Anthony Cerchia, CPA 292 x 292

Tax Planning for Expiring Trump Tax Cut Provisions

12.6.24

The Tax Cuts and Jobs Act (TCJA) of 2017, signed into law by then-President Trump on December 22, 2017, represents the most significant tax overhaul since President Ronald Reagan’s Tax Reform Act of 1986. The TCJA introduced widespread provisions that have substantially impacted contractors at both the business and individual tax levels. However, several key provisions are set to expire at the end of 2025.

Given the outcome of the 2024 Presidential Election, many are quick to draw conclusions about where future tax legislation is headed. With the GOP now controlling all three branches of government, some assume that the TCJA provisions will be extended or made permanent. However, I caution readers to remember that the government, including its many agencies, often moves slowly and sometimes not at all. Those who disagree likely have not had the pleasure of visiting their local Department of Motor Vehicles office lately.

Most recently, the Tax Relief Act for American Working Families and Workers Act of 2024 passed the House of Representatives in January 2024 with overwhelming bipartisan support, resulting in a 357 to 70 vote in favor of the bill. Many tax practitioners, including myself, were confident this bill would be passed into law, which included a few provisions that would reduce the tax bill significantly for contractors and other industries alike. However, the Senate ultimately rejected the bill. This underscores the importance of focusing on current legislation when analyzing tax planning strategies rather than speculating on what the government may or may not accomplish.

Economists on both sides of the aisle have expressed concern that extending the TCJA provisions could boost inflationary pressures and add to the national deficit. While tax cuts may sound appealing at face value, lawmakers must weigh the burden it would place on the macroeconomic level and vote accordingly.

It’s important to have a plan in place now under the framework of existing tax laws, with the flexibility to revise it if new tax laws are passed. Below are some key expiring provisions and actionable tax strategies contractors and individuals should consider:

Qualified Business Income (QBI) Deduction

The QBI Deduction provides a 20% deduction on business income generated by sole proprietorships, partnerships, S corporations and certain trusts and estates. This TCJA provision is set to expire at the end of 2025. Effective tax planning strategies should be implemented for 2025 to ensure this deduction is maximized in its final year. In addition, contractors may want to reevaluate their business structure, as the 21% tax rate for C corporations is one of the few TCJA provisions made permanent and will not expire.

Individual Tax Rates & Standard Deduction

Effective January 1, 2026, individual tax rates will revert to pre-TCJA levels, with the top marginal tax rate increasing from 37% to 39.6% for 2026 onward. The standard deduction available for taxpayers who do not itemize will also revert to pre-TCJA levels, cutting the deduction roughly in half. Given this, taxpayers may benefit from deferring expenses available to them from 2025 into 2026 to help reduce this burden.

Bonus Depreciation

The TCJA allows taxpayers to claim additional first-year depreciation on qualifying asset purchases by applying various percentages to the asset’s cost. For 2024, taxpayers can deduct 60% of qualifying assets in addition to regular depreciation. This percentage decreases to 40% in 2025, 20% in 2026, and phases out entirely beginning January 1, 2027. Contractors should consider purchasing qualifying assets by year-end 2024 to take advantage of the higher 60% first-year depreciation deduction currently in place.

State and Local Tax Deduction (SALT)

The TCJA limited the amount of state and local taxes that itemizing taxpayers could deduct to $10,000, significantly affecting taxpayers in high-tax states such as New York and California. This limit will expire after 2025, allowing taxpayers to deduct their real estate and state income taxes without limitation (in general). Careful attention should be paid when timing your real estate payments around year-end 2025, as it will likely be more advantageous to pay these taxes early on in 2026, where permissible.

Estate and Gift Tax Exclusion

Estate and gift taxes, also referred to as “transfer taxes,” are levied at a rate of 40% on wealth transfers during one’s lifetime or upon death. These taxes are offset by a significant exclusion, which is currently $13,610,000 per individual as of 2024. In other words, a taxpayer who dies in 2024 with an estate valued below this threshold will not pay any estate tax. However, this exclusion is scheduled to be cut in half after 2025, reverting to pre-TCJA levels.

On November 26, 2019, the IRS clarified that individuals taking advantage of the increased exclusion amount from 2018 to 2025 will not be adversely impacted after 2025 when the exclusion amount reverts to pre-2018 levels. It is paramount for contractors to obtain estate tax planning during 2025, as there are strategies to mitigate future transfer taxes. One common strategy is gifting assets to a grantor trust, effectively eliminating any transfer taxes on the asset’s appreciation from the date of the gift to the taxpayer’s date of death. For example, a contractor could obtain a valuation and gift a portion of their company to a trust, reducing future transfer taxes while using the higher exemption amounts available in 2025.

Act Now

Major tax changes are on the horizon and proactive planning is essential. Discuss these matters with your trusted tax advisor or connect with the tax professionals at Dannible & McKee, LLP to ensure you’re prepared for the road ahead.

Contributing author: Anthony J. Cerchia, CPA, is a tax senior manager with over eight years of experience providing taxation and strategic tax planning for a wide range of clients, specifically within the construction, manufacturing, automotive, architecture and healthcare industries. For more information on this topic, contact Anthony at acerchia@dmcpas.com or (315) 472-9127.