After a few years of relatively mild tax changes for most businesses, post-election results provide more clarity on the direction of future policy—with a confluence of expiring tax provisions, a new administration, and evolving economic factors that will shape the decisions of businesses and individual taxpayers alike.
The new administration’s tentative approach to tax policy brings a mix of ambition and caution. Talks of support for making various Tax Cuts and Jobs Act (TCJA) tax breaks permanent, reducing the corporate tax rate, and incentivizing domestic production are paired with concern over the potential inflationary effects from tariffs and the fiscal impact of permanent tax breaks. So, while the new administration may open the door for tax cuts, there are a number of potential policy changes that could have significant impacts on businesses.
With this in mind, there are steps you can take before year-end to stay well-positioned even amid uncertainty. Capitalizing on tax-friendly provisions while they remain in place and running projections for various tax outcomes could help you anticipate these changes and prepare with confidence.
Here’s a look at some important year-end insights, opportunities, and reminders for 2024 and beyond.
Deadline for New Corporate Transparency Reporting
The Jan. 1, 2025 deadline for initial filings under the Corporate Transparency Act (CTA) is approaching. This new law requires millions of U.S. privately-owned non-exempt corporations, limited liability companies, and limited partnerships to disclose information about their beneficial owners to the Financial Crimes Enforcement Network (FinCEN), aiming to promote transparency and prevent financial crime.
Planning tip: Fines for noncompliance can be up to $500 per day (up to a maximum of $10,000) and imprisonment for up to two years. Due to the strict filing requirements and expensive penalties, owners should consult with legal advisors to ensure compliance and avoid any violations.
Expiring Tax Provisions
Over 30 key provisions out of the 124 in the TCJA are slated to expire at the end of 2025, creating a ripple effect that could set other tax changes in motion. While some of these may get extended or made permanent, waiting to plan or remaining idle could be costly.
20% Deduction for Pass-Through Businesses
Section 199A of the federal tax code allows owners of flow-through businesses to deduct 20% of their qualified business income (QBI). This business-friendly TCJA provision is scheduled to expire on Dec. 31, 2025, if Congress does not act. Reinstating this provision would avoid a significant increase in tax rates for businesses operating as LLCs, partnerships, sole proprietorships, and S corporations, further widening the tax gap between corporate and flow-through entities.
Planning Tip: Consider evaluating entity selection to determine if converting from an S corporation to a C corporation could result in cost savings.
Bonus Depreciation
For years, bonus depreciation has encouraged businesses to invest in new equipment and property by allowing them to deduct the full cost of eligible assets in a single tax year, rather than spreading the depreciation over multiple years. Bonus depreciation may return to 100% under new legislation; however, under current law, this phases down by 20 points each year beginning in 2023 and scheduled to fully expire after 2026.
Additionally, the TCJA expanded eligibility to include bonus depreciation on the step-up in value when buying a partnership interest to accelerate deductions. Before finalizing any transaction, it’s important to review the final rules to see if a step-up can be created, determine how much expensing is possible, and understand the tax impact on the seller.
Planning Tip: To maximize the benefits of bonus depreciation, businesses should consider accelerating capital investments and exploring strategies like cost segregation studies and repair analyses to optimize deductions.
SALT Cap Set to Lift
The $10,000 annual limit on state and local tax (SALT) deductions is planned to be lifted at the end of 2025. Without congressional action, eligible taxpayers will be able to write-off 100% of their state and local taxes. If the cap remains in place, several states, including Massachusetts, have implemented elective workarounds that allow pass-through entities to pay taxes at the entity level to bypass the limit.
Planning Tip: Keep in mind that state, local, and property taxes are typically deducted in the year you pay them, not when they’re assessed. By strategically timing your tax payments, you may be able to maximize your deductions and minimize your tax liability by deferring payment when the cap expires. Also, consider how SALT deductions may impact future acquisitions and investment strategies.
Changing Deductions for Meal Expenses
Employers can currently deduct 50% of the cost of meals provided to employees for business purposes. This includes meals provided on-site or for employees who need to be available during mealtimes. However, this 50% deduction is set to expire in 2026. After that, these expenses will no longer be deductible.
It’s important to note that this change only affects employer-provided meals. Other employee benefits, such as social events and recreational activities, remain deductible under current tax laws.
Modified Energy-Related Tax Credits
The Inflation Reduction Act offers a number of tax credits for energy investments. For property placed in service in 2024, businesses can claim up to a 50% credit for solar, battery storage, geothermal, and other eligible energy property. Starting in 2025, the focus shifts to a technology-neutral credit, incentivizing projects that reduce greenhouse gas emissions.
Planning tip: The timing of your project’s construction start and placed-in-service date matters when determining which tax credit rules apply. To establish timing of whether your project qualifies under the old, modified, or new rules, ensure that it meets either the physical work test or the 5% safe harbor criteria.
Research and Development
There is bipartisan support for reinstating the immediate deduction for R&D wages and other costs. Currently, companies must capitalize these costs and amortize them over five years for domestic costs and 15 years for foreign costs. Businesses should review their R&D activities to determine the impacts to their taxable income under different policies and different years.
Earlier this fall, the IRS released an updated draft Form 6765, Credit for Increasing Research Activities, which heightens the reporting requirements for claiming research tax credits. Some additions to the form aim to simplify the reporting process; however, businesses will need to include more detailed aspects of their research activities, such as itemizing expenses by business component an including details on software development and research goals.
Planning tip: To ease the transition to the new reporting requirements, Section G of the revised Form 6765 will be optional for tax year 2024. However, starting in 2025, this section will become mandatory, and taxpayers will need to comply with the new reporting standards.
Massachusetts State Tax Law Updates
New Guidance on Single Sales Factor Apportionment for Corporations and Financial Institutions
Starting from Jan. 1, 2025, all multi-state corporations and financial institutions doing business in Massachusetts will be required to use the single sales factor apportionment method to calculate their state income tax liability. Meaning, state tax liability will be based solely on the proportion of your total sales that are sourced to Massachusetts.
Previously, a three-factor formula was used, considering sales, property, and payroll. However, the new law simplifies this process by eliminating the property and payroll factors.
Tax Amnesty
Massachusetts has reintroduced its tax amnesty program, open from Nov. 1, 2024 to Dec. 30, 2024. Similar to successful amnesty programs in 2015 and 2016, this initiative provides businesses and individuals alike a chance to clear any outstanding tax obligations with reduced penalties.
To qualify, businesses must submit any overdue tax returns and pay the related taxes and interest for periods ending on or before Dec. 31, 2024. Businesses that participated in the 2015 or 2016 amnesty for the same tax type and period, however, are ineligible for this year’s program.
Increased IRS Oversight
The IRS is ramping up oversight across multiple taxpayer segments—including corporations, partnerships, and high-net-worth individuals—by leveraging advanced technology and targeted audit initiatives to address potential tax liabilities and ensure compliance in areas such as the research and development and employee retention credits.
Planning tip: Take action now to review your compliance strategies, ensure accurate reporting, and always consider proactive tax planning to tamp down audit risks.
The Road Ahead
Final election results are beginning to bring some pieces of the tax policy puzzle into focus, yet nothing is certain until pen hits paper. By staying informed and proactive, businesses will be able to navigate the new tax policies effectively and position themselves for success in the coming years.
Contact Kerry McMenamy at kerry@erocktax.com or (781) 247-5569 with any questions.
