Business owners have faced a range of challenges over the last year, from supply chain disruptions to roller-coaster interest rates. Now, as 2024 launches, they can add one more item to that list: taxes. We spoke with some experts about upcoming changes and tips for dealing with them.

KPMG Tax Partner Robert Trenery Jr. said businesses will need to keep a sharp eye on some issues. “For personal income tax, the rates are static, but items like income brackets, standard deduction, exemptions, and deduction limitations fluctuate based on inflationary adjustments. This happens on a yearly basis based on the Chained Consumer Price Index.”

Bonus depreciation, or the ability to immediately deduct a large percentage of the purchase price of eligible assets, “decreased to 80% in 2023 from 100% in 2022 and will continue to phase down to 0% in 2027 due to the sunsetting of certain TCJA [2017 Tax Cuts and Jobs Act] provisions,” he added. “Businesses will need to continue to monitor the provisions of the TCJA and other provisions including those within the IRA [Inflation Reduction Act] and the CHIPs [Creating Helpful Incentives to Produce Semiconductors] Act.”

Politics matter

Trenery noted that if Democrats “win the Washington trifecta (House, Senate, White House) in 2024, the Build Back Better plan will likely be back on the agenda, which would mean a potentially higher corporate rate. So it’s critical for companies to scenario-plan and model the potential impacts now, so there are less surprises in 2025.”

Regardless of the outcome of the 2024 election though, “What is certain is that the tax system will continue to get more complex,” he added. “We can expect increasing regulatory updates, a very complex global tax regime, and more.”

Wiss Tax Partner Frank Calabrese doesn’t see many significant federal tax changes in 2024, so he’s advising companies to focus their tax planning “based on the current tax laws at the federal and state levels.” But that could change in 2025, he added, based on “what the results are in the upcoming elections toward the end of next year, and which party has the most control.”

There is some good news now. “For property placed in service during 2024 that is eligible for full expensing under IRC [Internal Revenue Code] Section 179, the maximum expensing limit will increase to $1.22 million – up from $1.16 million for 2023 – while the cost limit for sport utility vehicles is increasing to $30,500, up from $28,900 for 2023.”

But he cautioned that “not all the states conform” with the federal Internal Revenue Code, “so there may be unfavorable adjustments – like addition modifications – required when determining state taxable income.”

Businesses caught a break the last couple of years, which have been “relatively quiet from a federal tax perspective,” according to Benjamin Aspir, an Eisner Advisory Group LLC partner. “If federal tax rates don’t change in 2024, companies may want to consider following the traditional strategy of trying to accelerate expenses into 2024, when possible, while deferring revenue into 2025.”

But as certain business-friendly provisions of the federal 2017 Tax Cuts and Jobs Act continue to phase out, companies may want to look at other strategies. Aspir cited bonus depreciation as one issue to consider. “Bonus depreciation can reduce a company’s income, which in turn reduces its tax liability,” Aspir noted. “There is generally no cap on the dollar value of qualifying assets, but the percentage that can be expensed immediately gets lower each year. So, if their cash flow and other circumstances support it, then a business that’s planning to buy assets that qualify for bonus depreciation may want to consider doing so in 2024, when they can get a bigger write-off, instead of waiting until 2025.”

Alternatively, companies may consider expensing qualified assets on their federal returns under the Section 179 write-off. “The expensing limit is generally limited to $1.22 million of qualifying assets for 2024 – up from $1.16 million in 2023 – and the 179 expense is generally not available if it will put a company into a loss position,” he explained. “Of course, the same asset cannot be expensed under both the bonus depreciation method and the 179 write-off.”

Politics will likely put a lid on tax activity this year, noted Smolin, Lupin & Co. LLC Tax Director Neil Becourtney. “I do not envision any major Federal tax changes being legislated in 2024, since it is an election year — in addition to the presidential election, all House members will be busy campaigning, along with about one-third of the senators up for reelection,” he said.

Becourtney added that business owners and others are likely to see some positives and negatives as TCJA provisions expire. “The $10,000 SALT (state and local tax) deduction limit will vanish at the end of 2025, but the harsher Alternative Minimum Tax provisions last in existence in 2017 will resurface,” he said. “The QBI deduction, which allows eligible self-employed and small-business owners to deduct up to 20% of their qualified business income on their federal taxes, is also scheduled to disappear at the end of 2025, but it may be premature to be planning this early for those changes.”

Time to change?

The planned sunset of many TCJA provisions at the end of next year may spur some business owners to investigate altering their entity’s tax structure.

“There is not a ‘one size fits all’ answer,” KPMG’s Trenery said. “There are many factors that go into selecting an entity type. Closely held businesses will often look to a more flexible structure like a limited liability company or a Sub-S corporation. Depending on the short- to mid- to long-term business plans and future exit plans, an entity restructuring as a Sub-C corporation [subchapter C of the Internal Revenue Code] would become a feasible option, particularly for those looking at a potential IPO exit plan.”

A business may start out in one form, Trenery added, but entrepreneurs should continue to periodically review the structure “as the business grows and matures, particularly if a potential exit – like a divestiture, sale, or IPO – is being planned in the near term. The key here is to consult with tax and legal advisers to understand and model the entity type and structure that meet current and future business needs.”

Calabrese noted that, “From an income tax perspective, C corporations are taxed on taxable earnings and then any dividends distributed to shareholders are subject to income tax at the shareholder level, which results in double taxation.”

In contrast, “S corporations and partnerships are ‘pass-through entities,’ which are generally not subject to income taxation at the entity level — the profits and losses are passed through to the shareholders and partners to be reported on their respective income tax returns — resulting in no double taxation.”

Small businesses could benefit from operating as a pass-through entity, he added, “Especially if the owners have a lower effective tax rate than if the entity was set up as a C corporation. But there are other aspects to consider, including ownership, and personal liability of owners. So, consulting with a CPA and tax adviser is important in deciding which entity type to choose, or whether changing the entity structure is necessary.”

Unless there’s a big shakeup during 2024, businesses are not likely to see a tax-driven push to change their business structure, according to Aspir. “The 2017 Tax Cuts and Jobs Act spurred some companies to review their structure, because the TCJA introduced the QBI deduction that gave some businesses – mainly sole proprietors, partnerships and Subchapter S corporations, as long as they meet income limitations and other requirements – the ability to exclude up to 20% of their qualified business income from federal income tax, whether they itemized or not. Companies organized as traditional, or C type of corporations, however, generally do not qualify for the QBI.”

But it’s not a slam-dunk decision, he cautioned. Although the TCJA gave some tax deduction benefits to partnerships and other ‘pass-through’ entities, “it also reduced the top federal income tax bracket on C corporations to only 21%, which may be lower than the personal income tax bracket of pass-through entity owners. So business owners and their accounting advisers should consider all of the tax and other issues before they make a change to their filing structure. And in any case, the QBI is currently scheduled to sunset at the end of 2025.”

Sometimes, no change may be the best option. “If the current structure suits the needs of a business, there is generally no reason to change it at the present time,” according to Becourtney. “When we get to 2026, being a traditional, or C corporation may be more desirable for some [current] partnerships and S corporations, assuming the Tax Cuts and Jobs Act provisions slated to expire are not extended. That’s because of the expiration of the 20% Qualified Business Income (QBI) deduction, and since the top personal income tax rate is scheduled to revert to 39.6% in 2026, compared to the 21% C corporation tax rate, which is not scheduled to expire in 2026. But each business situation stands on its own as far as choice of entity, since the decision depends on several factors.”