What expiring TCJA provisions mean for businesses and individuals

By Patrick T.R. Charvat, CPA and Brian J. Kutz, CPA

While the Republicans will control the House and Senate when President-elect Trump takes office, advancing some of Trump’s agenda -- such as tax legislation -- may not be easy.

With the Senate filibuster, which requires a 60-vote threshold to overcome, Democrats could stall or stop some measures. The Republicans will likely need to use budget reconciliation, which only requires a simple majority, to pass tax reform measures.

During Trump’s first term, a united Republican Congress passed the Tax Cuts and Jobs Act (TCJA) using budget reconciliation. The TCJA instituted numerous changes for businesses and individuals, many expiring at the end of 2025.

One of the Republican’s priorities could be the extension or permanent adoption of sunsetting TCJA provisions. The following is a look at which TCJA provisions are expiring, and which are permanent:

KEY TCJA DOMESTIC PROVISIONS FOR BUSINESSES

Set to expire:

The TCJA instituted a limitation allowing the expensing of business interest only up to 30 percent of adjusted taxable income.

Taxpayers initially used EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) to calculate adjusted taxable income. In 2022, however, they were prohibited from adding back depreciation and amortization to calculate adjusted taxable income. The limitation is set to expire in 2026, which would generally allow taxpayers, with some exceptions, to deduct their interest expense without limitations.

Bonus depreciation, which allows for accelerated tax depreciation, will end completely for property placed in service in 2027 and beyond.

The allowable bonus percentage was 100 percent through 2022, and under the TCJA, it dropped by 20 percent annually until its scheduled phase-out in 2027. Taxpayers can still use IRC Section 179 expensing, but it does come with limitations based on capital expenditures and business income.

The qualified business income (QBI) deduction, which allows owners of qualified pass-through entities to deduct 20 percent of their QBI, will expire at the end of 2025. This provision benefited owners of S-Corps, partnerships, and sole proprietorships, allowing them to potentially reduce the marginal tax rate on their QBI from 37 percent to 29.6 percent.

Not expiring:

The TCJA reduced the C-corporation tax rate from a maximum of 35 percent to a flat 21 percent rate. Because this change is permanent, if the QBI deduction is not extended, a C-corporation may become more attractive when business owners consider their entity choice.

Another provision not set to expire is the requirement to amortize research and experimental expenses under IRC section 174. A bipartisan bill to eliminate this requirement and allow immediate expensing passed the House but failed in the Senate.

TCJA KEY DOMESTIC PROVISIONS FOR INDIVIDUALS

The TCJA decreased marginal tax rates and set a top marginal tax rate of 37 percent. If these reduced marginal tax rates expire as scheduled, taxpayers will see a new 39.6 percent top marginal rate.

The TCJA expanded the child tax credit, giving taxpayers a $2,000 credit per qualifying dependent child. This will revert to the pre-TCJA amount of $1,000 per child. Additionally, the Modified Adjusted Gross Income threshold for claiming the credit will be reduced.

The TCJA substantially increased the standard deduction and removed personal exemptions. Both provisions expire at the end of 2025. In 2024, the standard deduction is $14,600 for single filers and $29,200 for joint filers. In 2025, the standard deduction is $15,000 for single filers and $30,000 for joint filers. Unless extended, the 2026 standard deduction would be cut roughly in half and adjusted for inflation.

Reducing the standard deduction amount will allow more taxpayers to itemize. Additional TCJA provisions set to end also promise to enable taxpayers to claim a greater number of deductions, such as:

• Elimination of the $10,000 deduction limit on state and local taxes.
• Restoration of the miscellaneous expense deduction.
• Increase in allowable indebtedness for mortgage interest deduction from $750 thousand to $1 million.
• Increase in the ability to deduct home equity debt interest.
• Increase in the limit of cash contributions to charities from 50 percent of adjusted gross income to 60 percent.

Estate tax exemption

The potential reduction in the estate tax exemption amount is a major TCJA sunset change taxpayers need to consider.

The TCJA significantly raised the estate tax exemption amount, which is currently $13.61 million per individual. Unless extended, it would revert to the pre-TCJA amount indexed for inflation which is projected to be around $7 million.

We recommend that taxpayers proactively plan their estate before the TCJA sunsets, rather than relying on potential legislative action.

Bottom line

In this political climate, nothing is certain. President-elect Trump and the Republican Congress plan to tackle multiple legislation items. Our team of tax professionals will monitor developments and look for tax planning opportunities. 

Patrick T.R. Charvat is a CPA and Tax Manager with experience working with individuals and multistate and local business entities. Contact Patrick at 717-761-7210 or pcharvat@cpabr.com. 

Brian J. Kutz is a tax manager with Boyer & Ritter who provides services for businesses and individuals and works with clients in various industries. Contact Brian at 717-761-7210 or bkutz@cpabr.com