Preparing for Post-TCJA: Essential Steps for Businesses

ARTICLE | November 20, 2024

Introduction

The Tax Cuts and Jobs Act (TCJA) of 2017 brought significant changes to the U.S. tax landscape, offering various benefits to businesses and individuals alike. However, many of these provisions are set to expire at the end of 2025. This impending sunset poses challenges and uncertainties for businesses planning for the future. Now is the time for businesses to understand these changes and take essential steps to prepare for a post-TCJA environment.

Understanding the Tax Cuts and Jobs Act (TCJA)

Enacted on December 22, 2017, the TCJA was a comprehensive overhaul of the American tax code, aiming to stimulate economic growth through tax reductions and simplified regulations. Key features included lower tax rates for individuals and corporations, increased standard deductions, and incentives for businesses to invest and expand. The act was the most significant tax reform since the Tax Reform Act of 1986.

TCJA Provisions Set to Expire After 2025

While the TCJA introduced numerous benefits, many of its provisions were designed to be temporary. Without new legislation, these provisions will expire on December 31, 2025, reverting to pre-2018 tax laws. This expiration could have substantial implications for businesses across the country.

Section 199A Deduction for Qualified Business Income

One of the most impactful provisions for small and medium-sized businesses is the Section 199A deduction. This allows owners of pass-through entities—such as S corporations, partnerships, LLCs taxed as partnerships, and sole proprietorships—to deduct up to 20% of their qualified business income. The expiration of this deduction means that these businesses may face higher taxable income, leading to increased tax liabilities.

Bonus Depreciation Deductions

The TCJA introduced a 100% bonus depreciation deduction, allowing businesses to immediately expense the full cost of eligible property placed in service. This provision significantly incentivized capital investments. However, starting in 2023, this deduction begins to phase out by 20% each year and will expire entirely after 2026. Businesses planning significant capital expenditures need to consider the timing to maximize these deductions before they diminish.

Changes in Net Operating Loss (NOL) Deductions

The TCJA limited the use of net operating losses, restricting NOL deductions to 80% of taxable income and eliminating the carryback provision while allowing indefinite carryforwards. With the sunset of the TCJA, the previous rules—which allowed a two-year carryback and 20-year carryforward without the 80% limitation—may return. This change could affect cash flow management and tax planning strategies for businesses experiencing losses.

Business Interest Expense Deduction Limitations

Under Section 163(j) of the TCJA, deductions for business interest expenses are limited to 30% of adjusted taxable income. This limitation is set to continue, but adjustments to how taxable income is calculated could change after 2025, potentially reducing the amount of deductible interest expense. Heavily leveraged businesses might find their tax liabilities increasing as a result.

Other Expiring Provisions

Additional provisions set to expire include increased Section 179 expensing limits, which allow immediate expensing of certain property, and various tax credits and deductions that have provided relief to businesses. The rollback of these benefits could impact businesses relying on them for tax planning and investment decisions.

TCJA Provisions Not Sunsetting in 2025

While many provisions are temporary, several key aspects of the TCJA are permanent or have been extended beyond 2025. Understanding these can help businesses in their long-term planning.

Corporate Tax Rate

The TCJA permanently reduced the corporate tax rate from a graduated rate up to 35% to a flat 21%. This change will remain in effect unless future legislation alters it. This permanence provides C corporations with a stable tax environment for planning purposes.

Limitations on Business Interest Expense Deductions (Section 163(j))

The limitation on business interest expense deductions remains a permanent fixture under the TCJA. Businesses must continue to navigate these limitations when considering financing options and capital structures.

Research and Experimental Costs Under Section 174

Starting in 2022, the TCJA requires businesses to capitalize and amortize research and experimental expenditures over five years for domestic activities and 15 years for foreign activities. This change impacts businesses heavily invested in research and development, affecting their immediate deductions and cash flow.

Global Intangible Low-Taxed Income (GILTI) and Foreign-Derived Intangible Income (FDII)

The GILTI and FDII provisions are designed to tax foreign income and incentivize the use of intangible assets in the U.S. While these provisions remain, the deductions allowable for domestic corporations will be reduced after 2025—from 50% to 37.5% for GILTI and from 37.5% to 21.875% for FDII—effectively increasing the tax burden on affected income.

Potential Legislative Changes and Political Implications

The future of these tax provisions is subject to the shifting political landscape. Legislative actions could extend expiring provisions or introduce new tax laws. Businesses must stay vigilant, as changes can occur that either mitigate or exacerbate the impact of the TCJA sunset. The uncertainty underscores the importance of flexible and proactive tax planning.

