ARTICLE
10 January 2025

Preparing For Tax Evolution: What Changes To The Tax Cuts And Jobs Act Means For Businesses And Individuals In 2025

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Fennemore

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Fennemore, an Am Law 200 firm, has been a trailblazer in legal entrepreneurship since 1885. We guide businesses that driv e industry, transform communities, and empower people. From pioneering the use of cutting-edge AI to a history of client suc cess and industry-leading job satisfaction, Fennemore isn't just keeping pace—it’s accelerating ahead.
The Tax Cuts and Jobs Act (TCJA), passed in 2017, marked an overhaul of the U.S. tax system. While the act introduced sweeping changes for both individuals and businesses, many of its provisions are set to expire.
United States California Tax

The Tax Cuts and Jobs Act (TCJA), passed in 2017, marked an overhaul of the U.S. tax system. While the act introduced sweeping changes for both individuals and businesses, many of its provisions are set to expire at the end of 2025.

The TCJA was originally established to stimulate economic growth in the U.S. by reducing the tax burden on businesses and individuals. A few of the key elements of this included a permanent reduction in the corporate tax rate from 35% to 21%, temporary tax cuts for individuals including an increase of the lifetime exclusion from an estate, gift and generation-skipping transfer tax (GST), and incentives for businesses to invest in innovation and expansion. The law also simplified certain aspects of the tax law while introducing measures like limits on state and local tax (SALT) deductions which have a larger impact in states like California with a high state income tax rate.

These changes sought to make the U.S. tax system more competitive globally, but the temporary nature of many of its provisions leads to uncertainty as their expiration approaches. The timing out of parts of the TCJA opens the door for lawmakers to review and potentially revise U.S. tax policy—a process that can affect businesses of all sizes and individuals.

Income Tax Provisions of the TCJA Expiring in 2025

Although the TCJA's 21% corporate tax rate is permanent, many other provisions are not. Among the expiring measures is the Qualified Business Income Deduction (QBID), which allows pass-through businesses to deduct up to 20% of their income, set to expire unless extended. Research and Development (R&D) Deductions, which currently allow businesses to expense R&D costs immediately, will phase out, potentially requiring businesses to amortize these expenses over several years. Individual tax cuts affecting taxpayers, such as the expanded child tax credit and deductions for SALTs, will also expire, indirectly impacting small businesses and sole proprietors.

Estate, Gift, and GST Tax Provisions Expiring in 2025

Also affecting individuals, particularly those with higher net worth, the reduction of the lifetime gift, estate, and GST exclusion which is $13,990 in 2025, and if this sun downs, this credit will revert to credit amounts on gift, estate, and GST of roughly above $7 million in 2026, a decrease of 50%, which equates to an additional tax of above $2.8 million. Also of note is California's desire to enact an estate tax on estates whose assets exceed $1 million, up to the federal exemption amount at 40%.

Impacts on Businesses

The expiration of these provisions could create significant challenges for businesses. Pass-through entities may lose the QBID, resulting in higher effective tax rates. Phased-out R&D deductions could discourage investment in innovation, particularly for startups and tech companies. Businesses will face uncertainty in financial planning as they prepare for potentially higher taxes and shifting regulations. Higher tax rates may constrain budgets for expanding operations or hiring additional staff.

Impacts on Individuals

Increases in individual tax rates and increasing the standard deductions and family tax credits will have the largest effect. The business tax issues will also trickle down and impact individual business owners. The decrease in the lifetime exemption equates to an additional tax of above about $2.8 million. So, gifting may be in order if this expiration occurs.

The Role of the 2024 Election Year

2024 having been an election year will certainly play a pivotal role for the future of the TCJA. Since the Republican party controls the presidency, House, and Senate, that party will have significant influence over whether the expiring provisions (or certain provisions) are extended, reformed, or allowed to lapse. It is expected that Democrats will push for reforms that target high-income earners and large corporations, while Republicans are likely to advocate for extending the current tax cuts enacted under the TCJA.

Hold onto your seat!

Provisions are projected to cost $4 trillion over the next decade, raising concerns about the federal deficit and influencing negotiations.

Potential Changes to Corporate Tax Rates

Despite the corporate tax rate's permanence, there is an ongoing debate about adjusting corporate taxes. Increased corporate tax rates are proposed by some policymakers to fund government programs and reduce the deficit, which would disproportionately affect large corporations. Smaller businesses could see differentiated tax treatments, potentially benefiting from lower rates or targeted incentives.

Specific Business Tax Provisions: QBID and R&D

If the QBID is not renewed, many pass-through entities, including small businesses and partnerships, will face higher effective tax rates. Changes to R&D expanding rules may impact innovation-heavy industries, making it more costly to invest in new technologies and processes.

Looking Ahead and Preparing for Change

As the 2025 expiration of key TCJA provisions approaches, businesses should engage in scenario planning to assess the potential financial impacts of higher tax rates and reduced deductions. Monitoring legislative developments is essential, especially given we are beginning the year with a new presidential administration. Working with legal and financial advisors can help develop strategies for managing tax obligations in any environment and ensure success.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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