Staying informed about upcoming tax law changes is essential for entrepreneurs to effectively plan and manage their businesses. Even small adjustments in tax regulations can impact your cash flow, deductions, and overall financial strategy.
Tax Law Changes
Here are some significant tax law changes that may impact your business this year and next year, as well as how you can prepare.
Changes to Bonus Depreciation
Bonus depreciation allows businesses to immediately deduct a large portion of the cost of new and used assets, which will be phasing out over the next few years. What this means for you is if you’re planning to invest in new equipment or assets, now may be the time to take advantage of the higher deduction before it decreases further.
Example: Impact of Bonus Depreciation Phase-Out
Scenario: An entrepreneur plans to purchase new manufacturing equipment costing $500,000 in 2024.
- Under 2024 Rules (60% Bonus Depreciation): Immediate Deduction: $300,000 (60% of $500,000), the remaining $200,000 depreciated over the asset’s useful life.
- Under 2025 Rules (40% Bonus Depreciation): Immediate Deduction: $200,000 (40% of $500,000), the remaining $300,000 depreciated over the asset’s useful life.
- Under 2026 Rules (20% Bonus Depreciation): Immediate Deduction: $100,000 (20% of $500,000), the remaining $400,000 depreciated over the asset’s useful life.
The reduction in bonus depreciation results in a lower immediate deduction, increasing taxable income in the year of purchase. This change affects cash flow and may influence decisions on capital investments.
Updated Business Interest Deduction Limits
The IRS limits how much interest a business can deduct under Section 163(j) business interest expense deduction.
- Previously, the deduction was based on EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization).
- As of 2022, the deduction is calculated using EBIT (Earnings Before Interest and Taxes), which removes the depreciation and amortization adjustment.
- This results in lower deductible interest expenses for businesses.
Who is impacted?
If your business carries significant debt, this change reduces the amount of deductible interest, increasing taxable income. Entrepreneurs relying on growth financing should consult with us about alternative tax strategies.
Increased Research & Development (R&D) Tax Credit Scrutiny
The IRS is increasing audits of R&D tax credit claims. Additionally, new rules require that R&D expenses be amortized over five years instead of deducted immediately.
How this affects entrepreneurs:
- Due to delayed deductions, businesses investing in innovation, software development, or new products will see higher taxable income in the short term.
- Keeping detailed documentation is more important than ever to substantiate claims.
If you rely on the R&D tax credit, consult with us to ensure compliance and maximize your benefits.
New Digital Payment Reporting Requirements
The IRS lowered the reporting threshold for third-party payment processors (such as PayPal, Venmo, and Stripe) from $20,000 to $600.
In November 2024, the IRS announced new updates to Form 1099-K reporting thresholds for third-party settlement organizations (TPSOs), outlined in Notice 2024-85.
The new rule eliminates the number of transactions and lowers the yearly dollar amount threshold. For instance, the dollar amount threshold for the 2024 calendar year was $5,000. In 2025, the threshold amount will be further reduced to $2,500; in 2026, the threshold amount will be $600. With this new rule change, small businesses that previously did not receive 1099-K forms can expect to receive them and report them on their tax returns.
What this means for small business owners:
- If you receive more than $600 in business transactions through these platforms, you will get a Form 1099-K for tax reporting.
- This change increases tax reporting obligations for freelancers, independent contractors, and online businesses.
- Entrepreneurs should keep detailed records of business and personal transactions to ensure accurate tax reporting.
Inflation Adjustments for Tax Year 2025
The IRS has announced annual inflation adjustments for tax year 2025, affecting various tax provisions:
- Standard Deduction: Single Filers: Increases to $15,000 (up from $14,600 in 2024). Married Filing Jointly: Increases to $30,000 (up from $29,200 in 2024). Heads of Household: Increases to $22,500 (up from $21,900 in 2024).
- Marginal Tax Rates: The top tax rate of 37% applies to single filers with incomes over $626,350 and married filing jointly with incomes over $751,600. These adjustments may influence tax planning strategies, including income deferral and charitable contributions.
Expiration of Tax Cuts and Jobs Act (TCJA) Provisions in 2025
The TCJA, enacted in 2017, introduced several tax benefits for businesses, many of which are set to expire after 2025. What you should do:
- Review Business Structure: Assess whether your current business structure will remain tax-efficient post-2025.
- Plan for Future Tax Rates: Consider the potential impact of higher tax rates on your business income and explore strategies to mitigate increased tax liability.
Final Takeaway: Plan Ahead
Entrepreneurs should stay proactive about tax law changes and how they impact their business. Here are a few steps to take:
- Consult a tax advisor to maximize deductions and credits.
- Keep accurate financial records to prepare for IRS audits.
- Adjust cash flow planning based on depreciation and interest expense changes.
- Review tax strategies annually to align with new regulations.
- Accelerate investments by making significant capital expenditures sooner to take advantage of higher bonus depreciation rates.
- Plan for amortization by adjusting budgeting and financial projections to account for the amortization of R&D expenses.
- Adjust financial strategies for changes in deductions, credits, and tax rates to optimize tax outcomes.
By staying proactive, you can navigate the evolving tax landscape and make informed decisions to benefit your business.
If you have questions about how recent tax law changes affect your business, Steel Ledger Advisors is here to help. Contact us today to discuss your tax strategy for the upcoming year.