The start of a new year is a good time for planning for everyone because, in the absence of extenuating circumstances, your tax year will coincide with the calendar year for at least your personal taxes and likely your business taxes as well. For business owners, income planning and tax planning carry more significance than usual this year. Consider the following in your new year planning.
Sunsetting provisions of the Tax Cut and Jobs Act
The Tax Cut and Jobs Act (TCJA) enacted in 2017 had many tax law changes. Some, like the reduction of the corporate tax rate, are permanent. However, many other provisions are set to expire at the end of 2025. This gives you two years to ensure that you realize any benefits you may be eligible for under these provisions.
Among these tax provisions expiring at the end of 2025 are the increased standard deduction and the qualified business income deduction.
Federal Income Tax Brackets
According to the sunsetting schedule, the tax rates will increase to levels in effect before TCJA, and the income thresholds for each bracket will decrease. This means that most individuals and married couples will be subject to higher tax rates at lower income levels.
The TCJA doubled the standard deduction, indexed for inflation each year, and eliminated exemptions. Starting in 2026, in the absence of action by Congress, the standard deduction will be cut in half. This will likely result in more households itemizing their deductions once again.
For business owners
The scheduled expiration or sunsetting of these provisions also has a potential impact and should be considered.
Qualified Business Income deduction
The Qualified Business Income (QBI) deduction permits certain pass-through entities, such as sole proprietors, partnerships, and S Corps, to deduct up to 20% of their (qualified) business income on their personal income tax returns. This deduction is scheduled to expire at the end of 2025. So, look at your projections and consider accelerating or deferring income or other deductions (such as depreciation).
Bonus Depreciation rules
At the same time, the bonus depreciation percentages established by the TCJA are continuing to decrease. The bonus depreciation percentage for qualified property placed in service in 2024 is 60%. It will further decrease to 40% in 2025. And will continue to decline until it reaches 0% in 2027.
Keeping your options open
Tax and income planning this year can be more complex than in previous years due to the factors listed above. In addition, there is the possibility that Congress acts to extend some or all of these provisions. Your tax and income planning must consider the changes on your personal tax return and your business income and expenses. And more importantly, you need to consider the future impact of any elections made this year.
Regardless of your beliefs about Congress’s ability or likelihood of acting in time to change these tax provisions before the end of 2025, you should be aware of the impact of tax legislation as it stands now.
As you’ve heard me say countless times, much of financial planning involves keeping your options open in the future, and it is no different for business owners when planning for the new year. At this point, you want to consider the impact of your income and tax planning in multiple scenarios – if the provisions sunset as scheduled, if some of the provisions are extended, or if all the provisions are extended. You can only plan based on what you know. So, while it is always possible that an entirely new tax act is proposed and passed in the next couple of years, it is probably a better use of your time to plan for the possibilities that are considered most likely to happen.
This article is intended to be educational and thought-provoking rather than financial advice. When we work together in a financial planning engagement, we discuss your unique personal situation and your unique goals. We examine these factors and many others during our financial planning process to determine appropriate financial strategies for YOU.