Whether you are preparing to file your 2023 tax return or are planning for 2024 on, it is imperative to review the effects of changes to tax laws. Several provisions of the Tax Cuts and Jobs Act (TCJA) are set to sunset in 2025, while other changes have already occurred. Below are a few of the changes we expect will impact small business owners the most.
Updates for Business Tax Returns
Bonus depreciation for qualified property is scheduled to phase out after 2022, with a reduction to 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026, finally expiring in 2027. There may still be a way to immediately write off capital asset purchases using Section 179 but checking with your tax professional first is always recommended.
Pass-through entities, such as partnerships and S corporations, benefited from the introduction of the Section 199A deduction, commonly referred to as QBID. It is subject to sunset in 2025, potentially resulting in the loss of a 20% deduction for the owners of pass-through entities, ultimately creating a larger personal tax burden.
In addition to the sunset provisions above, there are changes which have already occurred that will impact businesses:
- Restaurants meals now qualify for a 50% deduction, down from 100% in 2022.
- Certain eligible employers will have tax credit available to them when setting up and maintaining specific retirement accounts in 2023 and 2024. Depending on the size of your plan, there could be significant tax savings provided.
- A new reporting requirement mandates millions of small businesses to submit a Beneficial Ownership Information (BOI) Report to the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN). This should be discussed by every LLC owner and their attorney to avoid unnecessary penalties for noncompliance.
Updates for Individual Tax Returns
Generally, taxpayers can expect higher tax brackets once the Tax Cuts and Jobs Act (TCJA) provisions expire. After 2025, the highest income tax rate will rise to 39.6%, up from the current 37%, with all other brackets also affected.
Personal exemptions, which were temporarily removed by the TCJA, will be reintroduced. This means you’ll be able to claim a deduction for yourself and for each of your dependents again. However, the standard deduction for all taxpayers will be decreased.
There will be a couple of meaningful changes to the limitations placed on certain itemized deductions. The current limitation of $10,000 on state and local tax deductions will no longer apply, allowing for greater deduction potential for clients with multiple properties or state tax exposure. Also, the limit for deductible mortgage interest will be raised, allowing deductions on mortgages with a principal balance up to $1 million, an increase from the current $750,000 limit.
With the changes on limits outlined above, the “Pease limitation” will make a comeback after 2025. The Pease limitations essentially reduce the amount of itemized deductions available to higher-income taxpayers.
There are significant changes to the credits available to taxpayers going green. There is a revamped “Clean Vehicle Credit” that will be available to most taxpayers who purchase(d) EV’s. The credits for solar panels and other energy improvements have also been reconfigured to be more beneficial to taxpayers.
Finally, the Alternative Minimum Tax (AMT), which was modified by the TCJA, will become more commonly applied after 2025, potentially affecting more high income taxpayers.
Taxpayers need to stay informed about the potential changes to the tax landscape. The expiration of certain provisions could lead to increased tax liabilities and impact strategic decision-making. If you would like to discuss how these changes may affect you, please call our office.