Taxpayers and tax preparers alike will agree that paying taxes is rough – at times, the whole process may seem unnecessarily rough! In keeping with the football theme of our firm’s annual CPE Day, GYF Tax professionals Don Johnston and Ryan Fronius presented “Unnecessary Roughness – Federal Tax Update” in which they walked through several key provisions concerning both businesses and individuals.
The tax system once again faces a potentially drastic evolution with the 2025 expiration of over 20 tax provisions, as well as Donald Trump’s return to office, on the horizon. This post summarizes the rough (and not so rough developments) that taxpayers can anticipate.
Compliance & Audit Trends
Now that most 2023 tax returns have been filed, the IRS and state and local governments are sending notices to taxpayers regarding an array of items. In some instances, the correspondence merely confirms certain items, but other times, it presents a disagreement with a return. Fortunately, tax notices are often incorrect and can be resolved. Dealing with the notices, however, is unnecessarily rough for sure! First, simply reaching the IRS, even by means of the IRS’s Taxpayer Advocate Service, can be a challenge. If a call does go through, there is no guarantee that the agent will understand the situation or be able to resolve it. In some cases, it is more efficient to just comply with the IRS’s requests rather than questioning them. IRS enforcement efforts, bolstered by an $80 billion budget expansion, are increasingly directed at pass-through entities, particularly in the realm of PPP and ERC. Having the support for the claims made on returns readily available is a taxpayer’s best defense against IRS scrutiny in this specific area and in general.
SECURE Act 2.0 & TRAFWA
An extension of the original SECURE Act, the SECURE Act 2.0 was passed at the end of 2022. Beginning in 2023, various provisions affect 401(k) and 403(b) plans, retirement plan contribution limits, the required minimum distribution age, and more. The impact of this legislation will continue into the 2024 tax year.
The Tax Relief for American Families and Workers Act (TRAFWA) of 2024 has been passed by the House but is being stalled in the Senate. Meant to provide tax relief, notable provisions include reinstating 100% bonus depreciation, allowing an immediate deduction of research and development costs, adjusting the business interest expense limitation, and expanding the child tax credit beyond 2025. If approved, these provisions and several others could bring significant tax savings to business and individuals in the coming years.
TCJA Sunsetting Provisions
More than 20 provisions of the of the momentous Tax Cuts and Jobs Act (TCJA) are set to expire at the end of 2025. It is reasonable to assume, however, that President-elect Donald Trump will extend the rules that were implemented in 2017 during his first term. Notably, the TCJA decreased the number of taxpayers itemizing their deductions due to the large increase in the standard deduction, as well as the $10,000 limit on state and local taxes (SALT) that can be deducted on individual returns. Expiration of these provisions will cause a drastic increase in taxpayers itemizing their deductions, which in turn, increases the significance of other itemized deductions, including medical expenses, mortgage interest, and charitable contributions for individual taxpayers. Termination of the SALT cap is particularly favorable for taxpayers who file in several states or who reside in areas subject to high property taxes, as their state and local tax liabilities often exceed the limit many times over.
In addition to a broader standard deduction, the TCJA created an additional deduction for qualified business income under Section 199A. This provision generally provides a deduction of 20% of the pass-through income from a qualified trade or business. Its expiration will eliminate a complex calculation, however owners of flow-through entities will no longer enjoy a lower effective tax rate.
One of the most significant TCJA provisions impacting businesses is bonus depreciation. From 2017 through 2022, businesses were allowed a 100% deduction for the cost of property placed into service during the tax year. Under the TCJA, the deduction is set to decrease by 20% each year beginning in 2023 until it is completely phased out after 2026. As previously noted, a provision of the TRAFWA could reinstate 100% bonus depreciation. Regardless, the full expense for property placed into service remains available to businesses under Section 179.
Business and individual taxpayers should be aware of various other sunsetting TCJA provisions:
- The TCJA doubled the child tax credit from $1,000 to $2,000 per qualifying child, but it is set to return to the prior amount in 2026. Again, TRAFWA could potentially expand the credit beyond 2025.
- Similarly, the TCJA doubled the lifetime gift and estate tax exemption, indexed each year for inflation. Currently set at $13,610,000 ($27,200,00 married filing joint), this exclusion will decrease to around $7,000,000 ($14,000,000 married filing joint) unless renewed.
- Additionally, various foreign tax provisions, including the Base Erosion and Anti-Abuse Tax (BEAT), the Global Intangible Low-Taxed Income (GILTI) tax, and the tax on Foreign-Derived Intangible Income (FDII), will be impacted by expirations under the TCJA.
TCJA Remaining Provisions
Some TCJA provisions will remain in place after 2025. Most notable of these provisions is the 21% corporate income tax rate, which was reduced from 35%, and could potentially decrease further to 20%, or even 15%, for some corporations. The treatment of Net Operating Loss (NOL) carryovers will also hold. The TCJA eliminated NOL carrybacks and limited the application to subsequent years to 80% of taxable income. Additionally, there will be no change to the Section 174 provision established under the TCJA, which requires the capitalization and amortization of research and development costs, rather than an immediate deduction. TRAFWA, however, may cause a reversion back to a full expense in the year incurred.
Other Tax Considerations – Entity Transactions
Buying or selling a business entails a myriad of tax implications. This topic was covered in more detail during a session at last year’s CPE Day, and it continues to be relevant heading into the 2024 filing season and beyond. One of the most important factors to consider in a business transaction from a tax perspective is whether the sale constitutes a stock sale or an asset sale. Tax discussions surrounding these transactions should begin a couple years in advance to ensure proper structuring and timing. The tax implications for the years following the transaction should also be considered, especially if carried out as an installment sale. If a significant loss is anticipated, taxpayers should be sure that sufficient capital gain is available to offset and realize the benefit from the loss. Additionally, it is imperative that state tax implications be brought into the discussion, as some states do not permit installment treatment and require all income to be recognized in the year of the transaction regardless of when the cash is actually received. Further, when distributing the cash, businesses should ensure sufficient cash is reserved to cover all state tax liabilities.
Final Thoughts
In planning for the upcoming tax years, it is important to distinguish between the provisions that have been approved versus those merely proposed. At this moment it’s unclear exactly what limits and exceptions will come into play in 2025. Nevertheless, awareness of these developments and consideration of their potential impact is imperative to successfully navigating each year’s new tax landscape and maximizing tax savings.
Click here to access copies of the slides, links to resources and a video of the presentation
About GYF’s CPE Day: The firm presents this program each year to bring together clients, friends of the firm, and other professionals who are interested in gaining knowledge. The day is always filled with interesting presentations and great networking opportunities, and is generally attended by 300+ guests. If you have any questions about the material covered, or other issues we did not have time to address, please reach out to your GYF Executive or contact the office at 412-338-9300. We look forward to seeing everyone next year!