Impact of the TCJA Sunset on Businesses

If the expiring provisions are not extended, businesses may face several challenges:

• Increased Tax Rates for Pass-Through Entities: The expiration of the Section 199A deduction will result in higher effective tax rates for owners of pass-through entities, directly impacting their net income.
• Reduced Deductions and Credits: The loss of enhanced deductions and credits means higher taxable income and increased tax liabilities.
• Cash Flow Implications: Higher tax payments can strain cash flow, affecting operations, investments, and growth strategies.
• Compliance Complexity: Reverting to previous tax laws could increase the complexity of tax compliance, requiring more resources and expertise to navigate.

Essential Steps for Businesses to Prepare

Given the potential impact of the TCJA sunset, businesses should take the following proactive steps to mitigate risks and seize opportunities:

Review Current Tax Strategies

Assess your existing tax positions and identify how the expiration of specific provisions will affect your business. Understanding the areas where your tax burden may increase allows you to plan accordingly.

Consider Timing of Income and Expenses

Strategically timing the recognition of income and expenses can be beneficial. For instance, accelerating income into years with lower tax rates or deferring deductions to offset higher future income can minimize tax liabilities. Likewise, planning capital expenditures to take advantage of the remaining bonus depreciation can yield substantial tax savings.

Evaluate Business Structure

Analyze whether your current business entity—be it a C corporation, S corporation, partnership, or sole proprietorship—remains the most tax-efficient structure post-2025. Changes in tax rates and deductions may make alternative structures more advantageous.

Plan for Increased Tax Liabilities

Adjust your financial projections and budgets to account for potential increases in tax expenses. Preparing for higher estimated tax payments can help maintain smooth cash flow and prevent unexpected financial shortfalls.

Stay Informed and Flexible

Monitor legislative developments closely. Tax laws can change rapidly, and staying informed allows you to adapt your strategies promptly. Working with tax professionals ensures that you receive timely insights and can implement necessary adjustments.

The Importance of Proactive Tax Planning

Proactive tax planning is essential in navigating the complexities of a post-TCJA tax environment. By acting now, businesses can position themselves to mitigate negative impacts and capitalize on any new opportunities that arise.

“The impending changes underline the critical need for businesses to engage in strategic tax planning,” says Jamie Miller, CPA and Partner at MBN & Company. “By understanding how these expirations affect your specific situation, you can make informed decisions that safeguard your financial health.”

How MBN & Company Can Help

At MBN & Company, we recognize the challenges that the TCJA sunset presents. Our Tax Services Group is equipped with highly credentialed professionals who understand the complexities and unique compliance issues that businesses face. We are committed to helping our clients navigate these changes through tailored solutions and expert guidance.

Comprehensive Tax Consulting: We provide in-depth analysis of how tax law changes impact your business and develop strategies to minimize liabilities.

Customized Planning Strategies: Our team works closely with you to structure business operations and transactions in a tax-advantageous way, aligning with your goals.

Business Structuring and Succession Planning: We assist in evaluating and selecting the most beneficial business entity and help plan for the future through succession strategies.

Regulatory Compliance Support: Keeping abreast of federal, state, and local tax laws, we ensure that your business remains compliant while maximizing tax benefits.

Industry-Specific Expertise: Our experience spans various industries, including construction, energy, financial services, healthcare, manufacturing, real estate, and more, enabling us to provide insights tailored to your sector.

At MBN & Company, we believe in proactive communication and year-round engagement. By partnering with us, you gain access to a unified team dedicated to your success, helping you adapt to changes and thrive in a post-TCJA landscape.

Conclusion

The expiration of key provisions of the TCJA presents both challenges and opportunities for businesses. By understanding the impending changes and taking essential steps now, businesses can mitigate potential negative impacts and position themselves for continued success. Engaging in proactive tax planning and seeking expert guidance are crucial components of this preparation. MBN & Company is here to support you through this transition, providing the expertise and personalized service needed to navigate the evolving tax environment.

Expert Profile

Jamie Miller

Certified Public Accountant (CPA) and Partner

Email: jmiller@marketingbynumbers.io

Jamie Miller has over 15 years of public accounting experience, specializing in providing tax services to clients in the construction, real estate, and not-for-profit sectors. He is passionate about advising clients on strategic tax planning, business growth, and succession planning. Jamie is dedicated to helping businesses navigate complex tax landscapes and achieve their financial goals.