Be Aware of Certain TCJA Provisions Set to Expire

The Tax Cuts and Jobs Act (TCJA) included many important federal income tax provisions that affect small business taxpayers and their owners. Some of these provisions are scheduled to expire in the near future, unless they’re extended or made permanent by Congress. Here’s an overview of five key provisions that may soon come to an end and the tax implications if they’re allowed to expire.

1. Individual Tax Rates for Business Income

For 2018 through 2025, the TCJA retains seven tax rate brackets as under prior law, but five of the rates are temporarily lower than they were under prior law. These rates generally apply to an individual’s:

• Net taxable income from a sole proprietorship or from a limited liability company (LLC) that’s treated as a sole proprietorship, and
• Net income passed through from an S corporation, a partnership or an LLC that’s treated as a partnership.

The 2024 rate brackets for ordinary income and net short-term capital gains are as follows:

2024 Federal Tax Rates on Ordinary Income and Net Short-Term Capital Gains

Tax Rates            Single                                 Married Joint Filers                 Head of Household

10%                  $0 – $11,600                             $0 – $23,200                          $0 – $16,550

12%                  $11,601 – $47,150                     $23,201 – $94,300                $16,551 – $63,100

22%                  $47,151 – $100,525                  $94,301 – $201,050               $63,101 – $100,500

24%                  $100,526 – $191,950               $201,051 – $383,900            $100,501 – $191,950

32%                  $191,951 – $243,725                $383,901 – $487,450           $191,951 – $243,700

35%                  $243,726 – $609,350              $487,451 – $731,200            $243,701 – $609,350

37%                   $609,351 and up                      $731,201 and up                     $609,351 and up

If Congress allows this TCJA provision to expire, the rates and brackets that were in place for 2017 (with cumulative inflation adjustments for the bracket thresholds) are scheduled to return starting in 2026. Importantly, the top rate bracket would move from the current 37% to 39.6%.

2. QBI Deduction

Net taxable income from the following entities simply passed through to the owners and taxed at the owner level at their standard federal income tax rates:

• S corporations,
• Sole proprietorships,
• Partnerships, and
• LLCs that are treated as sole proprietorships or as partnerships for tax purposes.

For tax years beginning in 2018 through 2025, the TCJA established a new deduction based on a noncorporate owner’s qualified business income (QBI) from these businesses. This deduction is available to individuals, estates and trusts. It can be up to 20% of QBI, subject to limitations that can apply at higher income levels.

The QBI deduction isn’t allowed in calculating a noncorporate business owner’s adjusted gross income (AGI), but it reduces taxable income. In effect, it’s treated the same as an allowable itemized deduction, but you don’t need to itemize to benefit.

If Congress allows the QBI deduction to expire, it will be gone after 2025.

3. Employee Deductions for Unreimbursed Business Expenses

For 2018 through 2025, the TCJA suspended miscellaneous itemized deductions for unreimbursed employee business expenses, such as business-related education expenses and costs related to using your personal vehicle for your employer’s business. Under prior law, miscellaneous itemized deductions were subject to the 2%-of-AGI deduction threshold.

If Congress allows this TCJA provision to expire, the more favorable rules for these expenses that were in place for 2017 are scheduled to return starting in 2026.

4. First-Year Bonus Depreciation

Under the TCJA, for qualified property placed in service between September 28, 2017, and December 31, 2022 (or by December 31, 2023, for certain property with longer production periods), the first-year bonus depreciation percentage increased to 100% (up from 50% in 2017). The 100% deduction was allowed for both new and used qualifying property. However, the property can’t have been used previously by the taxpayer.

The first-year bonus depreciation deduction was reduced to 80% for property placed in service in calendar year 2023. It has further decreased to 60% for property placed in service in calendar year 2024.

In later years, the first-year bonus is scheduled to be reduced as follows:

• 40% for property placed in service in calendar year 2025, and
• 20% for property placed in service in calendar year 2026.

Important: For certain property with longer production periods, the preceding cutbacks are delayed by one year. For example, the 80% deduction rate will apply to properties with long production periods that are placed in service in 2024.

If Congress allows this TCJA provision to expire, first-year bonus depreciation won’t be allowed after 2026 (2027 for long-production-period property).

5. Excess Business Losses

For 2018 through 2025, the TCJA limits deductions for current-year business losses incurred by noncorporate taxpayers. Such losses generally can offset income from other sources, such as salary, self-employment income, interest, dividends and capital gains, only up to the annual limit. “Excess” losses are carried forward to later tax years and can then be deducted under the net operating loss rules.

The CARES Act temporarily lifted the limit, allowing taxpayers to deduct 100% of business losses arising in 2018, 2019 and 2020. But the limit returned in 2021, and the Inflation Reduction Act of 2022 extended it through 2028.

If Congress allows this provision to expire, the more favorable rules for excess business losses that were in place for 2017 are scheduled to return starting in 2029.

Uncertain Future Clouds Business Tax Planning

Most of the TCJA provisions that affect small businesses and their owners are currently set in stone, unless Congress passes legislation to reverse them. (See “Permanent TCJA Provisions: Will They Last?” below.)

This article covers only five of the most common soon-to-expire TJCA provisions; there may be some less-common temporary provisions that apply to your situation. The future of the temporary TCJA provisions is unclear. It’s possible that Congress could extend all or some of them — or simply allow them to sunset as scheduled. So business owners are facing an unsettling tax planning environment. Contact your tax advisor to determine which of the TCJA provisions are relevant to your situation and how to respond to any changes.

Permanent TCJA Provisions: Will They Last?

Most of the business-related Tax Cuts and Jobs Act (TCJA) provisions will remain on the books permanently, unless Congress passes legislation to override them. Here’s a brief overview of the provisions that will remain on the books for businesses and business owners under current law:

• Flat 21% federal income tax rate on C corporations, including personal service corporations,
• Elimination of the corporate alternative minimum tax,
• More-generous rules for first-year Section 179 depreciation write-offs,
• More-generous depreciation deductions for passenger vehicles used for business (cars, light trucks and light vans),
• Faster depreciation for some real property and farming machinery and equipment,
• Expanded eligibility to use cash-method accounting and simplified inventory accounting procedures,
• Favorable accounting method change for eligible construction companies with long-term contracts,
• Elimination of favorable like-kind treatment under Section 1031 for exchanges of personal property,
• Reduced or eliminated deductions for business entertainment and some employee fringe benefits,
• Limitation on deductions for interest paid or accrued by a business (several exceptions apply),
• Stricter rules on deducting net operating losses,
• Certain self-created intangible assets (including inventions, models and designs, secret formulas, and certain processes) no longer treated as capital gains assets,
• Three-year holding period rule before long-term capital gains treatment is allowed for partnership carried interests,
• $1 million annual limit on compensation deductions for amounts paid to principal executive officers, and
• Requirement, for tax years beginning after December 31, 2021, for specified R&D expenses to be capitalized and amortized over five years (15 years if the R&D is conducted outside the United States).

In addition, the TCJA included sweeping permanent changes that affect business taxpayers with foreign operations. Together with the flat 21% corporate tax rate, these changes are intended to encourage multinational companies to conduct more operations in the United States.

Copyright 2024

This article appeared in Walz Group’s September 16, 2024 issue of The Bottom Line e-newsletter, produced by TopLine Content Marketing. This content is for informational purposes only.