This past year there was a strong sense that the 2017 Tax Cuts and Jobs Act, and all the changes it brought for businesses and high-net-worth individuals, was likely to expire. However, that has been replaced with a curiosity around how the law will be handled in 2025.
“Is it going to be an extension of some of those changes, a move to make them permanent, or a complete change?” says Matt McKinnon, Shareholder and Columbus Tax Practice Leader at Brady Ware. “It’s obviously too soon to know, but the potential outcome is something that we’re closely watching.”
Smart Business spoke with McKinnon about the provisions of the Act that businesses, and their accountants, will want to keep their eyes on this year.
What are some of the key provisions of the Act?
Among the key aspects of the Act that have much of the attention of the business community is the state and local tax (SALT) limitation. With this, a taxpayer can only deduct up to $10,000 of property, sales, or income taxes from their federally taxable income that they have already paid to state and local governments. Businesses and their owners have navigated around this limitation since its inception. Complete repeal or doubling the allowable deduction to $20,000 have been mentioned as possible changes.
Bonus depreciation, which allows businesses to deduct a percentage of the total cost of their short-lived fixed asset costs in the first year, is a big tool when it comes to companies managing capital expenditures and taxable income. Since 2001, bonus depreciation has fluctuated, but has been 100 percent for many years. Bipartisan efforts want to make it 100 percent permanently.
One change business leaders may want to see, however, relates to research and development expenditures. Prior to the Act, businesses could choose to fully expense the costs of research and development from their taxable income in the year those costs were incurred. The Act unfavorably removed immediate expensing, requiring these costs to be capitalized and amortized over five years.
For high-net-worth individuals, the gift and estate tax exemption is another aspect of the legislation that is seen favorably. The Act changed the exemption to $13.99 million for individuals in 2025, a number that doubles if a married couple makes a joint gift. If not renewed, that could drop back down to an estimated $7 million for individuals.
How might taxes be affected?
The tax rates in the U.S. are the lowest they’ve been in a long time. The Act brought a reduction to the C corporation tax rate to 21 percent and a decrease in the top individual tax rate to 37 percent. The sense is the new federal administration will make an effort to maintain these rate decreases, if not reducing them further. While it’s too early to know, there’s a rising sense of certainty that the corporate tax environment will continue to be favorable, but it’s unclear whether the current tax rates will continue as is, be made permanent, or be reduced.
Business owners, though, should keep in mind that while it’s always prudent to consider taxes into business decisions, generally, tax should not be the sole consideration when companies are navigating an acquisition or sale transaction.
How should business leaders prepare?
Business leaders who are factoring in the conditions under the current law as they plan their next moves should expect things to remain somewhat consistent. But exactly what the next few years will bring is still unknown. This is why it’s important to keep in touch with CPAs and tax advisers as much as possible. For those who are concerned about transferring wealth from one generation to the next through the estate tax exemption, or are considering new product development, an acquisition or an exit, the more the adviser is kept in the loop, even if it’s just an initial conversation, the better they’ll be able to discuss what’s on the legislative horizon and how that might impact planning.
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