The forthcoming presidential and congressional elections may have a substantial impact on the tax landscape for U.S. businesses. A key factor in the potential shift is a tax provision set to expire in approximately 17 months and how Washington politicians might address it.
Background
The Tax Cuts and Jobs Act (TCJA), which generally took effect in 2018, introduced significant changes to small business taxation. Many provisions within the TCJA are scheduled to expire on December 31, 2025.
As this expiration date approaches, you might be concerned about how future federal tax changes could affect your business. The uncertainty stems from differing perspectives between Democrats and Republicans on how to handle the TCJA’s various provisions.
Corporate and Pass-Through Business Rates
The TCJA reduced the maximum corporate tax rate from 35% to 21%. It also lowered the tax rates for individual taxpayers involved in non-corporate pass-through entities, such as S corporations, partnerships, and sole proprietorships. The highest individual rate is now 37%, down from 39.6% prior to the TCJA.
While the TCJA made the corporate tax rate cut permanent, the individual rate cuts are set to expire in 2025. However, future tax legislation could potentially alter the corporate tax rate.
In addition to rate reductions, the TCJA introduced several other changes. A notable provision for small business owners is the Section 199A qualified business income (QBI) deduction, which allows a deduction of up to 20% of QBI from noncorporate entities. The expiration of this deduction is a significant concern.
Another provision subject to expiration is the gradual phaseout of first-year bonus depreciation. The TCJA initially provided 100% bonus depreciation for qualified new and used property placed in service in 2022. This benefit is set to decrease to 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026, and phase out completely by 2027.
Potential Outcomes
The results of the upcoming presidential election and the composition of Congress will influence the future of the TCJA provisions. Four potential scenarios include:
- All TCJA provisions scheduled to expire will indeed expire at the end of 2025.
- All TCJA provisions scheduled to expire will be extended beyond 2025 or made permanent.
- Some TCJA provisions will expire while others are extended or made permanent.
- Some or all TCJA provisions will expire, with new laws enacted that introduce different tax benefits or rates.
The impact on your tax situation in 2026 will depend on which scenario unfolds, as well as the effects of the TCJA on your tax bill when it was first implemented. Factors influencing this include your business income, filing status, state of residence (with the SALT limitation affecting certain states), and the presence of dependents.
Additionally, the outcome of the presidential election and congressional control will play a crucial role, given the differing approaches of Democrats and Republicans. Tax proposals must pass both houses of Congress and be signed by the President to become law, or secure enough votes to override a presidential veto.
Looking Ahead
As the expiration of TCJA provisions approaches and election outcomes become clear, it is important to stay informed about potential changes and strategize accordingly. We are available to address any questions you may have and will continue to provide updates on the latest developments.
