Smart Money: Considerations for business owners ahead of upcoming tax law changes

Change is constant, especially when it comes to tax regulations. Six years ago, the Tax Cuts and Jobs Act (TCJA) fundamentally reformed the federal tax code, introducing significant changes for both individuals and businesses. With many of these changes set to expire after 2025, it's time for business owners to strategically plan their finances. There are areas that you control. Here’s what you need to know.

UNDERSTANDING THE 4 KEY CHANGES

Income Tax Rates

The TCJA introduced lower tax rates for individuals and businesses. Most notably, it reduced the corporate tax rate from 35% to 21%. For individuals, there are seven tax brackets, with rates ranging from 10% to 37%. Post-2025, these rates are scheduled to revert to pre-TCJA levels, which could mean higher taxes for many.

Deductions and Tax Credits

The TCJA made significant changes in standard deductions, nearly doubling them for individuals and eliminating personal exemptions. For business owners, it introduced a 20% deduction for qualified business income (QBI) from pass-through entities. These alterations are also set to expire, potentially reducing deductions and increasing taxable income.

Charitable Giving Deductions

The act increased the limit on cash contributions to public charities from 50% to 60% of adjusted gross income (AGI). This change encourages higher charitable giving, but with its expiration, the cap reverts back, potentially impacting philanthropic strategies.

Estate and Gift Tax Exemptions

One of the most significant changes was the doubling of the estate and gift tax exemption, allowing individuals to transfer more wealth without incurring taxes. This increase is temporary, and a return to lower exemption levels could have substantial implications for estate planning.

STRATEGIC FINANCIAL PLANNING APPROACHES

Converting to a Roth IRA

With the potential increase in income tax rates post-2025 and if you believe your rates will remain high, then converting to a Roth IRA from a traditional IRA may be a wise move. Roth IRAs offer tax-free growth and tax-free withdrawals in retirement. Converting now could mean paying taxes at the current lower rate, rather than the potentially higher future rate.

Gifting and Charitable Giving Options

Given the changes in the estate and gift tax exemptions and charitable giving deductions, it’s prudent to review and possibly accelerate your gifting and charitable strategies. Consider utilizing the higher gift tax exemption before it decreases, explore strategic charitable giving to maximize deductions under the current higher limits, and include charities as beneficiaries of tax-deferred retirement accounts.

Brian Loy

 

Practical Steps to Take Now

Review Your Business Structure: Assess whether your current business structure is still the most tax-efficient under the changing landscape. For some, a shift may be beneficial.

Maximize Retirement Contributions: With potential tax rate increases, maximizing contributions to retirement accounts can provide more tax-deferred growth.

Accelerate Income or Defer Deductions: Depending on your income projections, it may be advantageous to accelerate income into the current lower tax rate years or defer deductions until higher rates return.

Estate Planning Review: Revisit your estate plan in light of the changing exemptions. Consider strategies like lifetime gifting to leverage the current higher exemption amounts.

Stay Informed and Flexible: Tax laws can change rapidly, so staying informed and maintaining flexibility in your financial planning is key.

The sunsetting of the TCJA provisions presents both challenges and opportunities for business owners. By understanding these changes and planning strategically, you can position yourself and your business to navigate the evolving tax landscape effectively. Remember, every financial situation is unique. Consult with a tax professional and financial adviser for their specific areas of expertise and points of view, and tailor these strategies to your specific circumstances. As we approach these changes, proactive planning is the key to minimizing tax liabilities and maximizing financial growth.

Brian Loy, CFA, CFP is a financial advisor at Wealthspire Advisors based on Reno. He has dedicated his career to providing his clients with the specialized financial services they need and deserve. Contact Brian at 775-324-7244 or email at brian.loy@wealthspire.com. Wealthspire Advisors LLC is a registered investment adviser and subsidiary company of NFP Corp. This material should not be construed as a recommendation, offer to sell, or solicitation of an offer to buy a particular security or investment strategy. The information provided is for informational purposes only and should not be relied upon for accounting, legal, or tax advice. While the information is deemed reliable, Wealthspire Advisors cannot guarantee its accuracy, completeness, or suitability for any purpose, and makes no warranties with regard to the results to be obtained from its use.