What tax planning should business owners do in 2025 before the TCJA expires?

Business owners should consider accelerating income into 2025 to take advantage of lower rates, maximizing use of the Section 199A QBI deduction, executing Roth conversions at current rates, completing estate planning gifts using the full $13.99 million exemption, and reviewing entity structure for optimal positioning under either tax scenario.

Will the Section 199A qualified business income deduction expire?

Yes, the Section 199A deduction allowing eligible pass-through business owners to deduct up to 20 percent of qualified business income is scheduled to expire after December 31, 2025. Unless Congress extends it, pass-through business owners will lose this deduction starting in 2026, effectively increasing their tax rate on business income.

Planning for 2025: The Last Year of the TCJA as We Know It | Lynch Law

As 2025 begins, the tax landscape is dominated by a single overarching question: what happens to the Tax Cuts and Jobs Act? The most significant provisions affecting individual taxpayers, pass-through businesses, and estate planning are set to expire on December 31, 2025, absent congressional action. While the political environment makes extension likely, legislative outcomes are never certain, and the prudent course is to plan for multiple scenarios.

What Expires

The list of expiring provisions is extensive and affects virtually every taxpayer. The reduced individual income tax rates, which lowered the top marginal rate from 39.6 percent to 37 percent, revert to their pre-TCJA levels. The nearly doubled standard deduction returns to its pre-2018 baseline, adjusted for inflation. The $10,000 cap on state and local tax deductions remains in effect but would be subject to further legislative debate. The qualified business income deduction under Section 199A, which allows owners of pass-through entities to deduct up to 20 percent of their qualified business income, disappears entirely.^[1]

For estate planners, the expiration of the doubled estate and gift tax exemption is the most consequential provision at stake. The exemption, which stands at $13.99 million per individual in 2025, would revert to approximately $7 million in 2026 if the TCJA sunsets. This reduction would expose millions of dollars in assets to the 40 percent estate tax that are currently sheltered by the higher exemption.^[2]

The Legislative Outlook

The 2024 election results give Republicans the political infrastructure to extend most or all of the expiring provisions through the budget reconciliation process. However, several factors could complicate the timeline. The narrow House majority means that a small number of holdouts can demand changes or delay action. The cost of a full extension, estimated at over $4 trillion over ten years, will require either offsetting revenue measures or acceptance of increased deficits. Competing legislative priorities, from immigration to defense spending, may crowd the legislative calendar.

If Congress acts, the most likely outcome is a multi-year or permanent extension of the core provisions: individual rate cuts, the standard deduction increase, and the QBI deduction. The estate tax exemption may be extended as part of the same package or addressed separately. The details, however, matter enormously. Revenue offsets could include caps, phase-outs, or modifications that change the value of particular provisions for specific taxpayers.

Planning Strategies Regardless of Outcome

Income Tax Planning

Businesses and individuals should evaluate whether to accelerate or defer income and deductions based on the likelihood and timing of rate changes. If rates increase in 2026, there is a benefit to accelerating income into 2025 while rates are lower, and deferring deductions to 2026 when they will offset income taxed at higher rates. Conversely, if extension appears likely, the traditional approach of deferring income and accelerating deductions may remain appropriate.

For owners of pass-through entities, the potential loss of the Section 199A deduction is particularly significant. The QBI deduction effectively reduces the top rate on qualifying pass-through income from 37 percent to 29.6 percent. If this deduction expires, pass-through owners will see an immediate and substantial increase in their effective tax rate. Strategies to maximize the deduction in 2025, such as managing the W-2 wage and qualified property thresholds, deserve priority.

Estate Planning

The estate tax exemption planning window is narrowing. The anti-clawback regulation under Treasury Regulation section 20.2010-1(c) provides critical protection: gifts made under the current $13.99 million exemption will not be recaptured even if the exemption later decreases. This means that individuals who make large gifts in 2025 lock in the benefit of the higher exemption regardless of what Congress does.^[3]

Key planning vehicles include irrevocable trusts, spousal lifetime access trusts, grantor retained annuity trusts, and direct gifts. For married couples, the combined exemption of $27.98 million provides substantial capacity for wealth transfer. However, executing these strategies requires careful drafting, valuation, and implementation that takes time. Estate planning professionals should be engaged early in 2025 to ensure that plans can be finalized well before year-end.

Business Planning

Businesses should assess their capital expenditure plans in light of the continuing bonus depreciation phasedown, which drops to 40 percent in 2025. The interaction between reduced bonus depreciation and potentially higher individual rates in 2026 creates a complex planning environment for pass-through businesses. Modeling the combined effect of these changes on after-tax cash flow is essential to making informed investment decisions.

2025 will be a year of legislative uncertainty and planning opportunity. Business owners and individuals who engage proactively with their tax advisors will be best positioned to respond effectively to whatever the legislative process ultimately produces.

References

^[1] Tax Cuts and Jobs Act, Pub. L. No. 115-97, §§ 11001, 11011, 11042, 11061 (2017) (setting December 31, 2025, sunset dates for individual rate reductions, QBI deduction, SALT cap, and estate tax exemption increase).
^[2] I.R.C. § 2010(c)(3)(C) (providing the scheduled reversion of the basic exclusion amount after 2025).
^[3] Treas. Reg. § 20.2010-1(c) (anti-clawback rule ensuring that gifts made under the higher TCJA exemption are not recaptured upon later reduction of the exemption).