Taxes are an especially big deal to business owners, and this election has the potential to significantly change the game. That’s because major provisions of the Tax Cuts and Jobs Act of 2017 (TCJA) are expiring in 2025. Presumably, Trump would reinstate them, as this was his signature piece of legislation. But if Kamala Harris wins, it’s all but certain she’ll let them expire.
So, where would business owners feel it the most if TCJA tax provisions expire?
(Note! Our goal here is to be as apolitical as possible and deliver the facts while also putting any tax fears you may have to rest. Even if these provisions do expire, there is nothing on this list we haven’t successfully managed for clients before.)
Qualified Business Income Deduction (QBI)
(QBI) is a tax deduction that allows eligible self-employed and small-business owners that file “pass-through” tax returns (sole proprietors, S-Corps, LLCs, and partnerships) to deduct up to 20% of their qualified business income on their taxes.
In 2023, if your total taxable income was at or below $182,100 for single filers or $364,200 for joint filers you may have qualified for a 20% deduction on your taxable business income. In 2024, the limits rose to $191,950 for single filers and $383,900 for joint filers.
Assuming you’re a small business generating $100,000 in income and have a personal tax rate of 20%, with the QBI deduction you’d pay $16,000 in taxes. Without it, $20,000.
Bonus Depreciation
The Bonus Depreciation provision of the TCJA allowed business owners to immediately deduct $1.1 million of capital equipment investments placed into service. The deduction began phasing out in 2023 and will completely phase out after 2025. If it expires, business owners will have to spread out the deduction for capital assets over their useful life instead of taking the entire deduction in the first year.
Corporate Tax Rate
For business owners who file C-Corp tax return, the income tax rate would return to 28% from the current 21%. This is a partial reversal of the TCJA cut from 35%.
Individual Tax Rates
The TCJA adjusted the seven income tax brackets from 10%, 15%, 25%, 28%, 33%, 35%, and 39.6% to 10%, 12%, 22%, 24%, 32%, 35%, and 37% respectively. A change in the TCJA would reinstate the 39.6% top rate for individuals earning over $400,000 annually.
Capital Gains Tax
For households earning over $1 million, the long-term capital gains tax rate could increase from 20% to 39.6%, aligning it with ordinary income tax rates.
Estate Tax Exemption
The current estate tax exemption from $11.7 million would be reduced to around $5 million.
The tough spot many business owners will find themselves in is that they earn more than $400,000 on paper but take much less as a paycheck because they’re reinvesting that money back into their companies. That’s not typically taken into consideration when politicians author tax policies, so whatever comes of this election, it’s important to maintain consistent contact with your BGW team, so we can help avoid a heftier-than-warranted tax bill. In addition, higher individual and capital gains tax rates may impact your investment strategy. Remember, we can help with that, too.
