Everything you need to know about the tax law sunset as a small business owner or sole proprietor.
At Alleviate Tax, one of our areas of specialty is helping small business owners settle their tax debt. Often, new business owners or businesses that scale quickly end up owing more taxes than they expected. This can put your business at a loss as you struggle to cover monthly expenses, payroll, and cover past due taxes while setting aside money for your quarterly business taxes.
The Tax Cuts and Jobs Act changed many of the tax laws relevant to businesses, leaving many small business owners with a larger-than-expected tax bill. These laws are expected to sunset in the 2025 tax year, which means you’ll have a whole new set of rules to follow when you do your business taxes. Planning ahead can help you avoid any surprises and potentially lower your tax liability.
If you’re interested in learning about 2025 tax law changes for personal income taxes, read: Preparing for the Tax Law Sunset 2025.
Changes to Tax Laws for Businesses in 2025
Let’s explore some of the changes coming for corporate taxes, as well as independent contractors and self-employed individuals next year. These will affect quarterly estimated taxes and taxes due in April 2026.
Qualified Business Income – QBI Deduction Expires
When the TCJA passed in 2017, this provision gave “pass-through” business owners, including sole proprietors and independent contractors, along with partnerships and companies who file as S-corporations, a tax deduction worth 20% of their qualified revenue for the year. QBI stands for “qualified business income – QBI.” The deduction also applies to some estates, trusts, and investments.
Under the law, taxpayers could deduct up to 20% of their qualified business income on their personal federal income taxes. Taxpayers could take the deduction whether they itemize deductions on a Schedule A or opt to take the simpler standard deduction. Unless Congress votes to extend this provision of the TCJA, the last time you can claim this deduction will be in 2024, reflected on your tax returns due in April 2025. You can claim the deduction if your total income, including your business income, earned wages, and other income, totals less than $191,950 for individual taxpayers and $383,900 for married couples filing jointly. If you work in a “specified service or trade business,” you may qualify for the QBI in 2024 with an income as high as $232,100 for individuals or $464,200 for joint filers.
Investors in REIT (Real Estate Investment Trusts) or PTPs (publicly traded partnerships) may also deduct 20% of qualified REIT dividends or qualified PTP income, according to the IRS website.
For pass-through business owners, this deduction could range from $38,390 up to nearly $93,000. You’ll want to plan ahead to reduce your tax liability if you are expecting similar income in 2025 and won’t have the benefit of the QBI deduction.
Bonus Depreciation
The TCJA offered a tax benefit called “bonus depreciation.” The depreciation deduction was designed to strengthen the economy by encouraging business owners to invest in capital purchases by offering an additional first-year depreciation allowance. Bonus depreciation will drop from 100% at its peak in 2017 through 2023 down to 60% in 2024 and 40% in 2025. Bonus depreciation will be just 20% in 2026 and completely expire in 2027. Additionally, business owners will no longer be allowed to take bonus depreciation on used equipment.
If you’re planning to make any large capital purchases, consider making the investment in 2024, when you can still claim 60% bonus depreciation on qualified property. Be aware of how changes could affect your tax bill in 2026 and beyond.
Net Operating Loss Limitations
Claiming a net operating loss for your business may help reduce your tax liability. Prior to the TCJA, business owners could carryback an NOL deduction for up two years. That was taken away under current laws, but then the CARES Act allowed for a five-year carryback for losses in 2018, 2019, and 2020, up to 80% of the excess of taxable income over the total net operating loss deduction.
Under the TCJA, businesses could carry forward net operating losses for an indefinite amount of time, but the NOL carryover deduction is limited to 80% of that year’s net income.
If this law sunsets as expected, you may be able to carryback NOLs to reduce tax liability. Leveraging NOLs to reduce your tax liability is complicated and it’s best to consult with a tax professional to ensure you’re using this tax avoidance strategy properly.
Excess Business Losses
Along with changes to net operating loss (NOL) rules, the TCJA introduced limitations on Excess Business Losses (EBLs) for pass-through entities to $305,000 for individuals and $610,000 for joint taxpayers. Losses that exceed the EBL threshold can be added to an NOL carryforward. The excess business law deduction will not return to pre TCJA levels in 2026. Instead, the excess business loss limitation will continue through 2028 under the Inflation Protection Act of 2022.
Corporate Tax Rate to Remain the Same
Not all aspects of the TCJA pertaining to businesses and pass-through corporations will sunset in the near future. The corporate tax rate introduced in 2017 will remain the same unless Congress votes to change them. The TCJA changed the corporate tax to a flat rate of 21%.
Need Help Settling Your Past-Due Business Tax Debt?
If you are a small business owner or 1099 independent contractor, self-employed and you’re struggling with tax debt, the tax experts at Alleviate Tax can help. It’s important to settle your tax debt now to avoid additional penalties and interest. If you end up owing even more money to the IRS after the TCJA tax laws sunset, you will continue falling further behind. Unpaid tax debt could bankrupt your business, make it harder to take out a loan or secure new credit, and could even – in a worst-case scenario if you are found guilty of tax fraud – land you in jail.
Don’t take chances. Get help from the tax professionals at Alleviate Tax today.
FAQs
What is the tax law that expires in 2025?
Many aspects of the Tax Cuts and Jobs Act, effective since 2017, will expire in 2025, including many aspects that affect business owners.
Is the QBI deduction going away?
The Qualified Business Income deduction, which equals 20% of business income for sole proprietors, partnerships, S-corps, and other pass-through entities, is set to expire in 2025 as the Tax Cuts and Jobs Act sunsets.
