The tax filing deadline for calendar year 2024 individual income tax returns has now passed, and uncertainty still lingers concerning whether Congress will extend tax provisions enacted during President Trump’s first term by the Tax Cuts and Jobs Act of 2017.
Some of the more prominent provisions that are scheduled to expire or continue to phase-out on December 31, 2025, are:
- The qualified business income deduction for pass-through entities
- Lower marginal tax rates
- Increased standard individual deductions
- Higher bonus depreciation
- Income exclusion for the discharge of indebtedness on a principal residence
- Rollback of capital gains treatment for opportunity zone investment
- The increased unified credit against gift and estate tax
In addition, President Trump’s current administration is seeking new tax benefits for taxpayers, including the elimination of federal income taxes on tips and overtime pay, and an increased cap on deductions for state and local income taxes paid.
But political divisiveness and climbing federal deficits threaten the efforts to make these tax changes permanent.
In the face of this uncertainty, businesses and individuals must keep abreast of current legislative developments and be mindful of actions they must take before the end of 2025 if legislative efforts prove unsuccessful. Taxpayers who rely only on the Congressional majority to pass the promised tax legislation may lose important benefits if that legislation is not enacted.
Laws that may limit the extension of tax reform
The two laws that resulted in Congress’ passage of temporary rather than permanent changes in 2017 continue to be a challenge to permanent change.
The Congressional Budget and Impoundment Control Act of 1974 instituted a system of rules that requires the two houses of Congress to agree on a concurrent resolution concerning the basic parameters of the federal budget on or before April 15 of each year. Thereafter, the statute applies a complex set of rules to expedite the “reconciliation” of differences between the House and Senate versions of a budget bill, including provisions that limit debate on issues affecting the budget bill.
The “Byrd” rule, adopted by the Senate in 1985-86, allows senators to raise points of order to eliminate from the reconciliation process “extraneous issues” that have no budgetary effect, or that increase spending or reduce revenues when the Concurrent Resolution requires the opposite. Since the Byrd Rule may be waived only by a three-fifths vote of the Senate, bills that would result in a net revenue loss during the budget window in question have been amended to (i) eliminate costs, (ii) add revenue, or (iii) include a sunset provision.
To comply with the Byrd Rule, the Tax Cuts and Jobs Act of 2017 included a 10-year sunset provision, which eliminates many of the tax favorable tax provisions it contained on December 31, 2025. President Trump has proposed further extending those provisions and adding new tax reduction measures, but to accomplish that, Congress must either find new revenue sources to offset the tax revenue reductions, reduce spending or face the possibility of once again only temporarily extending existing tax laws.
In April, both houses of Congress passed the Concurrent Resolution establishing the blueprint for a new federal budget. Now the work of reconciliation must begin.
Congressional discussions of measures that will add revenue and avoid the limitations of the Byrd Rule include a tax increase on millionaires and the elimination of energy credits and subsidies. In this context, the personnel and program cuts implemented by the newly created Department of Government Efficiency and others in the new administration can be viewed as precursors to the legislative push to make permanent the Tax Cuts and Jobs Act changes along with the President’s new tax reduction priorities. Recently imposed tariffs on imported goods may have revenue production as their ultimate goal. In addition, perhaps fearing that new revenue sources and operational cost reductions may not be sufficient, Congress is discussing a significant shift in budgetary policy from a “current law” to a “current policy” assumption. A “current law” assumption counts the cost of the expiring 2017 tax cuts against current revenues in order to determine whether extension of the 2017 provisions result in a surplus or a deficit. In contrast, a “current policy” assumption assumes that extending existing tax provisions impose no new costs on the government budget by ignoring the sunset provisions of the 2017 act. The typically used “current law” assumption would require far more new revenue than the “current policy” approach.
The state and views of American business
American businesses, and particularly small businesses that rely on imported goods, are facing potentially significant cost increases and supply chain interruptions due to new tariffs on imported goods. The U.S. Chamber of Commerce has opined that small businesses might be at risk of closure over the new economic environment.
Business owners report that the tariffs on goods they import are at least 10%, and are often higher. For example, businesses importing goods from China face 100% tariffs,* including for orders placed months ago that are being shipped currently. Commitments to customers require the purchases, but the cost of goods from China is likely to be significantly higher than anticipated at the time of order.
The U.S. Chamber of Commerce further reports that an extension of the existing tax structure implemented during President Trump’s first term is critical to business success, if not their survival. In a recent Congressional visit, small businesses emphasized priority on (i) retaining the existing Tax Cuts and Jobs Act reforms permanently; (ii) preserving the 20 percent deduction for pass-through businesses; and (iii) reinstating deductions for research and development.
Observation, planning and action
In light of the complexity of the reconciliation process and relatively narrow Congressional majorities, individuals and businesses cannot afford to take a “wait and see” approach when it comes to tax policy. Business owners and individuals should engage now in planning for the months ahead. While legislation-extending tax cuts may ultimately be passed, if that does not occur, anyone waiting too long to react may have insufficient time to take important remedial action.
