3 Key Areas the TCJA Sunset Affects Small Business Owners

The Tax Cuts & Jobs Act of 2017 (TCJA) brought sweeping tax changes to the United States and small business owners were particularly affected. Individual Income tax rates, corporate tax rates, QBI deductions, the resulting state PTET programs, and more all made business owners’ lives more complicated. However, most of the changes the TCJA made to the tax code were temporary and are slated to revert to prior status or expire at the end of 2025. Because of that, small business owners are facing a changing tax environment as the TCJA sunset approaches. While there are more changes than will be discussed in this blog, I believe these to be the most common and impactful changes small business owners face.

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Why is the TCJA Sunsetting?

The TCJA was designed to pass through reconciliation. Reconciliation is a process whereby legislation can be passed with a simple majority in the Senate, rather than a 60-vote threshold. When utilizing reconciliation, the bill must meet certain requirements. Due to these requirements, many provisions of the TCJA were made temporary. As a result, this created what is commonly referred to as the TCJA sunset when provisions of the bill expire at the end of 2025. We will be reviewing how the TCJA sunset affects small business owners in 3 key areas.

• Business Taxes
• Personal Taxes
• Estate Taxes

How the TCJA Sunset Affects Your Small Business Taxes

The TCJA sunset has wide ranging implications for your small business taxes. We are focusing on the three impacts that I believe impact most small businesses.

Entity Selection for Small Businesses

One of the most important impacts the TCJA had on small businesses was the impact of the Qualified Business Income Deduction or QBI Deduction. This was created by Section 199A. This section created a deduction of 20% of qualified business income, or 20% taxable income minus capital gains, whichever was lesser. This deduction applies for owners of certain pass-through entities, assuming they meet specific criteria.

The section 199A, or QBI deduction, is slated to end without congressional action at the end of 2025. This means that taxes will increase for pass-through entities and individuals who currently benefit from this deduction.

While the QBI deduction is slated to end, the TCJA also made permanent changes to the corporate tax rate. This lowered C-Corporation income tax rates from 35% to 21%. With these changes being permanent, it may cause those who only used passthrough entities for the tax benefits to review their entity selection.

At the top tax rate, the difference in taxation between C-Corps & S-Corps goes from significant to minimal. For small business owners who are not at the top tax rate, the math changes as the flat corporate tax rate may be higher than your personal rates. However, the two rates will still converge with the expiration of QBI.

Takeaway: With the convergence of tax rates as the TCJA sunsets, small business owners may want to review how their entity is structured. There are significant considerations as part of this process: legal, distributions, employee benefits & compensation planning, business financing, business sale, and more. However, many of these considerations were ignored from 2018-2025 in order to attain the QBI deduction. In 2026 and moving forward, business owners should make a point to review the pros & cons of different entity structures.

Bonus Depreciation & Section 179 for Small Business Owners

Another temporary change from the TCJA is bonus depreciation. Unlike most of the other temporary provisions, this change is already in progress. Bonus depreciation allowed certain equipment and property placed in service to have their depreciation accelerated. While the property you purchased may have had a 5-year depreciation schedule (as an example), bonus depreciation allowed you to depreciate the entire 100% of the purchase price in year 1 instead of over 5 years. However, bonus depreciation is being steadily reduced and will be phased out by 2027.

Bonus depreciation applies to all business property, including real estate. Section 179 applies to most business property, with the exception of real property. While the changes to bonus depreciation were temporary, the changes to Section 179 were permanent. The permanent limits for Section 179 in 2024 are $1,220,000 with phase-out beginning at $3,050,000 of property placed in service.

Takeaway: Review any major business purchases, especially real property, and determine if they are eligible for bonus depreciation or Section 179 expensing. If only eligible for bonus depreciation, determine if you can accelerate purchases into an earlier year.  

Business Losses

As small businesses get started, they often incur losses. The TCJA sunset affects how losses can be taken for small business owners. Business losses were subjected to a new test under the TCJA called the excess business loss limitation. If you have a business loss, you are limited to taking to taking up to $610,000 MFJ/ $305,000 Single in losses. Any amounts over those losses are suspended and converted to a Net operating loss. This provision lasts until 2028.

The TCJA also amended how those Net Operating Losses were utilized. Currently, you cannot carry these losses back to previous years and you can apply them to up to 80% of your taxable income. In 2026, you can begin to carry them back for 2 years and apply them to up 100% of your taxable income.

Takeaway: If you plan to have a business loss, review in which year it will occur and what the applicable tax laws are to see if you can time the losses.

Personal Taxes for Business Owners as the TCJA Sunset Arrives

The second area of small business owners’ lives that the TCJA sunset will impact is their personal taxes. There are several changes that will have a significant impact on business owners.

Income Tax Brackets

One of the changes that the TCJA made which affected every taxpayer in the United States was the change in income tax brackets. Likewise, the sunset of the TCJA will affect every taxpayer in the United States.

Here’s how the brackets shift:

Takeaway: I see three main areas where you should consider additional tax planning – if you are in the 24%, 35%, and 37% brackets. If you are in these brackets, you will not only face an increase in rate, but your higher bracket will start at a lower income level. If you are in these brackets, you may want to consider accelerating income into earlier years through Roth conversions or other methods.

Standard & Itemized Deductions

Another change that affected most taxpayers was the change in standard and itemized deductions. The TCJA sunset will once again repeal most of these changes and business owners will be affected.

Here are a few of the major changes:

As you can see there are a significant number of changes in store for small business owners as the TCJA sunsets.

Takeaway: There will be a significant increase in taxpayers itemizing their deductions. Business owners making use of the PTET Deduction will no longer need to use it because of limitations of SALT tax deductions, but may want to continue using it as a way around the effects of Alternative Minimum Tax limitations. While a significantly higher number of business owners may utilize itemized deductions, they will need to remain aware of the PEP & PEASE limitations that kick in at $389,150 MFJ.

Estate Taxes for Business Owners & the TCJA Sunset

The TCJA expanded the estate tax exemption in 2017. As with almost everything else we’ve discussed, this was temporary and will be reverting to its prior state in 2026. This change affects significantly fewer people, but may become more important as your business grows.

As the TCJA sunsets, more small business owners may be subject to estate taxes. Remember, nothing must be passed for this to happen. This will occur with no congressional action.

Takeaway: If you’re a small business owner with a taxable estate, planning before the TCJA sunset occurs is critical. While you may not have a taxable estate now, you very well may in 2026 or later in life. If you don't want to plan, I guess the other option would be to die before 2026 to avoid this tax increase, but I think I would rather plan! Also, attorneys will be busy in 2025. Don’t expect to wait until the end of the year to get this done.

Summary

Small business owners face a slew of tax changes over the next two years as various programs in the TCJA sunset. Preparing for these changes is possible as we already know what we are facing with no congressional action. If you’d like help preparing for the changes, Ironclad Wealth Management is a full-service financial planning firm that focuses on providing tax & financial planning to business owners to help them lower their tax bill and realize their financial goals.

Schedule a no-cost intro call now!

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The Pre-TCJA 2017 tax numbers were inflated to today's dollars (2024) to give alike-for-like comparison with the current TCJA tax numbers. To arrive at these numbers, we took the current 20% long-term capital gains rate and divided it by the 2017 number to get our inflation factor (1.240174). We then multiplied that amount by the various 2017 tax numbers (e.g., income brackets, exemption amounts, etc.) to arrive at our 2024 numbers. Be mindful that these numbers are estimates. The Post-TCJA numbers in 2026 will be different.

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