The TCJA changed the rules for Net Operating Loss (NOL) deductions, removing the ability to carry back losses and limiting the deduction to 80% of taxable income. While this limited immediate tax benefits, it allowed businesses to carry forward NOLs indefinitely, providing flexibility for managing losses over time.
If the TCJA sunsets, businesses could again carry back losses for up to two years and offset 100% of taxable income using NOLs, offering more immediate tax relief. Businesses with NOLs will want to review their strategies to understand how potential changes affect their tax position.
Other Considerations
In addition to these core provisions, other aspects of the TCJA may affect businesses, including:
- Individual Income Tax Rates: Many business owners file taxes as individuals, so changes in personal tax rates — particularly for high-income earners — may affect personal tax planning and decisions related to income distribution or retirement contributions.
- Estate and Gift Tax Exemptions: The TCJA increased estate and gift tax exemptions, and a return to lower exemption levels may impact business succession planning, particularly for family-owned businesses.
- Employee Benefits: The TCJA eliminated employer deductions for qualified transportation fringe benefits and made moving expense reimbursements taxable for employees. If these provisions sunset, businesses may again be able to deduct these benefits, potentially reducing costs and providing more favorable tax treatment.
What’s Next?
As the 2025 deadline approaches, Congress will debate which provisions to extend, modify, or allow to expire. Business owners should remain informed of legislative developments and consider consulting tax professionals to understand how these changes could impact their bottom line.
How to Prepare Now
- Monitor Legislative Developments: Tax policy can change quickly. Staying informed on legislative updates will help businesses adjust their tax strategies as needed.
- Evaluate Your Tax Strategy: Businesses should assess how potential tax changes could affect their financial health and cash flow. Now is the time to plan for changes by accelerating income, restructuring, or adjusting capital investments.
- Consult a Tax Professional: Proactive tax planning is essential. A qualified tax advisor can help model various scenarios and implement strategies that mitigate potential risks.
Contact Us
The expected expiration of the TCJA tax changes means that companies should prepare new by exploring essential tax planning steps. If you have questions about the information outlined above or need assistance with another tax or accounting issue, Wilson Lewis can help. For additional information call 770-476-1004 or click here to contact us. We look forward to speaking with you soon.