Year-End Tax Planning for Businesses

After a few years of relatively mild tax changes for most businesses, post-election results provide more clarity on the direction of future policy—with a confluence of expiring tax provisions, a new administration, and evolving economic factors that will shape the decisions of businesses and individual taxpayers alike.

The new administration has proposed policy extensions aimed at broadening the tax base and lowering tax rates for both businesses and individuals. Support for making various Tax Cuts and Jobs Act (TCJA) tax breaks permanent, reducing the corporate tax rate, and incentivizing domestic production must be balanced with the concern over annual deficits and increasing the federal debt. So, while the new administration may open the door for tax cuts, there are a number of potential revenue raisers, such as tariffs, that could have impacts on businesses.

With this in mind, there are steps you can take before year-end to stay well-positioned even amid uncertainty. Capitalizing on tax-friendly provisions while they remain in place and running projections for various tax outcomes could help you anticipate these changes and prepare with confidence.

Here’s a look at some important year-end insights, opportunities, and reminders for 2024 and beyond.

Expiring Tax Provisions

Over 30 key provisions out of the 124 in the TCJA are slated to expire at the end of 2025, which would increase taxes for most businesses and individuals. While some of these may get extended or made permanent, waiting to plan or remaining idle could be costly.

20% Deduction for Pass-Through Businesses

Section 199A of the federal tax code allows owners of flow-through businesses to deduct 20% of their qualified business income (QBI). This business-friendly TCJA provision is scheduled to expire on Dec. 31, 2025 if Congress does not act. Reinstating this provision would avoid a significant increase in tax rates for businesses operating as LLCs, partnerships, sole proprietorships, and S corporations, further widening the tax gap between corporate and flow-through entities.

Planning Tip: Consider evaluating entity selection to determine if converting from an S corporation to a C corporation could result in cost savings.

Bonus Depreciation

For years, bonus depreciation has encouraged businesses to invest in new equipment and property by allowing them to deduct the full cost of eligible assets in a single tax year, rather than spreading the depreciation over multiple years. Bonus depreciation may return to 100% under new legislation; however, under current law, this phases down by 20 points each year beginning in 2023 and scheduled to fully expire after 2026.

Additionally, the TCJA expanded eligibility to include bonus depreciation on the stepped-up value when buying a partnership interest to accelerate deductions. Before finalizing any transaction, it’s important to review the final rules to see if a step-up can be created, determine how much expensing is possible, and understand the tax impact on the seller.

Planning Tip: To maximize the benefits of bonus depreciation, businesses should consider accelerating capital investments and exploring strategies like cost segregation studies and repair analyses to optimize deductions.

SALT Cap Set to Lift

The $10,000 annual limit on state and local tax (SALT) deductions is planned to be lifted at the end of 2025. Without congressional action, eligible taxpayers will be able to write-off 100% of their state and local taxes. If the cap remains in place, several states, including California, have implemented elective workarounds that allow pass-through entities to pay taxes at the entity level to bypass the limit.

Planning Tip: Keep in mind that most state, local, and property taxes are typically deducted in the year you pay them, not when they’re assessed. By strategically timing your tax payments, you may be able to maximize your deductions and minimize your tax liability by deferring payment when the cap expires. Also, consider how SALT deductions may impact future acquisitions and investment strategies.

Modified Energy-Related Tax Credits

The Inflation Reduction Act offers a number of tax credits for energy investments. For property placed in service in 2024, businesses can claim up to a 50% credit for solar, battery storage, geothermal, and other eligible energy property. Starting in 2025, the focus shifts to a technology-neutral credit, incentivizing projects that reduce greenhouse gas emissions.

Planning tip: The timing of your project’s construction start and placed-in-service date matters when determining which tax credit rules apply. To establish timing of whether your project qualifies under the old, modified, or new rules, ensure that it meets either the physical work test or the 5% safe harbor criteria.

Research and Development

There is bipartisan support for reinstating the immediate deduction for R&D wages and other costs. Currently, companies must capitalize these costs and amortize them over five years for domestic costs and 15 years for foreign costs. Businesses should review their R&D activities to determine the impacts to their taxable income under different policies and different years.

Earlier this fall, the IRS released an updated draft Form 6765, Credit for Increasing Research Activities, which heightens the reporting requirements for claiming research tax credits. Some additions to the form aim to simplify the reporting process; however, businesses will need to include more detailed aspects of their research activities, such as itemizing expenses by business component an including details on software development and research goals.

California Net Operating Losses Suspended

For tax years beginning between Jan. 1, 2024 and Jan. 1, 2027, California suspended the net operating loss (NOLs) deduction for businesses with net income exceeding $1 million. This means that businesses will be temporarily unable to offset taxable income with NOLs in the current tax year and must carry forward these NOLs during the suspension period. The new legislation also introduced industry-specific tax changes, including extended deductions for cannabis businesses and the elimination of certain oil and gas subsidies, effective in 2024 and beyond.

Planning tip: Strategic deductions can reduce the impact of higher taxes during the NOL suspension, helping businesses manage their cash flow more effectively.

Increased IRS Oversight

The IRS is ramping up oversight across multiple taxpayer segments—including corporations, partnerships, and high-net-worth individuals—by leveraging advanced technology and targeted audit initiatives to address potential tax liabilities and ensure compliance in areas such as the research and development and employee retention credits.

Planning tip: Take action now to review your compliance strategies, ensure accurate reporting, and always consider proactive tax planning to tamp down audit risks.

Deadline for New Corporate Transparency Reporting

The Jan. 1, 2025 deadline for initial filings under the Corporate Transparency Act (CTA) is approaching. This new law requires millions of U.S. privately-owned non-exempt corporations, limited liability companies, and limited partnerships to disclose information about their beneficial owners to the Financial Crimes Enforcement Network (FinCEN), aiming to promote transparency and prevent financial crime.

Planning tip: Fines for noncompliance can be up to $500 per day (up to a maximum of $10,000) and imprisonment for up to two years. Due to the strict filing requirements and expensive penalties, owners should consult with legal advisors to ensure compliance and avoid any violations.

The Road Ahead

While the tax landscape is set to change, these changes bring opportunities for growth and innovation. The potential for swift legislative action means that businesses can expect a more predictable tax environment in the near future. This stability is crucial for making informed decisions and fostering a positive business climate. By staying informed and proactive, businesses can navigate the new tax policies effectively and position themselves for success in 2025 and beyond.

Contact Jacob Sheffield, CPA, MST at jsheffield@bpw.com or (805) 963-7811 with any questions.