7 Tax Planning Considerations Ahead of the Great TCJA Sunset

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With several tax laws introduced as part of the Tax Cuts and Jobs Act (TCJA) expected to expire or fully sunset in 2025, this year is crucial for individuals and businesses to explore tax-planning strategies that may help reduce their overall tax bill.  

Some good tax news came at the beginning of this year, as a bipartisan, bicameral deal between the U.S. House of Representatives and the Senate, dubbed the Tax Relief for American Families and Workers Act of 2024, was announced. Although it has yet to pass, it does include some lucrative tax benefits, such as extending the child tax credit, allowing immediate research and development expense deductions and providing disaster relief, to name a few. This proposal would retroactively reverse several business-tax changes from the TCJA, so companies with interest costs, capital expenses and research spending would all benefit.  

As you plan for the year ahead, keep these key tax considerations in mind:  

1. Qualified Business Income (QBI) Deduction. Pass-through entities, including partnerships, limited liability companies, S corporations and sole proprietors, can deduct up to 20% of its QBI. This is subject to certain limitations based on W-2 wages paid, the unadjusted basis of qualified property and taxable income. This deduction is set to expire in 2025, so qualifying entities should take advantage of this tax savings opportunity while they still can.  

2. Bonus Depreciation. This deduction is scheduled to decrease to 60% for the 2024 tax year and decreases by 20% each subsequent year through 2027, under the current phase-out schedule. The current bipartisan framework proposes to extend 100% bonus depreciation through 2025. Regardless of the legislative outcome, it is still a worthy tax benefit for businesses that own machinery, computer systems, software, certain vehicles, equipment or office furniture, to name a few. Also of note, the Inflation Reduction Act of 2022 included a tax credit allowing companies that look to install solar panels or purchase electric vehicles to reap the benefits of both bonus depreciation and energy tax credits.  

3. Estate Tax and Gift Tax Exemptions. The annual exclusion and tax exemptions increased in 2023, with the gift tax annual exclusion increasing to $17,000, and the estate and gift tax exemption to $12.92 million (both adjusted for inflation). The gift tax exclusion is the amount you may give each year without depleting any of your gift and estate tax exemption. The gift and estate tax exemption is the amount you can transfer without being subject to a 40% tax. The gift and estate tax exemptions are both expected to return to $5 million in 2026, so it’s critical for taxpayers to not delay their estate and gift tax planning.

4. State and Local Tax (SALT) Limitation. The TCJA put a $10,000 cap on the SALT deduction, which allows taxpayers to deduct property, income and sales tax, for individuals who itemize their returns through 2025. Before the TCJA, there was no limit on this deduction. With the limitation in mind, it’s important to evaluate whether to deduct sales tax versus income tax when itemizing deductions, depending on where you reside or if you’ve purchased any major items this year.  

5. Section 163(j) Business Interest Expense Deduction. This deduction reverted to its TCJA rules in 2023, which imposes a limitation on the deduction and removes the addback of depreciation, amortization and depletion in the adjusted taxable income (ATI) calculation. The current bipartisan framework proposes to extend the allowance for depreciation, amortization or depletion when determining the limitation on business interest. Under Section 163(j), the amount of deductible business interest expense in a taxable year cannot exceed the sum of the taxpayer’s business interest income, 30% of the taxpayer’s adjusted taxable income (ATI) and the taxpayer’s floor plan financing interest. Taxpayers with average annual gross receipts of $25 million or less ($30 million for 2024) for the three previous tax years are generally exempt from the limitation.

6. Section 174. This tax code was amended under the TCJA and removed the option to expense research and experimental (R&E) expenditures in the year paid or incurred. Instead, taxpayers are required to capitalize and amortize domestic research expenditures over a five-year period (15 years for foreign expenditures), for amounts paid in tax years starting after Dec. 31, 2021. The amended code also specifies that amortization will begin with the midpoint of the taxable year in which expenses are paid or incurred, creating a significant impact on taxpayers. The bipartisan provision delays the date when taxpayers must begin deducting their domestic R&E costs over a five-year period until taxable years beginning in 2026.

Another major change in the rule is classifying software development costs as R&E expenditures under Section 174, subjecting them to the same mandatory amortization periods. With these capitalization requirements in mind, it’s important to properly identify R&E expenditures incurred within your business. The IRS Notice 2023-63 offers some much-needed guidance on how to navigate the treatment of R&E expenditures under Section 174 for taxable years ending after Sept. 8, 2023, which is the effective date of the notice.  

7. Net Operating Loss (NOL) Limitation. The TCJA significantly changed the NOL rules, limiting NOL incurred after Dec. 31, 2017, to 80% of taxable income (previously 100%) and disallowing NOL carrybacks. However, the TCJA allows NOL to be carried forward indefinitely. An NOL carryforward allows taxpayers to move a tax loss to future years to offset a profit, which can be beneficial from a tax planning perspective.  

Unsure of which of these tax incentives or deductions apply to you? We encourage you to work with a tax advisor to evaluate your current tax position, identify ways to optimize it and help minimize your overall liability. 

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Vivian Peng
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Vivian Peng is a Principal at Doeren Mayhew with nearly 20 years of experience in public accounting.

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