A significant concern for small business owners is keeping up with changes to the tax code. With the new year, it is likely that federal tax changes that will impact small businesses are on the horizon. Proactive business owners should plan not only to maintain compliance but also to identify potential benefits within the evolving tax landscape. This article explores possible tax law changes to consider when planning for business taxes in 2025 and beyond.
Will Corporate Income Tax Rates Change?
The Tax Cuts and Jobs Act (TCJA) was passed in late 2017 and significantly overhauled federal income tax laws. It reduced income tax rates, repealed the corporate alternative minimum tax, added the qualified business income deduction, allowed certain expenses to be deducted immediately instead of being depreciated, revised net operating loss rules, and made significant changes to the treatment of foreign-sourced income. Some TCJA changes are permanent, but many are set to expire at the end of 2025.
One of the biggest changes was the creation of a 21% flat-rate corporate tax, which is the tax paid by C-corporations. Before TCJA, corporate tax rates were progressive, ranging from 15% to 35%. TCJA also lowered the personal income tax rates, which apply to businesses that are operated as S-corporations, partnerships, or sole proprietorships. Before TCJA, personal income tax rates were 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. TCJA changed the personal income tax rates to 10%, 12%, 22%, 24%, 32%, 35%, and 37%.
With many TCJA provisions set to expire at the end of this year, Congress is currently working on proposals for changes to the tax code. It seems likely that Congress will extend TCJA personal income tax rates. Failing to do so would increase taxes for almost all taxpayers and would cause political risks and other consequences.
The 21% flat-rate corporate tax is not set to expire, but there has been a strong push by President Trump for a 15% flat-rate corporate tax. It’s not clear if the budget has room for such a significant decrease in the corporate tax rate, but this will be an important provision to watch once the new tax laws are passed. If a 15% flat-rate corporate tax is enacted, some small businesses may consider switching to C-corporations. Because C-corporations are taxed at both the corporate and individual levels, careful tax analysis and planning are essential before making changes to a business’s tax structure.
Consulting a tax professional can help ensure that the business structure you choose aligns with the company’s specific needs and flexes with the evolving tax landscape.
Will the Qualified Business Income Deduction Expire After 2025?
The qualified business income (QBI) deduction was enacted as part of TCJA. Beginning in tax year 2018, owners of S-corporations, partnerships, and sole proprietorships have generally been able to deduct up to 20% of their qualified business income on their personal income tax returns. This deduction was allowed even if the taxpayer did not itemize deductions on their Schedule A. The QBI deduction has been one of the most important tax policy changes in TCJA and has reduced the taxable income for most small business owners.
Unless Congress acts, 2025 will be the last tax year the QBI deduction can be claimed. If the QBI deduction expires, most small business owners will see an increase in their taxable income.
There’s a good chance Congress will decide to extend the QBI deduction, or they might just make it permanent. The QBI deduction could also be extended in a modified version, such as a different percentage of deduction or additional limitations on when a small business owner may be able to claim the deduction. Small business owners should stay on top of any changes to the QBI deduction. If the deduction is not extended, small business owners might consider tax planning that results in higher 2025 taxable income and lower 2026 taxable income.
Potential Business Tax Deduction Changes
Business deductions reduce the amount of a business’s taxable income. To help fund lower corporate income tax rates under TCJA, certain business deductions were either removed or limited. For example: Before TCJA, businesses were allowed a deduction for certain domestic production activities. That deduction was eliminated as part of TCJA. The deduction for business entertainment, sporting events, and amusement and recreation activities was likewise eliminated by TCJA. TCJA also contains a provision that makes many employer-provided meals non-deductible starting in 2026. One of the main arguments for removing and reducing these business tax deductions was that the lower personal and business income tax rates would offset any additional tax owed because of the removal or limitation of these deductions.
An extension of TCJA is likely to occur in some form. It seems doubtful that the domestic production activities deduction will be reinstated. While there was limited bipartisan support for the removal of that deduction, neither party appears to have a strong desire to bring it back. There has been little discussion about reviving the entertainment deduction, and it is likely that the current rules on deducting entertainment expenses will remain in place. It seems probable that Congress will extend the 50% deduction on employer-provided meals. Allowing the 50% meals deduction to expire would not result in significant budget savings and would remove a deduction that is viewed favorably by most employers and employees.
Once any new tax provisions are passed, small business owners should familiarize themselves with changes to business deductions. There may be opportunities to deduct expenses that were not previously deductible, as well as changes to the types of business expenses that can be deducted. Taxpayers do not want to be in a situation where they incurred significant expenses, believing they would be deductible, only to learn later that those business expenses are no longer deductible and are then faced with a much higher tax bill.
2025 Tax Planning for Small Businesses
Tax planning for 2025 and 2026 will be more difficult than in the past several years due to uncertainty over the expiring TCJA provisions and tax changes that may happen under the new presidential administration. Although future tax policies are in flux, it is likely that most TCJA business tax provisions will be extended.
Small business owners should work with a tax professional to identify tax-saving opportunities that may be available in 2025. Depending on the changes to the tax code, tax benefits may be possible by accelerating or delaying income or expenses. For example, if the QBI deduction is not extended, or if it is extended in a less favorable way, it may be a good idea to accelerate income in 2025 to take advantage of the QBI deduction before it expires. If taxpayers wait until 2026 to start their tax planning, they may miss opportunities for tax savings that could only be implemented in 2025.
Once the new tax provisions are in place, it is a good time for small businesses to review their tax structure with a tax professional and ensure that it’s still in the best position. Changes to the tax code can make previously effective structures less favorable.
As president of Rocket Legal Professional Services, Jack Rives spearheads Rocket Lawyer’s Alternative Business Structure initiatives and plays a key role executing AI strategy and solutions that accelerate productivity while being well-regulated and controlled by human judgment. Jack served as a judge advocate in the United States Air Force and was the first military attorney to attain a three-star rank. He then served as Executive Director of the American Bar Association from 2010 to 2023.
