Tax Cuts and Jobs Act sunset: Plan ahead for the future for your business

The spotlight may be on the 2024 United States presidential election, but C-suite executives can’t afford to take their eyes off 2025 and beyond. As we get closer to 2025, many tax-favorable provisions within the Tax Cuts and Jobs Act (TCJA) will start to expire unless legislative action is taken. Now is the time to evaluate how these changes may affect your organization’s bottom line and make the most of what’s ahead.  

Changes that can impact businesses include:

1. Qualified business income (QBI) deduction coming to an end

The TCJA has profoundly impacted businesses, particularly in how they approach tax planning and business structure decisions. The permanent reduction of the corporate income tax rate from 35% to 21% has made the traditional corporate structure more attractive for some businesses due to the lower tax rate.

However, for pass-through entities like S corporations, partnerships and sole proprietorships, where business income is taxed on the individual owners’ returns, the TCJA provided a 20% QBI deduction. This deduction effectively reduces the top individual tax rate on pass-through business income from 37% to 29.6%. It’s a significant benefit that aligns the tax treatment of pass-through entities more closely with C corporations.

But this QBI deduction is temporary and is set to expire for tax years beginning on or after January 1, 2026. The significant rate difference between corporate and pass-through entity income beyond this date could provide strategic planning opportunities, particularly when it comes to choosing the type of business entity.

2. Individual taxable income calculation and tax rates

Individual tax rates and brackets will revert back to pre-TCJA rates and brackets (adjusted for inflation). Prior to TJCA, the marginal tax brackets were 10%, 15%, 25%, 28%, 33%, 35% and 39.6%. TCJA reduced those brackets to 10%, 12%, 22%, 24%, 32%, 35% and 37%. 

In addition, the standard deduction, currently $14,600 (single) and $29,200 (married filing jointly), will sunset back to inflation-adjusted 2017 amounts, which were $6,350 and $12,700, respectively. However, the personal exemption, $4,050 in 2017, will be reinstated and adjusted for inflation.

3. Phaseout of bonus depreciation to 0% by 2027 

The TCJA’s provision for 100% bonus depreciation has been a significant incentive for businesses, allowing them to deduct the full cost of qualified property immediately. However, starting in 2023, this deduction began to phase out, reducing from 100% to 80%, and it will decrease by 20% each year until it’s completely phased out by 2027.

• 2022 = 100%
• 2023 = 80%
• 2024 = 60%
• 2025 = 40%
• 2026 = 20%
• 2027 = 0%

For businesses, this means that the window for maximizing investments with the highest tax deduction is narrowing. To take advantage of the higher bonus depreciation rates, they should consider accelerating their investment plans, especially for large projects that require substantial capital expenditure. By doing so, they can deduct a greater portion of their investment costs in the short term, leading to significant tax savings.

One way to increase the value of bonus depreciation is to use a cost segregation study to accurately categorize components of buildings into asset classes that have recovery periods of 20 years or less, making them eligible for the appropriate bonus depreciation percentage available in the year placed in service.

4. State and local tax (SALT) cap at owner level

The cap on state and local tax (SALT) deductions introduced by the TCJA significantly impacts individual business owners, especially those residing in states with high income and property taxes. The TCJA limited the SALT deduction to $10,000, which is not indexed to inflation, thereby increasing the federal tax burden for these individuals. However, the current cap is set to expire at the end of 2025, and unless new legislation is introduced, individuals will regain the ability to fully deduct state and local taxes starting in 2026. Once the SALT cap expires, taxpayers will need to evaluate the impact of the Alternative Minimum Tax and PEASE limitation as the benefit of SALT deductions can be limited by these other provisions returning in 2026.

5. Pass-through entity (PTE) state income tax deduction ending

As a result of the $10,000 SALT cap set to expire at the end of 2025, many states enacted pass-through entity tax legislation, which allowed pass-through entities to elect to pay tax at the entity level. In many states, the PTE elections will expire once the SALT cap sunsets after 2025. However, individual business owners who take itemize deductions on personal income tax return may still be able to deduct the state income taxes paid.

6. Lifetime estate and gift tax exemption reverting to $5 million, indexed for inflation

The federal gift tax exemption will revert to its pre-TCJA amount. This means it will decrease from $13.61 million (2024) to roughly $6 million, adjusted for inflation. The last year taxpayers can take the higher exemption amount will be 2025. The IRS has issued final regulations that help ensure there will be no clawback of the temporarily increased exemption if the taxpayer makes gifts and claims the higher exclusion amounts in effect from 2018 to 2025. This creates the opportunity for planning to use the “excess” exemption before it is reduced at the end of 2025.

For business owners, this change in tax law offers a strategic window to transfer wealth and potentially reduce future estate taxes by making gifts up to the higher exemption limit before it reverts to the lower amount. This can be particularly beneficial for owners who are looking to pass on their business to the next generation or to key employees as part of succession planning.

How Wipfli can help

Taking action now to prepare for these tax law changes can position your business to make the most of the new tax law environment. If you’d like guidance on how these tax law changes could affect you, Wipfli can help.

Our dedicated tax professionals are well-prepared to parse the changing regulations and assist you in adapting to the new landscape. Contact us today to see how we can help situate you for success.