What will the end of the Tax Cuts and Jobs Act of 2017 mean to small businesses?
By Deborah Jeanne Sergeant
The possible sunset of the Trump era Tax Cuts and Jobs Act of 2017 (TCJA) may affect small businesses in ways that business owners have not yet considered. The TCJA is slated to end in 2025 unless Congress intervenes.
“We don’t know what will happen,” said Michael J. Reilly, certified public accountant and consulting partner at Dannible & McKee, LLP, headquartered in Syracuse with additional offices in Auburn, Binghamton and Schenectady and Tampa, Florida. “Biden has said that nothing would change for those under $400,000. Trump talks about keeping these measures and expanding them—and not only for the higher incomes, but the middle class too.”
Reilly said that the largest impact from an end of the TCJA on small businesses would be the end of the qualified business income deduction. The QBI deduction provides for a 20% deduction against business income effectively lowering taxable income for many small businesses such as sole proprietors and owners of pass-through entities. For example, for taxpayers in the top federal tax bracket of 37%, their effective tax rate drops to 29.6% after factoring in the QBI deduction.
“Almost all small businesses currently qualify for the QBI deduction,” Reilly said.
Certain professional businesses such as medical, accounting and legal services generally don’t qualify for the QBI deduction.
Reilly said that the corporate tax rate went from a top tax rate of 35% to 21%, a shift that won’t sunset with the TCJA “but there’s talk of the Biden administration increasing it to 28%,” he added.
In view of the potential increase in personal income tax brackets due to the TCJA sunset provisions, Reilly said that it may be prudent to “consider accelerating income into current years when you’re in a lower tax bracket,” he said. “For example, you should consider converting all or a portion of your regular IRAs or other qualified retirement plans to a Roth IRA where the conversion would be taxable now, but in the future, all distributions from the Roth IRA would be completely tax-free.”
He added that most small business owners should be interested in gift and estate planning if they are concerned about the succession of their business and the ultimate distribution of the wealth they have accumulated.
Business succession also represents an area of concern to Cindi Turoski, partner with Bonadio Group with locations including Utica and Syracuse. If business owners are considering handing down the family business, time is running out.
“The 2017 tax law temporarily doubled the federal estate and gift exemption until Dec. 31, 2025,” Turoski said. “For 2024, each person can transfer up to $13,610,000 during their lifetime or at death tax-free for federal taxes. That means a married couple can shelter over $27 million of assets from federal estate taxes.
“Furthermore, federal estate tax law allows for portability of the estate or gift exclusion, if properly elected on the estate tax return of the first spouse to die. That means if you do not use all of your federal exemption, your spouse can use the rest of yours in addition to his or her own. Note that the generation-skipping transfer tax exemption also doubled to the same amount but isn’t portable. That exemption applies when gifting to grandchildren or to a trust that also benefits grandchildren.”
Once those higher federal exclusions end Dec. 31, 2025, those amounts will decrease by half. For this reason, Turoski advises business owners who want to give their business interest to heirs should consider beginning the process soon to complete it before the possible end of the TCJA. Turoski anticipates the volume of work for estate planners, attorneys and business appraisers will sharply increase in the coming months as other business owners plan accordingly.
“You don’t want to be shut out of the process due to their capacity by waiting too long,” she added. “Either way, gifting also removes future appreciation from compounding your estate. State estate tax laws also need to be considered.”
