The Tax Cuts and Jobs Act (TCJA) of 2017 introduced major changes to the tax code that have significantly impacted small businesses. Among its key provisions were the qualified business income (QBI) deduction, a bonus depreciation deduction for qualifying property, and new limitations on business interest expense deductions under section 163(j) of the Internal Revenue Code (I.R.C.).
With several provisions of the TCJA set to expire in 2025, and some already in the process of phasing out, business owners should review their tax strategies to adapt to these scheduled changes and minimize potential tax liabilities.
Overview of the TCJA
Signed into law by President Donald Trump, the TCJA was the most significant tax reform in decades, lowering tax burdens for many small businesses. However, many of the provisions were designed to be temporary, with specific expiration dates ranging from 2022 to 2025. Below is a detailed look at three major TCJA provisions that are set to expire and the potential effects on small businesses if no new tax legislation is enacted.
Qualified Business Income Deduction (Section 199A)
The TCJA introduced the QBI deduction, allowing owners of pass-through entities—including sole proprietorships, partnerships, S corporations, and limited liability companies (LLCs)—to deduct up to 20% of their taxable net income, subject to certain income thresholds and limitations.
This deduction is set to expire at the end of 2025. Business owners who currently benefit from the QBI deduction may want to evaluate whether they should restructure their business as a C corporation, given that the TCJA’s reduction in the corporate tax rate to 21% was made permanent. However, transitioning to a C corporation comes with potential drawbacks, including the risk of double taxation. Before making any decisions, it’s important to weigh the costs and complexities of changing tax elections or entity types. Additionally, business owners may want to explore strategies such as utilizing carryovers or accelerating income into years when the QBI deduction remains available.
Bonus Depreciation Deduction
Another valuable provision of the TCJA is the 100% first-year bonus depreciation deduction, which allows businesses to immediately deduct the entire cost of qualifying property in the year it is placed into service. This provision applies to new tangible property with a recovery period of 20 years or less, such as machinery, equipment, computers, and appliances. The property must have been placed in service after September 27, 2017, and before January 1, 2023, to qualify for the full 100% bonus depreciation.
This benefit is currently in a phase-out period, decreasing to 80% in 2023, 60% in 2024, 40% in 2025, and 20% in 2026 before it fully expires. Businesses considering capital investments, such as new equipment or facility upgrades, should consider making those investments sooner rather than later to take advantage of the higher bonus depreciation rates before they disappear.
Section 163(j) Business Interest Deduction Limitation
Many businesses rely on debt financing to fuel growth and expansion, and they are typically allowed to deduct the interest paid on their debt. However, the TCJA placed new limitations on this deduction by amending I.R.C. section 163(j), which limits business interest expense deductions to 30% of a business’s adjusted taxable income (ATI).
Before the TCJA, businesses were allowed to increase their ATI by adding back tax depreciation, amortization, and depletion, which helped increase the allowable interest deduction. However, starting in the 2022 tax year, these add-backs are no longer allowed, which reduces the amount of business interest that can be deducted for some companies.
While section 163(j) itself is not set to expire, businesses affected by the 2022 changes should evaluate the impact on their tax planning. It is also important to note that businesses with average annual gross receipts under $27 million for a three-year period are generally exempt from the section 163(j) limitation. Additional exemptions exist for certain industries, including real property trades and farming businesses.
Why Planning Ahead Is Critical
The expiration of these TCJA provisions could increase tax burdens on businesses and coincide with broader economic challenges, such as rising interest rates and reduced access to credit. Although legislative changes could occur before the sunsetting provisions take effect, proactive tax planning is crucial to help business owners navigate these upcoming changes and minimize their tax liabilities.
Our team of experienced business attorneys is available to assist you in taking full advantage of the TCJA while it’s still in effect and to help you prepare for a post-TCJA tax environment. To explore your options and develop tax-saving strategies, please reach out and schedule a consultation.
The Time to Act Is Now
With key TCJA provisions set to sunset in the coming years, it’s essential for business owners to act now to ensure their companies are well-positioned for the future.
