Navigating TCJA Changes: Strategic Planning for Businesses

The 2017 Tax Cuts and Jobs Act (TCJA) introduced sweeping changes that have significantly impacted businesses and individuals across the United States. Among these changes are several key provisions set to expire, some as early as next year. As the deadlines approach, it is critical for business owners to understand the implications and prepare accordingly.

Qualified Business Income (QBI) Deduction

This deduction lowers the tax rate for certain pass-through businesses, such as S corporations, partnerships, and sole proprietorships. Once this deduction expires, the highest marginal tax rate on QBI-eligible income will increase by 10%, rising from 29.6% to 39.6%, which represents an effective increase of nearly 34%.

SALT Deduction Cap

The TCJA established a $10,000 cap on state and local tax (SALT) deductions, which is set to expire at the federal level. Following the introduction of this cap, most states implemented a workaround for pass-through entities, allowing income-based state taxes to remain at the entity level and reducing the income reported on the business owner’s Schedule K-1. The expiration of the TCJA provision will not directly affect state laws regarding this workaround; however, it will eliminate the current SALT deduction limitation, making the state tax regimes less appealing.

Foreign Derived Intangible Income (FDII) Deduction

This provision applies a 13.125% effective tax rate on intangible income linked to Intellectual Property held in the U.S. for tax years ending before January 1, 2026. For tax years beginning after December 31, 2025, this rate increases to 16.4%.

Opportunity Zones: A Limited-Time Incentive

Another notable provision under the TCJA is the creation of Opportunity Zones, designed to spur economic development and job creation in distressed communities by offering tax incentives to investors. Investors can defer and potentially exclude capital gains from their taxable income by investing in these designated zones, provided they meet specific requirements.

However, the ability to defer capital gains through Opportunity Zone investments will expire after December 31, 2026. After this date, new investments in Opportunity Zones will no longer offer tax benefits, making it crucial for interested investors to act soon. Collaborating with a tax advisor is essential to understanding the specific requirements and benefits of these investments, ensuring compliance with IRS regulations, and maximizing tax advantages before this opportunity disappears.

Bonus Depreciation

Prior to the TCJA, taxpayers were allowed to deduct 50% of the cost of qualified property through bonus depreciation. The TCJA increased this deduction to 100%. However, the 100% bonus depreciation is already being phased out. Under a special transition rule, it decreased to 80% in 2023 and will drop to 60% in 2024. The phase-out will continue as follows: 40% in 2025, 20% in 2026, and 0% in 2027.

The expiration of these TCJA provisions presents both challenges and opportunities for businesses. As these deadlines approach, it is imperative to stay informed about potential legislative changes and to develop proactive tax planning strategies. To learn more about the upcoming changes and expirations within the TCJA, please contact your Anchin Relationship Partner.