As we enter the third month of summer:
- Pumpkin Spice Lattes have returned;
- Students are headed back to school; and,
- Our government has delivered long-promised family and business friendly tax changes.
Sorry, but it looks like we’re going to have to settle for the first two out of three!
Prospects for Tax Reform Continue to Dim in Both Washington and Sacramento
Last winter and spring, we told you about a bipartisan bill making its way through Congress. Often referred to as the Wyden-Smith bill, it recently failed to pass the Senate. While technically not dead, it is unlikely to see further action until after the November election.
Similarly, taxpayer-friendly adjustments to California’s passthrough entity tax regime stalled in the Assembly Appropriations Committee last week.
While many commentators remain optimistic, particularly for a lame-duck session bill in Congress, we don’t expect any significant tax legislation until February at the earliest.
If Nothing is Happening, Why Do We Care?
It’s all about the sunset, or rather, the sunsetting of several beneficial tax provisions. Without the Wyden-Smith bill or other taxpayer-friendly legislation:
- Research and Development expenditures must be capitalized and amortized over five years.
- The QBI deduction is only available through 2025. Beginning January 1, 2026, the effective federal tax rate on business income increases by 20%.
- Bonus depreciation will continue to phase down. Currently 80% is deductible for 2023, 60% for 2024, and 40% for 2025.
- The refundable child tax credit will remain at $1,600 instead of gradually increasing to $2,000.
In addition, otherwise valid Employee Retention Credit claims may be prohibited. Currently, ERC claims may still be filed for the first three quarters of 2021. For now, the deadline to file is April 15, 2025. The IRS is very skeptical of most ERC claims, especially as more time passes. Congress seems to be listening to the IRS on this matter and the House has already passed an earlier claim cutoff date of January 31, 2024. It is likely that the Senate will move this date forward. How far? We don’t know. We also don’t know how long it will take the IRS to review a claim filed today. Even so, if you have an unfiled ERC claim, the time to act is now.
And finally, as we discussed in a blog post last month, the estate tax exemption is likely to fall dramatically on January 1, 2026. For 2024, the individual exemption is $13,610,000. If Congress takes no action, we expect this to fall to approximately $7,000,000. The maximum tax rate will also increase to 45% from 40%. Depending on the results of the November election, the reduction in the estate tax exemption and the increase in the maximum estate tax rate could be even more dramatic. These negative changes could also happen much earlier than January 1, 2026.
How Do We Move Forward?
Our advice remains as it was in April: File your returns and make your estimated payments based on the law that we have now.
You might also want to consider accelerating capital improvements from early 2025 into this year since bonus depreciation will likely fall from the current 60% to 40% next year.
Similarly, if you can make lifetime gifts, please consider making them now.
And of course, go get that first taste of Pumpkin Spice. You don’t have to wait for fall!
Please don’t hesitate to contact us if you have any questions.
