Federal Income Taxes Are Set To Skyrocket

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S Corporation shareholders and partners in a partnership could see their effective federal income tax rate increase by 30% by the end of December 31, 2025, due to the expiration of certain tax laws. With the sunsetting of the 199A deduction and an increase in individual federal income tax rates scheduled to occur as of December 31, 2025, the effective tax rate for pass-through entity owners will jump from 30% to 39.6%. Taxable income could also increase due to the sunsetting Tax Cuts and Jobs Act provisions, including the capitalization of research and experimental expenditures, bonus depreciation dropping to 60% in 2024 and to 40% in 2025, and the application of a more restrictive interest expense limitation calculation.

To ensure that the anticipated deficit did not extend outside the 10-year budget window, the Tax Cuts and Jobs Act included many sunsetting provisions. Thereby, sealing the fate that with no Congressional movement before the end of December 31, 2025, tax rates will skyrocket for many small and privately held businesses.

Like most of us, business owners likely assume that Congress will not allow this tax doomsday to occur. However, the past few years have shown us that the ability for Congress to pass tax legislation is quite difficult. Many of the tax provisions that are increasing taxable income dramatically are already operational, including:

1. The requirement for domestic R⁘E expenditures to be capitalized over a 5-year period (effective as of January 1, 2022),

3. The bonus depreciation rate decreased to 80% in 2023 and will continue to decrease by 20% each year until it is zero for property placed in service after December 31, 2026.