Business Owners: Expiration Date Is Approaching for Certain TCJA Provisions

The Tax Cuts and Jobs Act (TCJA) included many important federal income tax provisions that affect small business taxpayers and their owners. Some of these provisions are scheduled to expire in the near future, unless they're extended or made permanent by Congress. Here's an overview of five key provisions that may soon come to an end and the tax implications if they're allowed to expire.

1. Individual Tax Rates for Business Income

For 2018 through 2025, the TCJA retains seven tax rate brackets as under prior law, but five of the rates are temporarily lower than they were under prior law. These rates generally apply to an individual's:

• Net taxable income from a sole proprietorship or from a limited liability company (LLC) that's treated as a sole proprietorship, and
• Net income passed through from an S corporation, a partnership or an LLC that's treated as a partnership.

The 2024 rate brackets for ordinary income and net short-term capital gains are as follows:

If Congress allows this TCJA provision to expire, the rates and brackets that were in place for 2017 (with cumulative inflation adjustments for the bracket thresholds) are scheduled to return starting in 2026. Importantly, the top rate bracket would move from the current 37% to 39.6%.

2. QBI Deduction

Net taxable income from the following entities simply passed through to the owners and taxed at the owner level at their standard federal income tax rates:

• S corporations,
• Sole proprietorships,
• Partnerships, and
• LLCs that are treated as sole proprietorships or as partnerships for tax purposes.

For tax years beginning in 2018 through 2025, the TCJA established a new deduction based on a noncorporate owner's qualified business income (QBI) from these businesses. This deduction is available to individuals, estates and trusts. It can be up to 20% of QBI, subject to limitations that can apply at higher income levels.

The QBI deduction isn't allowed in calculating a noncorporate business owner's adjusted gross income (AGI), but it reduces taxable income. In effect, it's treated the same as an allowable itemized deduction, but you don't need to itemize to benefit.

If Congress allows the QBI deduction to expire, it will be gone after 2025.

3. Employee Deductions for Unreimbursed Business Expenses

For 2018 through 2025, the TCJA suspended miscellaneous itemized deductions for unreimbursed employee business expenses, such as business-related education expenses and costs related to using your personal vehicle for your employer's business. Under prior law, miscellaneous itemized deductions were subject to the 2%-of-AGI deduction threshold.

If Congress allows this TCJA provision to expire, the more favorable rules for these expenses that were in place for 2017 are scheduled to return starting in 2026.

4. First-Year Bonus Depreciation

Under the TCJA, for qualified property placed in service between September 28, 2017, and December 31, 2022 (or by December 31, 2023, for certain property with longer production periods), the first-year bonus depreciation percentage increased to 100% (up from 50% in 2017). The 100% deduction was allowed for both new and used qualifying property. However, the property can't have been used previously by the taxpayer.

The first-year bonus depreciation deduction was reduced to 80% for property placed in service in calendar year 2023. It has further decreased to 60% for property placed in service in calendar year 2024.

In later years, the first-year bonus is scheduled to be reduced as follows:

• 40% for property placed in service in calendar year 2025, and
• 20% for property placed in service in calendar year 2026.

Important: For certain property with longer production periods, the preceding cutbacks are delayed by one year. For example, the 80% deduction rate will apply to properties with long production periods that are placed in service in 2024.

If Congress allows this TCJA provision to expire, first-year bonus depreciation won't be allowed after 2026 (2027 for long-production-period property).

5. Excess Business Losses

For 2018 through 2025, the TCJA limits deductions for current-year business losses incurred by noncorporate taxpayers. Such losses generally can offset income from other sources, such as salary, self-employment income, interest, dividends and capital gains, only up to the annual limit. "Excess" losses are carried forward to later tax years and can then be deducted under the net operating loss rules.

The CARES Act temporarily lifted the limit, allowing taxpayers to deduct 100% of business losses arising in 2018, 2019 and 2020. But the limit returned in 2021, and the Inflation Reduction Act of 2022 extended it through 2028.

If Congress allows this provision to expire, the more favorable rules for excess business losses that were in place for 2017 are scheduled to return starting in 2029.

Uncertain Future Clouds Business Tax Planning

Most of the TCJA provisions that affect small businesses and their owners are currently set in stone, unless Congress passes legislation to reverse them. (See "Permanent TCJA Provisions: Will They Last?" below.)

This article covers only five of the most common soon-to-expire TJCA provisions; there may be some less-common temporary provisions that apply to your situation. The future of the temporary TCJA provisions is unclear. It's possible that Congress could extend all or some of them — or simply allow them to sunset as scheduled. So business owners are facing an unsettling tax planning environment. Contact your tax advisor to determine which of the TCJA provisions are relevant to your situation and how to respond to any changes.