The likely expiration of several provisions of the 2017 Tax Cuts and Jobs Act (TCJA) a little more than two years from now will impact tax planning not only for individuals but for business and business owners as well. Not to mention other tax-law changes that will kick in before the end of 2025.
“There are impacts from the TCJA that may require more immediate action,” said Timothy Laffey, head of tax policy and research advisory at Rockefeller Global Family Office in Philadelphia.
Some of the TCJA provisions that are set to expire or change after 2025 affect qualified business income (QBI), bonus depreciation and the limitation on state and local tax deductions. Also set to change are individual income tax rates and brackets, the standard deduction, personal exemptions and miscellaneous itemized deductions.
“For example, the accelerated business tax deduction that allows businesses to immediately deduct a large percentage of the purchase price of eligible assets is set to sunset by an additional 20% at the end of 2023,” Laffey said. “In addition, with the qualified business income deduction set to expire at the end of 2025 and the 21% corporate tax rate remaining in place indefinitely, pass-through entities may want to begin discussing whether a conversion to a C corp at the end of 2025 would make financial sense. These businesses may also have to consider the likelihood that the $10,000 cap on the state and local tax (SALT) deduction will sunset at the end of 2025 and how that will impact their choice of entity and overall financial picture.”
TCJA aside, now might be the moment to buy certain business assets. “Currently, businesses can write off up to 80% of the purchase price of an asset placed into service within the calendar year and depreciate the remaining 20% over the next several years,” said Brett Walters, financial planner at TBH Advisors in Brentwood, Tenn.
“For example, if the business purchases a vehicle with a [gross weight] of 6,000 pounds or more, the business can deduct 80% of the purchase price within the year the vehicle was placed into service, as long as the vehicle is used solely for the business,” Walters said. “In 2024, bonus depreciation falls to 60%, and is reduced by 20% until 2026.”
Business owners need to attend to their future, too, and have some special financial tools to do so.
“Make the maximum deductible contributions to retirement accounts,” said Richard Pianoforte, managing director at Fiduciary Trust International in New York. “Business owners can take advantage of SEP (Simplified Employee Pension) IRAs to reduce their overall income and at the same time set aside some money for retirement.
“You can also try to postpone income into the next year such as holding off on taking capital gains on appreciated stock, deferred stock options or deferring their bonus income if possible,” Pianoforte said. “If you’re currently in required minimum distribution status with your IRA and at least 70½ years old, [you can] use a qualified charitable distribution to give up to $100,000 directly from your IRA to an eligible charity without paying tax on it.”
Business owners with a traditional IRA, like other holders of such accounts, should look into Roth conversion – particularly young owners facing the likelihood of higher tax rates in the future.
“Roth conversions should be made up to the 24% bracket only, and it’s best if the taxes from the conversion are paid from an outside source and not from the converted Roth IRA,” Walters said. “The younger the taxpayer, the greater the long-term benefit from annual Roth conversions, because the investments in the converted Roth IRA will replenish the taxes paid on the conversion.
“Self-employed business owners should consider opening and funding a Solo 401(k0 or individual 401(k) by Dec. 31,” Walters said. “If they don’t have employees, they may be able to make a deductible contribution to the qualified plan of up to $66,000 for the tax year 2023 either as employee contributions or profit sharing – but the plan must be opened before the end of the tax year.