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How Businesses Can Plan for Sunsetting TCJA Provisions
The Tax Cuts and Jobs Act (TCJA) of 2017 brought significant changes to the tax code, affecting many small businesses and business owners in Delaware. The TCJA introduced the qualified business interest deduction, added a bonus depreciation deduction for qualifying property, and imposed a new limitation on business interest expense deductions under Internal Revenue Code (I.R.C.) section 163(j) [1].
With some TCJA provisions set to expire in 2025 and others already phasing out, and without a clear legislative plan for extending these tax laws, business owners in Delaware should evaluate their tax-planning strategies to prepare for these changes.
About the TCJA
The TCJA, signed into law by President Donald Trump, represents the most extensive tax reform in a generation. It has lowered the tax burden on many small businesses in Delaware.
However, many TCJA provisions were designed to be temporary and are set to expire at various times, from 2022 through 2025. Below is a breakdown of three expiring TCJA provisions and their potential impacts on small businesses in Delaware if no new tax law is passed.
Qualified Business Interest Deduction
The TCJA introduced the qualified business interest (QBI) deduction, also known as the section 199A deduction, allowing taxpayers from pass-through tax entities such as sole proprietorships, partnerships, S corporations, and limited liability companies to deduct up to 20 percent of their taxable net income, subject to limits and income thresholds.
The QBI deduction is set to expire at the end of 2025. However, the TCJA’s reduction in the corporate tax rate to 21 percent was made permanent. Business owners in Delaware might consider changing their business tax structure from a pass-through entity to a C corporation. Before making such a change, it is crucial to understand the potential effects of double taxation on C corporations and any costs and complications associated with changing tax elections or entity types. It may also be possible to utilize carryovers and push income into QBI years to maximize the remaining provision.
Bonus Depreciation Deduction
The TCJA’s 100 percent first-year bonus depreciation deduction allows businesses to deduct the entire cost of qualifying property in the year it is placed in service rather than depreciating it over several years. This deduction is scheduled to phase out from 2023 to 2026.
Generally, new tangible property with a recovery period of 20 years or less, such as appliances, computers, equipment, and machinery, qualifies for the deduction. The property must be placed in service after September 27, 2017, and before January 1, 2023, to qualify for the 100 percent bonus depreciation. The bonus depreciation dropped to 80 percent in 2023 and will continue to decrease: 60 percent in 2024, 40 percent in 2025, and 20 percent in 2026.
Businesses in Delaware considering additions, expansions, or upgrades to their capital goods should investigate doing so sooner rather than later, as this valuable benefit winds down and eventually expires.
Section 163(j) Business Interest Limitation
Businesses often rely on debt financing for growth and are permitted to deduct interest paid or accrued on valid debt within a tax year.
The TCJA amended I.R.C. section 163(j) to limit business interest expense deductions to 30 percent of a business’s adjusted taxable income (ATI). Before the TCJA, taxpayers could typically increase ATI by adding back tax depreciation, amortization, and depletion. However, the TCJA changed this beginning in the 2022 tax year and thereafter, resulting in a lower business interest deduction for some businesses [2]. Any interest expense that exceeds the interest limitation is not deductible in the current tax year but can be carried forward to future years.
It is important to note that businesses in Delaware with average annual gross receipts for a three-year period that do not exceed $27 million are generally exempt from the section 163(j) deductibility limit. There are other exceptions as well, including those for certain real property trades or businesses and farming businesses [2]. Although section 163(j) is not expiring, affected businesses should evaluate the impact of the 2022 changes and plan accordingly.
The Time to Implement Tax-Saving Strategies Is Now
The expiration of these TCJA provisions over the next few years is expected to increase the tax burden on businesses and create an economically challenging period with rising interest rates and decreased lending to small businesses in Delaware.
Although much could change before these TCJA provisions expire, proactive tax planning can better prepare business owners in Delaware for the potential financial effects. Our business attorneys can help you take advantage of the TCJA before it sunsets and prepare you for a post-TCJA business environment.
To explore advantageous strategies before these provisions expire, please reach out and schedule an appointment.
Contact an experienced tax attorney at The Law Office of Jason Carr, PLLC for help in resolving your tax issues in Delaware.
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