Changes in the economic and political landscape often influence the way business owners strategize about an upcoming ownership transition. Staying up-to-date on the impact of legislation is another way for business owners to be proactive and ensure they are making the best decisions for the long-term.
Currently, business owners should be aware that some of the main provisions of the Tax Cuts and Job Act (“TCJA”) of 2017 are set to end soon. The TCJA was put into place on December 22, 2017, and has an expiration date of December 31, 2025. It amended the Internal Revenue Code (“IRC”) with the aim of lowering tax rates and increasing deductions for both individuals and businesses. Unless Congress decides to extend some or all of the TCJA’s provisions, both individuals and business owners—especially those transitioning ownership—need to begin planning to make the most of any available tax savings that will expire on December 31, 2025.
What Changes Come with the Expiration of the TCJA?
The TCJA planned for the sunset of a number of its changes. In other words, on January 1, 2026, parts of the U.S. tax code will return to the way they were before the TCJA was initially signed into law. Here are some examples:
- Loss of the Qualified Business Income (“QBI”) Deduction – Currently, pass-through businesses—such as sole proprietorships, partnerships and S corporations—which do not pay the corporate income tax may currently claim a deduction of up to 20.0% of the firm’s QBI under Section 199A of the IRC, subject to certain limits. However, after December 31, 2025, the Section 199A deduction will end.
- Standard Deduction – The TCJA nearly doubled the standard deduction for all taxpayers, which made it much less likely that taxpayers would itemize deductions once the TCJA was signed into law. Prior to the TCJA, the standard deduction was $6,350 for single filers and $12,700 for those filing married and jointly, indexed for inflation. For 2024, these deductions have increased to $14,600 and $29,200. Starting in 2026, the standard deduction will fall to about half of what it is in 2025, adjusted for inflation.
- SALT – The state and local tax (“SALT”) deduction was limited to $10,000 by the TCJA, which The Tax Adviser says “had a significant impact on taxpayers in high-tax states.” Once the SALT deduction sunsets, taxpayers will once again be able to gain a larger benefit from deducting taxes paid during the calendar year, including real estate taxes, state or local income taxes, and personal property taxes.
- Miscellaneous Additional Itemized Deductions – The TCJA temporarily eliminated most miscellaneous itemized deductions; however, they will be reinstated on January 1, 2026.
- Estate, Gift and Generation Skipping Transfer Tax Exemptions – The TCJA allowed for temporary increases to the lifetime exemption amounts, which are the totals an individual or couple can transfer during their lifetime without paying federal gift or estate tax. Any amounts conveyed above these totals would be subject to a significant transfer tax—approximately 40.0%. At the time the TCJA was enacted, the totals were $5.6 million per individual or $11.18 million per couple. For 2024, the exemption amount is $13.61 million per individual or $27.22 million per married couple. Notably, the temporarily increased exemptions will fall by about half on January 1, 2026.
Be Proactive…Planning Takes Time
There is, of course, the possibility that Congress may make changes to the TCJA before it expires on December 31, 2025. However, due to the uncertainty of the current political environment, it is imperative to be proactive and plan as if the TCJA will expire as planned. Whether you will continue to operate your business or move forward with an ownership transition event, it is a good idea to work with your trusted estate or tax advisor to determine whether there are any steps you should be taking to best position yourself for future success.
What Strategies May Be Available?
Creating strategies in a time of change requires owners to think ahead so that they can achieve the best possible outcome for their business and for the future of everyone involved. With regard to the expiration of the TCJA, there are many potential tax planning strategies that can help your company find the best way forward. Some strategies to consider are:
- Transfers to Family Members – Transfer assets that are income-producing property to family members who may be in a lower tax bracket.
- Grantor Retained Annuity Trust (“GRAT”) – GRATs are irrevocable trusts that allow the grantor (the person establishing the trust) to transfer assets away from their estate while, at the same time, they retain the right to receive income from the trust. In such cases, the grantor is eligible to receive annuity payments for a set number of years. Once the term ends, the assets that remain in the GRAT are distributed to the beneficiaries; usually, these are the grantor’s children or grandchildren.
- Charitable Giving – Charitable contributions can be deducted from taxable income, which reduces income taxes, and they can also be used as a vehicle for estate tax planning. Taxpayers can discuss charitable giving strategies such as donor-advised funds, charitable gift annuities, charitable remainder trusts or private foundations with their tax advisors.
How Will a Qualified Appraisal Best Prepare You for Anticipated Changes?
Many of the strategies discussed previously are dependent on the valuation of your business. Changes in the economy or the market in which your company operates are important factors that impact the overall valuation of your business for estate and gift tax purposes. Prairie Capital Advisors can work with you to prepare a qualified appraisal as part of your estate and gift tax planning.
Start Preparing Today
Navigating change does not have to be overwhelming. Planning now to create an intentional and well-thought-out plan to address the sunsetting of the TCJA will have a lasting and positive impact on your business and the people you care about the most. If you are working on an ownership transition, think strategically about whether you should accelerate the process before tax rates increase. Most importantly, you don’t want to wait to start any of these processes until a year from now. Beginning the process NOW will keep you from rushing through life-changing decisions. Lastly, have you thought about your long-term goals? Share these with your legal, accounting and financial advisors so that you can get started on an effective plan to get the best outcome for your future.
Melissa Goetz a Vice President at Prairie Capital Advisors, Inc. She can be contacted at 785.560.3511 or by email: mgoetz@prairiecap.com.
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