The upcoming presidential and congressional elections could bring significant changes to the tax landscape for businesses in the U.S. This stems from a key tax law set to expire in at the end of 2025, and differing political views on how it should be handled.
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Background: The Tax Cuts and Jobs Act (TCJA)
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The Tax Cuts and Jobs Act (TCJA), enacted in 2018, brought sweeping changes to small business taxes. However, many provisions are scheduled to expire on December 31, 2025.
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As the expiration date approaches, you might be concerned about how your business’s future tax obligations could change. With Democrats and Republicans holding differing opinions on the fate of the TCJA, the situation remains unclear.
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Corporate and Pass-Through Business Rates
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The TCJA reduced the maximum corporate tax rate from 35% to 21%, while also lowering rates for individual taxpayers involved in noncorporate pass-through entities such as S corporations, partnerships, and sole proprietorships. The highest individual tax rate today is 37%, down from 39.6% before the TCJA.
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While the corporate tax rate cut was made "permanent" (i.e., no scheduled expiration), the individual rate cuts are set to expire in 2025. However, future legislation could still adjust the corporate rate.
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Other significant TCJA changes include the Section 199A qualified business income (QBI) deduction, which allows for a deduction of up to 20% of QBI from noncorporate entities. This provision is also set to expire at the end of 2025.
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Another expiring provision is the first-year bonus depreciation phaseout. Under the TCJA, 100% bonus depreciation was available for qualified new and used property placed in service in 2022. This percentage decreases annually, eventually phasing out completely by 2027.
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Potential Scenarios
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The outcome of the upcoming election and the balance of power in Congress will largely determine the future of the TCJA. But here are four possible outcomes:
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Scenario #1: All expiring provisions of the TCJA will expire as scheduled at the end of 2025.
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Scenario #2: The provisions will be extended or made permanent.
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Scenario #3: Some provisions will expire while others are extended or made permanent.
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Scenario #4: Expiring provisions will lapse, and new tax laws will introduce different rates and tax breaks.
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The impact on your tax bill in 2026 will depend on which scenario plays out, as well as on factors like your business income, filing status, the state where you live (due to the SALT limitation), and whether you have dependents.
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Looking Ahead
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As we near the expiration of key TCJA provisions and the election results become clear, it's essential to stay informed about potential tax law changes. We’re here to answer your questions and keep you updated on any developments.