Tax Breaks for Small Businesses: A Ticking Clock
Key TCJA Provisions Set to Expire Soon for Small Businesses
The Tax Cuts and Jobs Act (TCJA) brought some big changes to the tax code for small businesses. But the good times might not last forever. Several provisions are set to expire soon, unless Congress acts. Here are five key provisions and what could happen to your taxes if they’re allowed to sunset.
1. Individual Tax Rates for Business Income
The TCJA, effective from 2018 to 2025, keeps the seven-tier income tax system but lowers five of the tax rates. These reduced rates primarily impact:
- Self-employment income from sole proprietorships or LLCs taxed as sole proprietorships
- Income passed through from S corporations, partnerships, or partnerships treated as LLCs
The 2024 tax brackets for ordinary income and short-term capital gains are detailed below:
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 - $609,650 |
| 37% | $609,351 and up | $731,201 and up | $609,351 and up |
If the TCJA is not extended, tax rates will return to the 2017 levels, adjusted for inflation. This means the top marginal income tax rate would increase from the current 37% to 39.6% starting in 2026.
2. QBI Deduction
Net taxable income from the following business structures is passed through to the owners and taxed at their individual income tax rates:
- S corporations
- Sole proprietorships
- Partnerships
- LLCs treated as sole proprietorships or partnerships for tax purposes
The Tax Cuts and Jobs Act (TCJA) of 2017 introduced a new deduction for qualified business income (QBI) earned by owners of these businesses. This deduction, available to individuals, estates, and trusts, can reduce taxable income by up to 20% of QBI. However, it’s subject to income limitations.
The QBI deduction doesn’t affect adjusted gross income (AGI) but directly reduces taxable income. It functions similarly to an itemized deduction, but you don’t need to itemize to claim it.
It’s important to note that the QBI deduction is set to expire after 2025 unless Congress extends it.
3. Employee Deductions for Unreimbursed Business Expenses
Between 2018 and 2025, the TCJA put a hold on miscellaneous itemized deductions, which included expenses like business-related education costs and vehicle use for work. Before the TCJA, these deductions were allowed, but only to the extent they exceeded 2% of your AGI. If Congress doesn’t extend the TCJA, the more lenient rules from 2017 will come back into effect in 2026.
“Time is running out for certain TCJA provisions that could significantly benefit your small business.”
4. First-Year Bonus Depreciation
The Tax Cuts and Jobs Act (TCJA) significantly increased the first-year bonus depreciation percentage for qualified property placed in service between September 28, 2017, and December 31, 2022, (or 2023 for certain property). This bonus deduction, applicable to both new and unused property, was raised to 100%. However, the deduction has since been phased down, reaching 80% in 2023, 60% in 2024, 40% in 2025, and 20% in 2026.
Important: Properties with longer production periods will experience a one-year delay in the reduction of depreciation benefits. As an example, the 80% deduction rate will apply to such properties placed in service in 2024.
If the TCJA provision isn’t extended by Congress, first-year bonus depreciation will end after 2026 (2027 for long-production-period property).
5. Excess Business Losses
The Tax Cuts and Jobs Act (TCJA) of 2017 imposed limits on how much non-corporate taxpayers can deduct from their current-year business losses. These losses can typically offset other income sources, such as wages, self-employment earnings, interest, dividends, and capital gains, but only up to a specific annual amount. Any “excess” losses are carried forward to future tax years and can be deducted under net operating loss rules.
The CARES Act temporarily lifted these limits, allowing taxpayers to fully deduct business losses incurred in 2018, 2019, and 2020. However, the limits were reinstated in 2021 and extended through 2028 by the Inflation Reduction Act of 2022.
Unless Congress takes action to extend these provisions, the more favorable rules for excess business losses that were in place for 2017 will return starting in 2029
Uncertain Future Clouds Business Tax Planning
Time is running out for certain TCJA provisions that could significantly benefit your small business. Congress may or may not extend these temporary measures, so it’s crucial to act now. Consult your tax advisor to understand the potential impact and take advantage of these opportunities before they disappear.
Questions?
Tax, Accounting, and Advisory Services
Matt’s background in federal, state, and local tax enables him to provide extensive services to the firm’s clients in the areas of tax compliance and consulting across a spectrum of industries.