2025 Tax Updates for Businesses and Individuals
As 2024 ends and we move into 2025, taxpayers may face significant changes and uncertainties. With phased reductions in Bonus Depreciation, potential new tariffs, and adjustments in international tax policy, both businesses and individuals must stay informed to adapt their tax strategies in this evolving landscape.
Corporate Tax Rate
The corporate federal tax rate is currently 21%. When this rate was passed as part of the Tax Cuts and Jobs Act, Congress also put in the Qualified Business Income Deduction (QBID) to reduce the taxes on the owners of partnerships and S corporations. However, the part of the TCJA that deals with QBID sunsets after 2025.
If the current situation stands, it might actually be more advantageous for small businesses to become C corporations. The advantages of this would be not only in the reduced tax rate (which might be lower than the tax rates for high income earners), but also there is an exclusion from capital gains for certain small business stock. That stock must be in a C corporation, and it might even be possible to switch entity types and take advantage of this.
Given the election results, it is likely that the QBID will be expanded or perhaps even made permanent, but that is not for certain.
Non-Legislative Tax Change
By far, the biggest recent non-legislative tax change is the Supreme Court overturning the Chevron Doctrine. The Chevron Doctrine, based on the 1984 ruling in Chevron U.S.A., Inc. vs. Natural Resources Defense Council, Inc. (467 U.S. 837), essentially stated that in all situations where the intent of legislation is unclear, the courts were to defer to the federal agencies’ policies so long as their interpretation was deemed “reasonable.” In other words, unless the laws are clear and unambiguous, the agencies were free to make their own policies, and those policies were to stand as law unless they were considered unreasonable.
However, in 2024 a new case was brought before the Supreme Court, Loper Bright Enterprises v. Raimondo. This was a case concerning the ability of the National Marine Fisheries Service to compel fishing companies to pay for the federal employees assigned to their boats to regulate the size of the catch, rather than have that cost paid by the agency itself. In a 6-2 ruling (Justice Ketanji Brown Jackson had taken part in the lower court case and was thus excluded), the Court removed the Chevron Doctrine, and left the power to decide what the meaning of an ambiguous law is to the judicial branch (courts), rather than the executive branch of government (agencies).
What does this mean for taxation? It means that the Internal Revenue Service is not the final decision maker in the meaning of a tax statute. In other words, while the IRS is still free to right it’s own code and make policy decisions, the courts are free to remove those opinions and substitute their own rulings, and those will be considered law. We now stand on equal ground with the United States government in Tax Court. This is unprecedented!
Expiration of Tax Cuts and Jobs Act of 2017
Under the current laws, many of the provisions of the TCJA are set to expire at the end of 2025. As mentioned in the first point, that is now unlikely to happen. That means that:
The corporate tax rate is likely to remain at 21%
Standard deduction stays at the higher levels, no personal exemptions
Itemized deduction for SALT (state and local tax paid) likely to rise above current $10,000 to $20,000
Higher estate tax and gift exemptions
No deduction for moving expenses
Business Tax Changes
One part of the TCJA that is scaling down is Bonus Depreciation. This allows for an expedited write down of equipment and property, to lower taxable income and was passed in order to increase purchasing. Through 2022, bonus depreciation on qualified property was allowable up to 100%. For 2023, that percentage declined to 80%, and 60% for 2024. That is slated to be further reduced to 40% for 2025, 20% for 2026, and be gone altogether for 2027 and beyond. The next administration is likely to restart this process again, so it is possible that the 100% Bonus Depreciation will make a return shortly.
Whether you like or dislike the current tax laws, the likelihood is that the current system will continue under the Republican Congress and White House. Some parts may change or be expanded upon, but the majority of the current situation will remain unchanged.
Employment Tax Changes
President-Elect Trump campaigned in part on eliminating taxes on tips, overtime, and social security. While removing social security as taxable income is fairly straightforward in how it is accomplished, the taxes on tips and overtime will be significantly harder to implement. It will require major adjustments to the tracking and calculation software and processes for employers and payroll companies nationwide. We can expect movement on this promise, but we can also anticipate a length of time to both pass and implement these changes.
Pass-Through Entities
Since we are operating under the assumption that the current tax situation will continue, the issue of Pass Through Entity (PTE) taxation will need to be addressed.
In response to the SALT limitations of the TCJA, many states enacted PTE taxes, allowing shareholders of pass-through entities to pay taxes at the corporate level rather than individually. While this did not change the amount of tax received at the state level, it allowed the deduction to be taken at the federal level through the K-1 form, rather than being subject to the Schedule A deduction limited by SALT.
Some states did not pass any PTE laws, some with expiration dates, some no dates, and some with dates tied to the federal law. Depending on what happens with the TCJA being extended, and any changes to the SALT deduction limits, some states will either change their laws or have their constituents go back to being subject to the SALT limitations.
International Tax and Tariffs
Another key plank of the President-Elect’s campaign platform was the imposition of more tariffs on the importation of goods from foreign lands. The implication here is that the United States will seek parity with its foreign trade partners in both tax treatment and tariffs. The results of these policies are unclear. It is possible that it will lead to increased prices on many goods that we bring into the country, as these costs are usually passed on to consumers. There is also the possibility that this will lead to lowering tariffs across the board, so that prices remain constant here, but the price of US-manufactured goods sent abroad decreases with reduced tariffs charged on US exports.
We can also expect the incoming administration to try to implement tax treaties that are consistent between other countries and the United States in the recognition and taxation of income, both for businesses and individuals. The United States is one of very few countries that taxes worldwide income of its citizens and residents, regardless of where that income is earned. The Internal Revenue Service allows for foreign tax credits to reduce tax on income that has already been taxed by other countries, but since rates are inconsistent across nations we can expect more collaboration between the governments as to how income and taxes are allocated.
Other Considerations and Recommendations
What are the results of all of this? What else is likely to change?
We can expect IRA and 401k limits to continue to rise slowly with time, allowing people to save more for retirement with some type of tax advantage. Choosing between ROTH and Traditional plans are not always straightforward, so make sure to speak with both your financial advisor and your tax accountant.
Similarly, we can expect estate and gift tax exemptions to continue to index higher, and to remain at the higher starting points as legislated in the TCJA.
Taxing unrealized capital gains is off the table for the foreseeable future. While popular with a small segment of the population, the real world implementation would have been a logistical and judicial nightmare.
There may be some additional changes to certain business expenses. Meals and Entertainment may return as 100% deductible, 50% deductible, or stay at the current position.
Conclusion
The election season is over for now. There are several issues that are settled, but many remain unresolved. The importance of proper tax planning and strategy continues to be a high priority in a business environment as volatile as this.
With all of these updates, it can seem daunting to navigate these challenges alone. Luckily Johanson Group has more than 25 years of experience and is more than equipped to guide you and your organization through anything that the future holds. Contact us today for a free consultation regarding your 2024 and 2025 taxes.
