Have you been wondering what tax cuts expiring in 2025 will mean to you, a small business owner and your business? Well, I have and will share what I’ve learned about them as that deadline fast approaches within a year.
Knowing now what you can to prepare for the end of 2025 will help your small business prepare for these changes. The tax cuts set to expire could significantly impact your small biz’s money.
Table of Contents
Overview of Tax Cuts Expiring in 2025
In 2025, several key tax cuts are set to expire. This includes changes in individual tax rates, corporate tax rates, and various deductions and credits.
These changes could affect your business’s financial health and operations. Start thinking about what you can do now to avoid the most financial pain with higher taxes.
Individual Tax Rates and Their Impact
If your small business is a pass-through entity, changes in individual tax rates will directly impact your personal income. Currently, pass-through entities like sole proprietorships, partnerships, and S-corporations benefit from lower individual tax rates.
However, these rates are scheduled to increase, potentially leading to higher taxes on your business income.
What Tax Cuts Expiring in 2025 Will Do For Corporate Tax Rate Changes
While many small businesses are pass-through entities, some are structured as corporations. The corporate tax rate, which was lowered to 21% in recent years, might increase if the expiring tax cuts are not extended.
A higher corporate tax rate means your business needs to allocate more budget towards taxes, impacting your profit margins.
As of now, I know I need to save 35% of my income from the business to pay taxes. I’ll have to prepare to save at least 45% and find a way to cut expenses by 10% to not lose income.
After all, we are in the business of business to make money, not to give it all away in taxes.
Deductions and Credits Affected
Several deductions and credits that are vital for small businesses are also set to expire. These include Section 179 expensing and the Qualified Business Income deduction.
Section 179 Expensing
Section 179 allows you to expense the cost of new equipment in the year it is purchased, rather than depreciating it over several years. This expensing limit is set to be reduced after 2025.
Without this benefit, you might find it harder to make immediate investments in new machinery or equipment, which can hinder growth and efficiency.
What Tax Cuts Expiring in 2025 Mean For Qualified Business Income Deduction
The Qualified Business Income (QBI) deduction allows eligible businesses to deduct up to 20% of their qualified business income. This deduction is particularly beneficial for pass-through entities.
With its expiration, your taxable income might increase, leading to higher tax liabilities and less money for you and your small business.
What Tax Cuts Expiring in 2025 Mean for Small Business Owners
To slower the effects of expiring tax cuts, consider proactive strategies and thorough planning.
Financial Planning and Tax Consultation
Engage with your tax professional to gain insight into how these changes will impact your business.
Your tax consultant can help you identify the best strategies to minimize tax liabilities and take advantage of any remaining benefits before they expire.
What Tax Cuts Expiring in 2025 Means For Reassessing Business Structures
Evaluate your current business structure. Depending on the impending tax changes, it might make sense to reorganize your business.
For example, switching from a pass-through entity to a corporation, or vice versa, could result in better tax outcomes based on future rates and deductions.
However, it may cost you some money to make these changes between an accountant and lawyer.
Conclusion: What Tax Cuts Expiring in 2025 Will Mean For You and Your Small Biz
The expiration of tax cuts in 2025 presents significant challenges for small businesses. By understanding the potential impacts on individual and corporate tax rates, as well as the loss of crucial deductions and credits, you can take steps to prepare.
Proactive financial planning and possibly reassessing your business structure will help you navigate these changes and maintain your business’s financial health in the coming months and years.
Remember, the election is taking place in November this year. Whoever becomes president and who has the majority in the house and senate will play a huge role on whether these tax cuts expiring in 2025 will take affect or not.
Make your vote count in November. There are less than 95 days to decide who deserves your vote.
Are you prepared for the tax cuts expiring in 2025? I’d love to hear about it from you in the comment section.
FAQS: What Tax Cuts Expiring in 2025 Means: What Small Businesses Need to Know
What tax cuts expiring in 2025 are key?
Several tax cuts from the 2017 Tax Cuts and Jobs Act (TCJA) are set to expire. Key provisions include the reduction in the corporate tax rate, the pass-through business income deduction, and expanded Section 179 expensing.
How will the expiration affect corporate tax rates?
The corporate tax rate, which was lowered to 21% under the TCJA, is set to increase. Specific rates will depend on new legislation, but rates could revert to pre-TCJA levels of around 35%.
What changes will happen to pass-through business income?
The 20% deduction for qualified business income (QBI) from pass-through entities, like S-corporations and LLCs, will expire.
This means pass-through business owners will lose a significant tax break, resulting in higher taxable income.
What about Section 179 expensing?
Bonus depreciation, allowing businesses to deduct a substantial percentage of the cost of qualified property upfront, will phase out with the tax cuts expiring in 2025.
The 100% deduction will decrease incrementally after 2022, disappearing completely by 2027.
How will the individual tax rates impact small business owners?
Individual tax rate cuts are also set to expire. For small business owners who report business income on personal tax returns, higher individual rates could lead to increased tax liabilities.
Are there any expected changes to tax credits?
Some business tax credits, such as the research and development (R&D) credit, may be reduced or phased out. This could lead to increased expenses for businesses that rely on these credits for innovation.
What should small businesses do to prepare for what tax cuts expiring in 2025 will do?
Small businesses should consult with a tax advisor to understand the specific impacts on their finances.
Consider strategies like accelerating income or deferring expenses to mitigate the effects.
Could there be new legislation affecting what tax cuts expiring in 2025 will be?
Yes, Congress may introduce new tax legislation before 2025. Staying informed on legislative updates will be crucial for small businesses to adapt and plan effectively.
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