(This column originally appeared in The Washington Times)
Webster’s dictionary defines “Armageddon” as “the site or time of a final and conclusive battle between the forces of good and evil.” When it comes to next year’s tax battle, that definition couldn’t be more appropriate.
The 2017 Republican tax overhaul is going to expire, and until a few weeks ago, its future was uncertain. But President-elect Donald Trump has vowed to either extend or make permanent most of the policy provisions (and even add a few more carrots). While nothing’s guaranteed, he’s got congressional backing to help do just that.
I’ll let you determine which side is good and which is evil. Meanwhile, here are 10 ways your business should prepare.
1. Become a pass-through entity.
It’s a strong probability that the qualified business income tax deduction will be made permanent. This deduction allows the owners of eligible “pass-through” entities — partnerships, S-corporations, etc. — to take a 20% deduction on their business income before it passes through to their individual returns.
If made permanent, then it would be time to seriously reconsider your business entity and determine whether it makes more sense to keep it as a “C” corporation (even with lower rates) or convert to a pass-through, as doing this could reap huge long-term tax savings.
2. Defer capital expenditures.
I hate to let tax policy drive business decisions. Still, in 2025, you’re going to be able to deduct only 40% of your capital equipment purchases as “bonus depreciation” before amortizing the remaining cost over the asset’s life. If extended or made permanent, however, that amount would likely go back up to a full 100% in 2026. Would the potential tax savings be enough to encourage you to hold off on big purchases until then?
3. Defer research expenditures.
In 2022, businesses were no longer able to deduct the cost of their research and development expenditures in the first year; instead, they are made to defer those expenses over a five-year period. But this huge first-year deduction is likely to be reinstated. So, like those capital expenditures, does it make sense to hold off on that research or even defer payment of those expenses to 2026 if possible?
4. Die.
If you meet your maker before the end of 2025, then $13,990,000 would be exempt from estate taxes. This provision is likely to expire in 2025, and that exemption would be cut in half. I’m betting that this will be among the provisions that is allowed to expire. If that’s the case, then it makes more sense to die before the end of 2026 in order to maximize that exemption. Think of the family.
5. Move purchases to lower-tariff countries.
Separate from the federal tax overhaul, we all know that Mr. Trump will impose tariffs on all imports. The biggest target will be China, facing tariffs as high as 60%. And though countries such as Mexico and Canada will be subject to significant tariffs, those rates will be much lower.
Can you find suppliers in those countries? Can you open an office there and add production value to the products you buy from China to circumvent this? These are considerations you should be making now.
6. Have children.
Increasing the child and dependent care credit has long been favored by Democratic lawmakers, who have an ally in the White House: J.D. Vance. The VP-elect said: “I’d love to see a child tax credit of $5,000 per child. President Trump has been on the record for a long time supporting a bigger child tax credit, and I think you want it to apply to all American families.”
I’m betting this will be part of new tax legislation, so if you’re able to defer these costs — or your baby-making activities — for just a little longer, it could save you some money.
7. Consider homeschooling.
Republicans have said that they would like to add homeschooling costs to the list of expenses that are eligible for tax-free withdrawals from 529 plans. That means you can put money away, let it grow tax-free and use that money sometime in the future for these expenses if you are so inclined.
8. Reconsider your 401(k) contributions.
When you “save pretax” money in a 401(k), you are merely deferring your tax bill to some day in the future when the government forces you to withdraw those funds and pay taxes at that time. If the tax overhaul is extended or made permanent, individual rates will stay low. In the likely event that the government can’t figure out a way to reduce deficits, however, there’s a good chance that tax rates will increase in the future, which means you could be paying less taxes now if you don’t defer those wages.
If you think this will happen (I do), a better bet is to pay the taxes today and save as much as you eligibly can in a Roth IRA or 401(k), which will then grow tax-free.
9. Don’t defer deferred compensation.
If you’re an executive who participates in a deferred compensation plan, where you earn but don’t get taxed on those earnings until you take the cash, you should consider taking the cash over the next few years and not waiting until tax rates increase.
10. Budget more for your accountant.
Lots of tax changes are about to happen, and I haven’t even mentioned the potential complications that will arise if Congress actually approves Mr. Trump’s proposal not to tax tips, overtime or Social Security income. These changes will create a greater demand for tax experts, which is great news for my profession. As for you, get ready to budget more for accounting fees next year.
As previously mentioned, it’s important to remember that tax policy — or consequences — should not drive your business decisions. Taxes are just another cost that must be figured into your business strategy. But 2025 is different. 2025 will be tax Armageddon
