“Listen, Terry – I want to believe that you have a passion for the U.S. Tax Code… But some of the others are starting to think you just carry it around for exercise.”

TIPS & TRICKS

The Tax Code is Going to Change – Tips on How to Stay Ahead of the Curve

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Big changes are coming.

The Trump administration’s Tax Cuts and Jobs Act of 2017 is sunsetting in 2025, and we don’t yet fully know what (if anything) will replace it. What we do know, however, is that tax liability for medium-sized businesses and especially for small-businesses is very likely to sharply increase.

“With the [government’s] growing debt, you can expect our discounted tax rates to increase. Most of my clients have seen an increase of 2.2-2.8% in the last year, and after these provisions lapse, you’re going to see a 5-8% liability increase for small businesses,” says W. Jack Sells, an enrolled agent who represents small businesses before the IRS.

“It’s logical to see that the debt ceiling is rising, the government needs to pay for the wars [in Ukraine and the Middle East], the crumbling infrastructure needs to be addressed… There is a need for cash in our government, so you’ve got to be focused on tax as the taxes are rising.”

It’s hard to argue with his logic. The New York Times, in a recent report, agrees, stating:

“If Congress does nothing, the tax code in 2026 will suddenly shift to what it would have been if the law had never changed, effectively generating trillions of dollars in extra liabilities for taxpayers and an equal amount of revenue for the federal government. As if that weren’t complicated enough, the tax code before the 2017 law included provisions for future inflation adjustments – and there has been a lot of inflation over the last few years.”

In 2026, if nothing is done, the child tax credit will essentially be cut in half, as will the standard deduction. Of more interest to business owners is the business pass-through deduction, which allows some self-employed individuals to deduct up to 20% of qualified income.

The loss of this provision would most affect businesses making less than $400,000 a year. “It’s going to be the difference in keeping the lights on for many small businesses,” says Sells.

Tax brackets will likely shift downward even as tax rates shift upward, meaning every tax bracket gets more expensive while simultaneously including people with lower income levels.

The last few years, has been relatively easy to track expenses, meet with an accountant once a year, and not worry too much about taxes because of the beneficial policies stemming from the 2017 Tax Cuts and Jobs Act. Going forward, however, this may not be the case.
Sells gives business owners a couple of tips for staying on top of the uncertain and evolving situation.

“Most business owners don’t understand how different streams of revenue are taxed,” he explains. “Capital gains, versus investment rates, versus income tax, versus self-employment tax, AMT, payroll tax, recapture… If you’re reviewing history and you see large changes in certain revenue streams, you need to account for a shift in your liability.”

In other words, most people are laser-focused on income tax – and for good reason. But if your business suddenly sees a change in what kinds of revenue are coming in (such as earning more on investments, selling assets, etc.), then it is important to anticipate how this can affect your tax burden.

“Have more conversations with your accountant throughout the year,” Sells recommends. “Access is very important.”

On the personal finance side, as estate tax law may change in the next few years, wealthy families interested in passing down their success to future generations may want to start using this time to prepare, according to Tracy Craig, partner at Seder and Chandler’s Trusts and Estates Group. For some, that may mean it is advantageous to do an early disbursal of estate gifts, or setting up a trust might be the way to go.

For small to medium-sized businesses, making sure that you are structured in the most advantageous way is a must.

At the end of the day, as Christians, we need to render unto Caesar what is Caesar’s… but Caesar has an awfully convoluted tax code these days, and as long as our tax preparation falls within the confines of lawful behavior, leaders need to be proactive to keep as much of their income as they can, to wisely steward its use. Don’t put off next year’s tax planning just because this year’s tax season is over.

Look ahead to the next few years and prepare accordingly.
Sent to Win is for entertainment purposes only, and its articles in no way represent financial advice. For financial advice, visit a local certified tax planner or personal finance professional.

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