Planning for Expiration of Tax Cuts and Jobs Act

The Tax Cuts and Jobs Act of 2017 brought significant tax relief to many small and medium-sized businesses. However, as critical elements of this act begin to expire, businesses that haven't been proactive in planning for tax cut expiration may face substantial financial surprises. A recent article, "Small Business Unprepared For Wallop of 2017 Tax Cut Expiration," from Chief Executive, underscores the potential impact of these changes and the importance of planning for tax cut expiration.

Understanding the Sunsetting Provisions

The sunsetting, or expiration, of the tax provisions in the law, should not come as a surprise. However, many business owners seem unaware of the potential impact on their current and future financial situation. This lack of awareness highlights the need for planning for tax cut expiration.

With one exception - a cut in the top rate for the "C Corp" tax rate from 28% to 21% - all other provisions in the law are being phased out. The first provisions are set to expire this year, making planning for tax cut expiration an immediate concern.

The Impact of Expiring Provisions

"Bonus depreciation," which allowed for the accelerated deduction of the purchase price of certain assets, was at 100% for the past five years. It will drop to 80%, with further annual declines of 20% until it's completely phased out. This change underscores the urgency of planning for tax cut expiration.

The qualified business deduction, also known as the section 199A deduction, allows many "flow-through" business owners to reduce their taxable net income by up to 20%. This provision, which often results in savings of several thousand dollars, will end in 2025.

The loss of this deduction doesn't just mean a 20% tax hike. The top marginal rate will rise to 39.6%, compounded by a reversion to the previous bracket structure. This will result in many businesses facing 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 significant tax hit for small business owners, further emphasizing the need for planning for tax cut expiration.

The Return of Estate Taxes

Estate taxes will also kick in at far lower estate values than current levels. Business owners must engage in significant estate planning, which can tie up cash and limit the flexibility often needed for business growth.

The Impact on Business Growth and Stability

The expiration of these tax cuts will not only affect business owners' prosperity. Many small and mid-sized enterprises lack sufficient capital for business growth or unexpected costs. With bank and credit markets retrenching after rising interest rates, this situation will unlikely improve soon.

What Can Business Owners Do?

Businesses taking advantage of the bonus depreciation law should do so now. In 2023, companies can still deduct 80% of the total price of certain capital goods in the first year. If a business plans to make large capital improvements, now is the time.

This is also the time for anyone benefiting 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.

Seeking Professional Advice

Given these changes' complexity and potential impact, it's highly recommended that business owners consult with an experienced Austin estate planning attorney. Such a professional can help prepare both your business and personal finances for the coming changes, ensuring that you're not caught off guard when the provisions of the Tax Cuts and Jobs Act of 2017 begin to expire.

In conclusion, while the Tax Cuts and Jobs Act of 2017 provided significant tax relief for small and medium-sized businesses, the expiration of critical elements of this act could lead to substantial financial surprises for those who haven't planned. By understanding these changes and seeking professional advice, business owners can better prepare for the future and mitigate the potential impact on their businesses.

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