By: Frank Calabrese

As a partner at Wiss focused on tax matters, clients often ask me what lies ahead in the new year. With 2024 now underway, business owners want insights on potential tax impacts.

With the recent bipartisan tax agreement that the Senate Finance Committee and House Ways and Means Committee (The Tax Relief for American Families and Workers Act of 2024) announced in mid-January, provisions from the 2017 Tax Cuts and Jobs Act that have expired or have been phasing out could be back on the table for businesses, assuming it passes through Congress and is signed into law by President Biden. 

For assets eligible for full expensing under IRC Section 179, the expensing limit rises to $1.22 million in 2024 under current law, up from $1.16 million in 2023. The expensing limit would be $1.29 million under the proposed legislation, adjusted for inflation annually.

For assets eligible for bonus depreciation under IRC Section 168(k), current tax law allows 60% of the original cost of the asset to be deducted if placed in service during 2024, down from 80% of the original cost in 2023, eventually phasing out by 2027.  Under the proposed legislation, 100% bonus depreciation would be reinstated for property placed in service after December 31, 2022, and before January 1, 2026.

For research and experimental expenditures under IRC Section 174, current law provides that amounts paid or incurred in tax years beginning after December 31, 2021, are required to be deducted over a five-year period (15-year period for those attributable to research that is conducted outside of the United States). Taxpayers may deduct in full domestic research or experimental costs that are paid or incurred in tax years beginning after December 31, 2021, and before January 1, 2026, under the proposed legislation.

For purposes of the business interest expense limitation under IRC Section 163(j), computation of adjusted taxable income (ATI) under current law is determined without regard to any deduction allowable for depreciation, amortization, or depletion (i.e., earnings before interest, taxes, depreciation, and amortization (EBITDA)). Under the proposed legislation, EBITDA would apply to the ATI calculation for taxable years beginning after December 31, 2023 (as well as taxable years beginning after December 31, 2021, if elected by the taxpayer), and before January 1, 2026.   

Assistance will be crucial in understanding the provisions outlined in the proposed legislation, particularly those involving retroactive changes. Additionally, it’s important to note that not all states adhere to the Internal Revenue Code. Therefore, it is essential to examine how the mentioned provisions apply on both levels. Certain states may necessitate additional adjustments when computing their taxable income.

I advise clients to focus current tax planning on existing laws, being mindful that Federal tax law changes could come later this year. The outcome of the 2024 elections could also shift approaches in 2025 if new policies gain traction.

Regarding entity structure, factors beyond taxes also weigh heavily in choosing one form over another – like liability exposure. C corporations face double taxation, first at the entity, then at the shareholder level on distributed dividends. As S corporations and partnerships operate as pass-throughs, owners report profit/loss on personal returns, avoiding double taxation. For smaller businesses, this pass-through approach often proves more beneficial. Before making any structural changes, consult a CPA and tax advisor to vet the pros and cons of alternatives fully.

In 2026, revisiting entity choice may gain appeal if specific expiring TCJA provisions – like the qualified business income deduction – are not extended. But tax optimality doesn’t drive every decision. The needs of one’s business dictate structure more than tax implications in most cases. Again, no one solution fits all.

This gives a helpful perspective on the tax landscape ahead. As 2024 unfolds, I’ll continue monitoring for changes relevant to clients’ planning. Please reach out with any questions along the way.