The Tax Cuts and Jobs Act (TCJA) was passed in 2017, bringing various tax changes. Several major provisions are set to expire after 2025, which could have a significant impact on business owners. We have provided a summary followed by a brief explanation and discussion of each action item to help you in your planning.
And please don’t put this off. Start right away—there’s lots to do.
SUMMARY OVERVIEW
| 5 Key TCJA Provisions Expiring in 2026
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6 Action Items to Do Now
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| Lower Individual Tax Rates Individual tax rates are scheduled to revert to pre-2018 levels, affecting pass-through businesses, such as S Corps and partnerships.
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Review Entity Structure and Evaluate Compensation and Benefits. Consider whether your current setup will still be tax-efficient post-2025. Plan bonuses, 401(k) contributions, and other deferred compensation ahead of rate hikes.
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| 20% Qualified Business Income (QBI) Deduction (Section 199A) The deduction for qualified business income is set to expire, impacting eligible pass-through entities.
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Accelerate Income / Defer Deductions. If tax rates increase, it may be advantageous to recognize more income in 2025. |
| Bonus Depreciation The 100% deduction for qualified asset purchases began phasing down in 2023 and will be completely finished by the end of 2026.
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Invest in Capital Assets. Make purchases while bonus depreciation is still favorable.
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| Interest Deductibility Limits
(IRC Section 163(j))
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Evaluate the Current & Model the Future.
Consider reducing debt or restructuring loans. Capital expenditures (CapEx) timing becomes crucial as tax increases weaken future cash flows.
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| Estate & Gift Tax Exemption The exemption will be cut roughly in half starting in 2026, affecting business succession plans.
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Review Succession Plans Consider using the current estate exemption before it shrinks.
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| And, if capital gains rates rise… | Time Transactions Strategically. M & A deals and asset sales may be more favorable before capital gains rates increase.
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DISCUSSION
5 Key TCJA Provisions Set to Expire in 2026
1. Lower Individual Tax Rates
These lower rates will disappear and the new tax rates will revert to higher, pre-2018 levels. Owners of pass-through businesses, such as S Corps, partnerships, and sole proprietorships, will likely experience higher overall tax burdens, which can impact cash flow, complicate business planning, and influence investment decisions.
2. 20% Qualified Business Income (QBI) Deduction (Section 199A)
The deduction for qualified business income is set to expire, impacting eligible pass-through entities. That could mean an income increase for pass-through businesses and, as above, higher taxes and less cash.
3. Bonus Depreciation
The 100% deduction for qualified asset purchases of property acquired and placed in service after September 27, 2017, and before January 1, 2023, began phasing down in 2023 and will expire January 1, 2027. This heavy front-end depreciation—resulting in a welcomed reduction in taxable income—encouraged investments in equipment, machinery, and vehicles by both large and small businesses. It’s going away.
4. Interest Deductibility Limits (IRC Section 163(j))
The cap tightens. The interest expense a business can deduct from its taxable income will limit deductions to 30% of Earnings Before Interest and Taxes (EBIT) instead of Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA).
5. Estate & Gift Tax Exemption
The exemption will be cut roughly in half starting in 2026, affecting business succession plans.
6 Actionable Steps for 2025
1. Review Entity Structure
Consider whether your current setup will remain tax-efficient after 2025. One of the decisions might be to restructure your S Corp to a C Corporation to take advantage of the flat federal corporate tax rate of 21%. Let LSL CPAs walk you through a side-by-side, showing the pros and cons of a C Corp versus an S Corp. By relating the advantages and disadvantages of each and by making comparative tax projections for each situation, you might be surprised. But don’t delay. A restructuring takes time and it must be done by the end of this year.
Check your 401 (k) or other retirement plans to see whether plan bonuses, plan contributions, and other deferred compensation can be timed to occur ahead of income tax rate hikes. Deferring 401(k) income to retirement age is another effective strategy.
2. Accelerate Income / Defer Deductions
If tax rates go up next year, it may make sense to recognize more income in 2025. Take a hard look at your qualified business deductions, ranging from depreciation to interest and insurance to operating expenses to marketing and advertising, and everything in the QBI bucket. Consult with LSL CPAs for ideas on both the income and the deduction side of the equation.
3. Invest in Capital Assets
Make purchases while bonus depreciation is still favorable. But remember that there’s no reason to rush mindlessly just to spend the money this year. Pay attention to your business’s short- and long-range goals. Will the new assets help your growth, ensure compliance with regulatory agencies, and/or increase production efficiently and sustainably? Will the purchase hurt cash flow? Can the asset be placed into service before year-end 2025? If not, the asset will not qualify for depreciation deductions. Take your time. Work with your CPA to understand the tax ramifications of any large purchase and realize that diverse industries might be handled slightly differently.
4. Evaluate the Current and Model the Future.
Reducing debt goes hand in hand with restructuring loans. Debt expense can strangle a perfectly healthy business, especially as the calculation for deductions changes from EBIT instead of EBITDA. Assessing today’s debt structure will help model future cash flows and strengthen planning. Ask for guidance. Talk to your banker and your CPA.
5. Review Succession Plans
Consider using the current estate exemption before it shrinks. As discussed, the increase in taxable income may make leveraged buyouts riskier and less attractive. With higher tax burdens, successful transitions to heirs and successors become harder to negotiate. It might be time to consider a (flat tax) C Corp and to review outstanding buy-sell agreements to move pending talks toward a sale.
6 Time Transactions Strategically
M & A deals and asset sales may be more favorable before capital gains rates increase. Sooner is better. Buyers may have already changed their requirements. Review operational efficiencies and be willing to restructure debt as needed. Perform several tax modeling scenarios yourself or engage your CPA to help position your company in the best light for future success whether for yourself or for the new owner(s).
What’s Next? Keep an Eye on Potential Legislation
While the provisions discussed above are currently set to expire after 2025, lawmakers are actively debating new tax legislation that could impact these changes. A bill introduced in the House earlier this year aims to extend or modify several key TCJA provisions, and although nothing is finalized, it’s likely that some form of tax legislation will eventually move forward. Business owners should stay alert to updates—especially as Congress approaches its self-imposed July 5 deadline, which may slip. We recommend staying in close contact with your tax advisor to adjust your strategy as new developments emerge.
Conclusion
Many of the TCJA’s benefits were temporary. Waiting until 2026 could mean higher taxes, fewer deductions, and lost opportunities.
Meet with your tax advisor in 2025 to make informed decisions before the clock runs out. Contact LSLCPAs for guidance!
Click here to see the number of days left in 2025.
