Now that we all have a better grasp of the sweeping changes put into place by the Tax Cuts and Jobs Act (TCJA) that (largely) took effect in 2018, it’s time to get ready for the next round.
I’m sure at this point you’re asking, “What next round?” Absent future legislation (and based on the current workings in Washington, future legislation is highly unlikely), many of the measures included in the TCJA expire or change in the coming years. While a few of the headline items (e.g. C corporation rate cut and C corporation AMT) are permanent, the tax changes related to individuals are set to expire in 2025. On top of that, bonus depreciation begins to phase out in 2023, and the definition of alternative taxable income, as it relates to the business interest expense limitation, changes to remove an addback for depreciation expense in 2022. This could create a scary scenario for a company that leverages up to fund an expansion in 2022 to take advantage of the final year of 100% bonus depreciation, incurs excess interest expense, and ends up having their interest expense unexpectedly limited for tax purposes.
The other items to focus on are the 199A deduction (the 20% reduction in qualified business income for flow through entities), decreased individual tax rates, increased standard deductions, and increased estate tax exemptions. All of these are slated to return to pre-2018 rules in 2025.
So what do we do now? Modeling out your income is key. Do you elect out-of-bonus depreciation in order to accelerate income into years with a 20% permanent 199A benefit and lower individual tax rates? Do you make an estate plan now (even if you’re way under the current expanded estate tax exemption?) These are all things to consider.
Whether it’s a change in administration, or the status quo, things in the tax world are slated to change yet again. Are you ready?
As always, we’re here to answer your questions and help you plan. Do not hesitate to reach out to us with your questions.