The potential expiration of key provisions of the Tax Cuts and Jobs Act (TCJA) at the end of 2025 is a critical issue that requires careful attention and proactive planning, and Section 199A is no exception.
Lawmakers are currently carefully reviewing the impact of a potential wave of passthrough business conversions to C corporations if Section 199A expires as scheduled. This provision currently allows a 20% deduction for qualified business income from pass-throughs, effectively reducing the top marginal tax rate from 37% to 29.6% for these entities, and even lower for most small businesses.
The Congressional Budget Office (CBO) is grappling with predicting when and how many businesses might convert, given the uncertainty surrounding potential extensions of TCJA provisions. If TCJA expires, the top individual tax rate will return to 39.6%. Coupled with the loss of the Section 199A deduction, this could create a significant gap between passthrough and C corporation tax rates (potentially 40% vs. 21%). This disparity could make it difficult for pass-throughs to compete with C corporations, making it highly likely that a wave of conversions will ensue.
The CBO estimates that fully extending TCJA provisions would cost $4.6 trillion over 10 years. However, allowing provisions to expire could also impact revenue due to business conversions. Some lawmakers are exploring options to equalize tax treatment across business forms, which could influence decision-making for business owners.
The uncertainty is making 2024 tax planning challenging as C and S Corporation elections are required to remain in place, in most cases, for at least 60 months. That puts business owners in a precarious planning position this year trying to predict what direction the tax provisions may go.
Beyond the passthrough issue, tax preparers should be aware of other expiring TCJA provisions. Current lower individual tax rates will expire, potentially increasing tax liability for many clients. The enhanced Child Tax Credit will revert to pre-TCJA levels, affecting families with children. The $10,000 limit on State and Local Tax (SALT) deductions is set to expire, which could benefit clients in high-tax states. The increased estate tax exemption amount will be cut roughly in half, potentially impacting estate planning strategies. Additionally, 100% bonus depreciation for qualified property will begin phasing out, affecting business investment decisions, and various provisions limiting business expense deductions may revert to pre-TCJA rules.
Given these potential changes, tax preparers should take several actions. Inform clients about these changes and how they might impact their tax situation. Develop multiple tax strategies based on different potential outcomes (TCJA extension, partial extension, or full expiration). Discuss with business clients the pros and cons of converting to C corporation status, considering both short-term and long-term implications. Stay informed about any proposed extensions or modifications to TCJA provisions. Review clients' personal tax situations, considering potential changes to rates, deductions, and credits. Revisit estate plans for high-net-worth clients in light of potential changes to the estate tax exemption. Advise business clients on the potential impact of changing bonus depreciation rules on capital expenditures.
If you’re not currently utilizing tax planning or projection software, now would be a good time to look at the options available to you. While models can be manually built with programs like Excel, it will be difficult to keep up with the many changing provisions that could impact your clients. An individual taxpayer may be negatively impacted by the 199A expiration but positively affected by the expiring cap on SALT taxes. Careful analysis will need to be done in most cases to advise clients as to the best next steps.
Christine Gervais is a licensed CPA, using her skills to help businesses grow and achieve their fullest potential. Christine has a Master’s degree in accounting from Southern New Hampshire University in addition to holding her CPA license for over a decade. Notably, Christine is a nationally recognized speaker providing education to other CPAs on how to best serve clients as well as instruction on a wide variety of topics for business owners on how to maximize success. Christine prides herself on the value she can bring to clients with her extensive tax knowledge and provides strategic, forward-thinking financial strategies to help clients grow. When not behind her desk, you can find Christine spending quality time with her daughter and stepson or tending to the family’s excessively loved farm animals.
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