Year-End Updates and Planning Considerations for Business Owners
With 2025 fast approaching, businesses must brace for critical tax changes and new filings. Several provisions from the Tax Cuts and Jobs Act (TCJA) will expire, impacting planning for estate taxes, depreciation, deductions, and tax credits. To help business owners prepare for these changes and capitalize on current opportunities, strategic tax planning is essential.
Tax Planning for Estates
As the TCJA provisions expire, one of the most significant areas impacted will be estate and gift taxes. Currently, the federal estate and gift tax exemption stands at an all-time high, allowing individuals to gift up to $13.61 million (as of 2024) without incurring federal estate taxes. However, after 2025, this exemption is set to be cut in half.
Planning Considerations:
- Maximize Gifting Now: High-net-worth individuals should consider making significant gifts before the exemption decreases, potentially saving millions in taxes.
- Valuation Discounts: If you plan to gift business interests, work with valuation experts to ensure that any discounts for minority interest or lack of control are maximized.
- Be mindful that Washington State has its own estate tax considerations and should be incorporated into Estate planning.
New for 2024 Beneficial Ownership Reporting
Starting on January 1, 2024, the FinCEN department is requiring businesses to file a Beneficial Ownership Information (BOI) form. The due date for existing companies is January 1, 2025. If the form is not filed on time, a fine of $500 per day will be accrued up to the date of filing. Generally, most corporations, LLCs, and other similar entities created or registered in the U.S must report their beneficial owners to FinCEN.
A beneficial owner for BOI reporting purposes is anyone that owns and/or controls 25% or more of the company. The report will be filed electronically through the FinCEN.gov website with no filling fee.
Use the following link to consider the exemptions and instructions for filing.
Website Link: https://fincen.gov/
Washington State Capital Gains Tax
In 2022, Washington introduced a 7% tax on certain capital gains. This tax applies to Washington residents on their federal net long-term capital gains exceeding $262,000.
Exemptions and Deductions:
Washington law provides exemptions from the capital gains tax, covering real estate sales, specified business assets, farming-related livestock, and others. Deduction is available for charitable donations made to Washington based charities in excess of the standard deduction amount.
Planning considerations:
- Consider gain deferment strategies to keep Washington Capital Gains under the annual standard deduction amount.
- If you are selling your operating business, ensure you are structuring the sale in the most tax efficient way.
Depreciation Rules: Changes Ahead
The bonus depreciation provision, which allowed businesses to fully expense qualified property, is phasing out. The deduction is set to decline to:
- 60% for 2024,
- 40% for 2025, and
- Fully expiring (0%) by 2027.
Planning considerations:
- If you’re planning large equipment or property purchases, consider accelerating purchases to take advantage of higher bonus depreciation. Combining bonus depreciation with Section 179 (discussed below) can further optimize deductions for smaller businesses.
Section 179 Expensing Limits
Section 179 remains a useful tool, allowing immediate expensing of up to $1.16 million in qualifying property, with a phase-out starting at $2.89 million. Unlike bonus depreciation, this provision is not set to phase out, providing long-term flexibility for businesses making equipment investments.
Planning considerations:
- Section 179 applies differently than bonus depreciation – ensure your business, and your asset, is qualified to utilize the expense.
Qualified Business Income Deduction (QBID) Changes
The 20% Qualified Business Income Deduction (QBID) has been a huge benefit to pass-through entities (e.g., S Corporations, partnerships). However, this deduction is set to expire after 2025, leaving pass-through businesses with higher effective tax rates.
Planning considerations:
- Assess the impact of losing QBID on your overall tax situation and explore other strategies to minimize taxable income.
Changes to or Additions of Tax Credits
Several tax credits are available for businesses, and changes to these credits can offer valuable planning opportunities:
- Research & Development (R&D) Credit: Still in effect, the R&D tax credit offers incentives for innovation. Recent changes have allowed small businesses to apply the credit against payroll taxes. If you haven’t explored this, consider doing so before year-end to reduce current liabilities.
- Energy Efficiency Credits: With a growing focus on sustainability, businesses can benefit from tax credits for energy-efficient property improvements. Credits for solar energy, wind energy, and other sustainable investments have been extended and may offer opportunities in the future.
- Employee Retention Credit (ERC): Tied to COVID-19 relief, the Employee Retention Credit (ERC) expired in 2021 for most businesses. However, some retroactive claims may still be available if your business was eligible during 2020 and 2021.
Individual Tax Rate Changes
On the individual side, the TCJA’s lowered tax rates are set to expire after 2025, with the top marginal rate returning to 39.6% from the current 37%. This change will affect high-income business owners significantly.
Wrapping Up
With significant changes to depreciation, tax credits, and estate tax provisions, 2025 presents a critical opportunity for proactive tax planning. By taking advantage of the remaining benefits and preparing for the upcoming shifts, businesses and high-net-worth individuals can minimize their tax burden.
