Navigating the Changing Tax Landscape: What Business Owners Need to Know
With the expiration of key provisions of the Tax Cuts and Jobs Act (TCJA) looming in 2025, independent retailers need to prepare for potential changes that could affect their business and personal tax strategies. While much remains uncertain, understanding the upcoming shifts can help your business plan for the future.
Key TCJA Provisions Set to Expire in 2025
Several provisions in the TCJA, which benefited small business owners, are temporary and scheduled to expire at the end of 2025. Here’s a breakdown of the most important ones:
1. The 20% Qualified Business Income (QBI) Deduction
What is it? This deduction allows owners of pass-through entities (like S Corporations, partnerships, and sole proprietorships) to deduct 20% of their business income—effectively reducing their tax rate.
Why It Matters:
The QBI deduction lowers the effective tax rate on business income from 37% to as low as 29.6%. If this provision expires, it could significantly increase your tax burden, affecting your ability to reinvest in your business and compensate employees.
2. Bonus Depreciation
What is it? Bonus depreciation allows businesses to deduct 100% of the cost of qualifying assets (like equipment and certain real estate improvements) in the year they are placed into service.
What’s Changing:
This provision phases out over the next few years:
2024: 80%
2025: 60%
2026: 40%
2027: 20%
2028: 0%
Why It Matters:
If your business is planning major capital expenditures, you may want to accelerate purchases before bonus depreciation continues to decrease. This will help you maximize your current tax deductions.
3. Estate Tax Exclusion
What is it? The TCJA temporarily doubled the estate and gift tax exclusion—the amount of wealth that can be transferred tax-free. For 2024, this stands at $13.61 million per individual ($27.22 million for couples).
What’s Changing in 2025:
The exclusion is set to cut in half after 2025, which could impact business succession planning, especially for owners thinking about passing down wealth.
Why It Matters:
If you’re considering transferring your business or assets to heirs, now is the time to act and take full advantage of the higher exemption amounts before they expire.
4. The SALT Deduction Cap
What is it? The state and local tax (SALT) deduction was capped at $10,000 under the TCJA, impacting business owners in high-tax states.
What’s Changing:
After 2025, this cap will lift, allowing businesses to fully deduct state and local taxes (e.g., income and property taxes).
Why It Matters:
While this may offer some relief, the potential return of the Alternative Minimum Tax (AMT) could limit the full benefit of the SALT deduction.
How to Prepare: Steps to Take Now
1. Review Your Tax Strategy
Work with your accountant to evaluate how expiring provisions will impact your business. Consider whether timing your income recognition or deductions can help minimize future tax liabilities.
2. Invest in Capital Equipment
If you’re planning on purchasing assets or making improvements, do so before the bonus depreciation deduction phases out. This will allow you to deduct a larger portion of your investment.
4. Stay Informed on Legislative Changes
The expiration of TCJA provisions may spark congressional action. While some changes are set, keep an eye on potential extensions or alterations of key tax breaks.
Conclusion: Stay Ahead of the Curve
The tax landscape is evolving, and independent retailers need to stay proactive. By understanding the changes ahead, reviewing your strategies, and making adjustments where necessary, you can ensure that your business is positioned for long-term success. The time to plan is now—start working with your tax advisor to take advantage of the current provisions before they expire.
Important Notes:
QBI Deduction: The 20% QBI deduction is a crucial benefit for pass-through entities. If it expires, tax rates for these businesses could increase, impacting profitability and reinvestment.
Bonus Depreciation: The gradual phase-out of this benefit means you may want to consider accelerating capital purchases to maximize deductions.
Estate Tax Exclusion: Start planning now to take advantage of the higher estate tax exemption before it reverts to pre-TCJA levels.