Big changes to business taxes could be on the way, depending on the results of the upcoming presidential and congressional elections. A key reason for this is a tax law that will expire in about 17 months, and how lawmakers in Washington choose to handle it could impact your taxes.
The Tax Law Background
In 2018, the Tax Cuts and Jobs Act (TCJA) introduced major changes to small business taxes. Many of these changes will expire on December 31, 2025. As that date approaches, you might be wondering how it will affect your business’s federal taxes. The truth is, it’s still uncertain. The two major political parties have different ideas on how to move forward with the expiring provisions.
What Changed with Business Tax Rates?
The TCJA lowered the top corporate tax rate from 35% to 21%. It also cut taxes for business owners using pass-through entities, like S corporations, partnerships, and sole proprietorships. The top tax rate today for these individuals is 37%, down from 39.6% before the law passed.
While the individual tax cuts will expire in 2025, the corporate tax cut was made “permanent.” That doesn’t mean it can’t change in the future, but there’s no expiration date currently.
Other Important Changes for Small Businesses
One of the most important parts of the TCJA for small businesses is the Section 199A qualified business income (QBI) deduction, which allows a write-off of up to 20% of QBI from pass-through entities. This, too, is set to expire in 2025.
Another expiring benefit is the phaseout of bonus depreciation. This allows businesses to write off 100% of certain property in the first year it’s in service. In 2023, the bonus depreciation dropped to 80%, and it will keep dropping—60% in 2024, 40% in 2025, 20% in 2026, and 0% by 2027.
What Could Happen?
What happens to these tax provisions depends largely on the outcome of the upcoming elections. Here are four possible scenarios:
- All of the TCJA provisions set to expire will do so at the end of 2025.
- They’ll all be extended (or even made permanent).
- Some provisions will expire, and some will be extended (or made permanent).
- New tax laws may replace the expiring provisions, offering different rates and benefits.
How this will affect your business taxes in 2026 depends on which scenario plays out, and on factors like your business income, filing status, where you live, and whether you have dependents.
What’s Next?
Your taxes will also depend on which party controls the presidency and Congress, since they have different ideas on tax policy. Keep in mind that tax changes can only become law if both houses of Congress pass them and the President signs them (or if Congress overrides a presidential veto).
As the 2025 deadline approaches and the election results settle, stay informed about possible changes and consider what tax-saving moves you can make. We’re here to help answer your questions and keep you updated. Find your local Padgett office here!