The Tax Cuts and Jobs Act (TCJA), enacted on December 22, 2017, indeed stands as one of the most significant overhauls of the U.S. tax code in the last 30+ years. Many of the tax changes in the 2017 TCJA, however, may not be here to stay and are scheduled to sunset between 2025 and 2028, if not extended by Congress. With this, it is crucial for businesses and individuals to be aware of these upcoming changes and plan accordingly.
What Expires With the Sunset?
Here are some notable sunset business provisions impacting investment partnerships in the financial services industry:
Itemized Deduction for Miscellaneous Expenses (IRC Section 67(g))
The TCJA temporarily eliminated most miscellaneous itemized deductions taxpayers could deduct on Schedule A, such as investment/advisory fees, legal fees, and unreimbursed employee expenses.For tax years beginning in 2026, individual taxpayers who itemize their deductions will once again be able to deduct miscellaneous expenses to the extent that those expenses together exceed 2% of their AGI.
Deduction for Pass-Through Business Income (IRC Section 199A)
Sec. 199A allows taxpayers other than corporations a deduction of 20% of qualified business income earned in a qualified trade or business, subject to certain limitations. The Section 199A deduction is set to expire after 2025, for Tax years beginning in 2026, the 199A deduction will no longer be available. The qualified business income from pass-through investments would now be subject to taxes in accordance with the taxpayer’s ordinary individual tax rates. Thereby losing the benefit of the qualified business income deduction that was temporarily allowed under Sec. 199A.
Limitation on Losses for Noncorporate Taxpayers (IRC Section 461(l))
The TCJA initially set limitations on the deduction of excess business losses for non-C corporation taxpayers, which was to be in effect until 2026. However, the Inflation Reduction Act (P.L. 117-169, IRA) extended this limitation to 2028. During this period, excess business losses cannot be deducted in the current year but are instead treated as a Net Operating Loss (NOL) carryover to subsequent tax years. This carryover can then be applied to future tax filings, subject to certain conditions and limitations.
Upon expiration, generally businesses will be allowed to carry over a net operating loss (NOL) to past years as well as carried forward into future years if certain conditions are met. For individuals and certain other taxpayers, the passive loss rules restrict the ability to offset passive activity losses against other types of income, with the excess being carried forward to the subsequent year.
State and Local (SALT) Deduction (IRC Section 164(b)(6))
The TCJA instituted a cap of $10,000 for state and local tax (SALT) deductions for taxpayers who itemized their deductions, which had a significant impact on taxpayers in high-tax states. After the SALT cap was introduced by the TCJA, a workaround for pass-through entities was implemented in more than 30 states, which allowed these pass-through entities to pay state income tax at the entity level (PTET regime). This workaround helped to bypass the cap for individual taxpayers. The cap is set to expire after 2025, and beginning tax year 2026, 100% of a taxpayer’s eligible State and Local (SALT) payment will be able to be deducted on Schedule A. The expiration of the SALT deduction may also bring the possibility of certain state cap workarounds to expire as well, which could lead to a reassessment of any PTET strategies currently in place.
Now is a time to consider these potential changes when thinking about your long-term financial plan. While there is always the possibility of new legislation that could extend, modify, or replace the current provisions, it is important to stay informed and prepared for the scheduled changes. Withum is committed to helping clients navigate and plan for an ever-changing financial environment.
Authors: Vincent Greenberg, CPA, Principal | [email protected] and Katherine Zaballero, CPA | [email protected]
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