Plan for Expiration of Tax Cuts and Jobs Act

Medium and small businesses who haven’t planned ahead may be in for some brutal financial surprises starting this year as key elements of the Tax Cuts and Jobs Act of 2017 begin to expire, reports a recent article, “Small Business Unprepared For Wallop of 2017 Tax Cut Expiration” from Chief Executive.

The sunsetting of the tax provisions in the law shouldn’t be a surprise. However, many business owners seem unaware of the impact this could have on current and future prospects.

With one exception—a cut in the top rate for the “C Corp” tax rate, from 28% to 21%--everything in the law is being phased out, with the first provisions ending this year. “Bonus depreciation,” the accelerated deducting of the purchase price of certain assets, was 100% for the past five years. It will drop to 80%, with further annual declines of 20% until it’s gone completely.

The qualified business deduction, the section 199A deduction, allows many “flow-though” business owners to reduce their taxable net income up to 20%, with savings commonly amounting to several thousand dollars. In 2025, it ends. However, the loss of this deduction doesn’t just mean a 20% tax hike because the top marginal rate will jump back up to 39.6%, compounded by reversion to the previous bracket structure, which will see many being hit with a higher tax rate on lower incomes. Even the standard deduction will be cut by more than half. These changes will add up to a dramatic tax hit for small business owners.

Estate taxes will also kick in at far lower estate values than current levels, which means business owners will need to do significant estate planning, which can tie up cash and the flexibility businesses often need to maintain growth.

As a result, it’s not just business owners who will feel less prosperous. Many small and mid-sized enterprises currently don’t have sufficient capital to grow their businesses or for unexpected costs or emergencies. With bank and credit markets retrenching after rising interest rates, this isn’t getting better any time soon.

What can business owners do?

Any business that can take advantage of the bonus depreciation law should do so now. In 2023, you can still deduct 80% of the total price of certain capital goods in the first year. If the business planned to make large capital improvements, now is the time.

This is also the time for anyone benefitting from a Qualified Business Income deduction to determine if they have any carryovers which may expire and could be unlocked. It’s also the time to identify ways to accelerate income into years where QBI is still available. Paying tax on 80% of income is better than paying tax on 100% of income.

A conversation with an experienced estate planning attorney to prepare your business and personal life for the coming changes is highly recommended.

Reference: Chief Executive (June 2023) “Small Business Unprepared For Wallop of 2017 Tax Cut Expiration”