To avoid that situation, business owners and individuals can take three steps to chart an optimized course through this maze.
- Gather information. Information bombards us each day from numerous sources and sometimes finding reliable information is difficult. However, good decision-making is based on a complete understanding of relevant facts. Consider listening to Congressional hearings related to budget and tax policy discussions. Review the Conference Committee Reports related to the Tax Cuts and Jobs Act of 2017 to better understand Congressional intent. That information can provide context that improves one’s understanding of current debates. Look to primary sources for reliable, accurate reporting on budget and tax policy issues.
- Engage in the public process. Officials elected to Congress serve the people and generally welcome the opportunity to have meaningful discussion about relevant issues. Those officials need to understand how the decisions made in Washington affect constituents’ daily lives. If individual meetings are not possible or practical, consider engaging with advocacy groups such as the state and local chambers of commerce or the U.S. Chamber that may have access to better information than is available to the public on television or online, and may provide town halls or other meetings that provide easier access to discussions with senators and representatives.
- Plan for “what if.” Planning for change is rarely effective if left to the last minute. That is particularly true when it comes to tax planning. Now is the time for business owners and individuals to consult with trusted advisors to understand their options if tax reforms are not extended as anticipated. Below are some of the most important areas of planning to consider.
- Implementing gifting strategies. The looming decrease in the federal unified credit against gift and estate tax is among the most important changes scheduled for Dec. 31. If the current credits are not extended, each U.S. individual will lose the opportunity to transfer approximately $7,000,000 in wealth to future generations. If the unified credit reverts to prior levels, any credit previously applied will still count against the new lower credit amount. This means that if the unified credit is reduced from $14,000,000 per person to $7,000,000 per person, one must be willing to transfer more than $7,000,000 now to get the benefit of today’s higher credit. For example, if a taxpayer who has previously applied no unified credit makes a gift of $5,000,000 in 2025, he or she will have $2,000,000 of unified credit to apply in 2026 and later years assuming that Congress does not adopt new legislation. If, on the other hand, under the same circumstances, the gift is $10,000,000, the taxpayer will have no remaining credit as of Jan. 1, 2026, but will have the benefit of having used an additional $3,000,000 in credit that is available during 2025. When one dies, his or her property goes one of three places: to family or others whom the person wishes to benefit, to charities or to the government. Those who are willing to make significant charitable transfers may employ less complicated planning because transfers to charities are estate tax-free. However, anyone with sufficient means to take advantage of the unified credit who prefers to benefit family members should not let the opportunity pass to consider appropriate planning options in the event that the unified credit is not extended at current levels.
- Consider business entities. Under President Trump’s 2017 Tax Cuts and Jobs Act, pass-through businesses were given a deduction said by proponents to disincentivize taxpayers to shift business entity forms to corporations with their then-new lower corporate tax rate. This was Congress’ attempt to provide a degree of parity between entity types and to support small businesses. If that deduction expires, the effective tax rate of owners of pass-through entities could be significantly higher than if business was conducted in corporate form. In light of the possible expiration of the deduction, now is a good time to consider with trusted advisors whether the current business entity structure remains appropriate.
- Budget for tax changes. If Congress does not extend current tax provisions, marginal income tax rates will increase, and taxpayers will lose deductions they now enjoy. Businesses should project the impact of these changes to effectively plan for future economic stability in the fact of higher taxes. Also, to the extent that businesses can take advantage of current rules by year-end, accelerating investment may be worth the cost in cashflow. For example, bonus depreciation — a tax incentive that allows businesses to deduct a significant percentage of the cost of qualifying assets in the first year of service, rather than spreading the deduction over the asset's useful life — is among the Tax Cuts and Jobs Act provisions that may continue to phase-out after 2025 and eventually expire in 2027. In light of that possible change, businesses should consider with their advisors whether advancing purchases of necessary equipment that qualifies for this benefit makes economic sense. Advance budgeting and planning for change can assist individuals and businesses achieve stability in the fact of significant change.
Conclusion
Any uncertainty in an economic environment, even if positive, can leave business owners unsure of their options. Planning for multiple options becomes more difficult but is equally critical to ensuring positive economic outcomes. Individuals and business owners who achieve a better understanding of the current issues, engage appropriately in the public process to attempt to influence a better outcome, and plan now to avoid lost opportunities, will have the best chance at success and longevity in a changing economic and political environment.
*At the time this article was written.
Click here to read Otto's article published by the Phoenix Business Journal.
About the Author
Otto Shill helps individuals, business owners, and employers comply with and plan for laws and regulations related to federal and state taxation, employee benefits, and executive compensation. Recognized as a Certified Tax Specialist by the State Bar of Arizona's Board of Legal Specialization, Otto assists clients with audits, investigations, and regulatory disputes related to these areas and advises business owners on various transactions and long-term succession and estate planning.