January 3, 2025

Potential Upcoming Tax Reforms in 2025 Could Influence Business Taxes

The Republican Party’s upcoming control of the White House and both chambers of Congress marks a pivotal moment for tax legislation. With many provisions of the Tax Cuts and Jobs Act (TCJA) set to expire in 2025, the potential for significant reforms is high. These changes could have profound effects on businesses and their owners, influencing income tax rates, deductions, and investment incentives.

Extension of TCJA Provisions

The TCJA, effective since 2018, introduced numerous tax provisions impacting small businesses. While some of these measures are permanent, several are scheduled to sunset by the end of 2025. It is anticipated that the Republican-led Congress will extend key provisions, particularly those benefiting individual business owners.

Individual Tax Rates on Business Income

The TCJA retained seven tax brackets, with reduced rates for most taxpayers. These rates apply to net taxable income from sole proprietorships, partnerships, and S corporations. For example, in 2025, the top individual tax rate is 37%, but without legislative action, this will revert to the pre-TCJA rate of 39.6% in 2026. The extension of current rates would maintain a favorable tax environment for business owners.

Qualified Business Income (QBI) Deduction

Another critical TCJA provision is the QBI deduction, allowing eligible business owners to deduct up to 20% of their qualified business income. This deduction reduces taxable income but not adjusted gross income (AGI). With its expiration looming, many expect the new Congress to extend or even make this deduction permanent, ensuring continued relief for pass-through entities.

Investment Incentives: Depreciation and Expensing

First-Year Bonus Depreciation

The TCJA initially allowed 100% bonus depreciation for qualifying assets, promoting business investment. However, this percentage has been phasing down since 2022 and will be entirely eliminated by 2027 without intervention. Republicans may seek to restore or extend 100% bonus depreciation, encouraging capital investments.

“With key tax provisions set to expire in 2025, businesses face a critical year for navigating potential changes to deductions, rates, and investment incentives.”

Section 179 Expensing

Section 179 expensing permits small businesses to immediately deduct the cost of qualifying equipment. The TCJA permanently set the deduction limit at $1 million, adjusted for inflation. With the limit at $1.25 million for 2025, proposals to double this threshold could significantly enhance small businesses’ ability to invest in new equipment.

Corporate Tax Rate and R&E Costs

The TCJA permanently lowered the C corporation tax rate to 21%, benefiting many small and midsize businesses. President-Elect Trump has suggested reducing this rate further for companies manufacturing in the U.S., although congressional support remains uncertain.

For research-intensive businesses, changes to research and experimentation (R&E) expenditure deductions have been challenging. Under current law, these costs must be amortized over five or fifteen years, depending on their geographic location. Bipartisan support exists for reverting to immediate expensing, potentially alleviating tax burdens for innovative industries.

Additional Tax Proposals

The Republican agenda includes several other tax initiatives that could impact small businesses:

• Payroll Tax Reforms: Proposals to eliminate payroll taxes on tips, overtime pay, and earnings of certain public service professionals could reduce employer tax liabilities.
• Energy Tax Credits: While President-Elect Trump opposes green energy subsidies, congressional Republicans from clean energy states may resist a full repeal of the Inflation Reduction Act’s tax incentives.
• Tariffs on Imports: Proposed tariffs on goods from Canada, Mexico, and China could raise costs for businesses relying on imported materials, potentially leading to higher consumer prices.

Looking Ahead

With many TCJA provisions nearing their expiration and new tax proposals on the table, 2025 is poised to be a landmark year for federal tax legislation. Small businesses should closely monitor these developments and consult with tax professionals to prepare for potential changes.