Nothing Lasts Forever –Expiring Tax Provisions

The Long-Term View

Among its core functions, federal tax policy seeks to encourage those behaviors among businesses that, in the long run, will have a lasting positive effect upon the nation’s economy as a whole.[i]

Implicit in this approach toward tax legislation is the enactment of a set of relatively constant and long-lasting rules on which businesses[ii] may rely when planning for the future.

Under this long-term view of tax policy, a provision that is drafted to be short-lived probably should not be adopted unless Congress reasonably determines the provision will generate benefits that endure well beyond its expiration.

A short-term measure that is intended to have a temporary or limited effect – i.e., one that fails to consider, or is not overly concerned with, long-term economic consequences – is likely the product of political negotiations and procedural niceties,[iii] not the result of sound tax and economic planning.

Recent History

Although few would question the wisdom of evaluating tax legislation from the perspective of its long-term benefits, the federal government has for many years compelled businesses to plan and operate on the basis of temporary or expiring tax provisions.

For example, the 2001 EGTRRA[iv], which included several tax cuts, also contained a sunset provision pursuant to which those tax cuts were to be eliminated on January 1, 2011.[v]

During the period between the sunset of EGTRRA and the enactment of the 2017 Tax Cuts and Jobs Act[vi], Congress routinely confronted the question of whether an expired or expiring tax break should be extended for an additional period of limited duration (say one or two years) or allowed to expire.

TCJA

More recently, the TCJA amended the Code to provide several tax benefits, including reduced corporate and individual income tax rates, a qualified business income deduction for certain passthrough entities, bonus depreciation, and an increased estate and gift tax basic exclusion amount.

Like some of its predecessors, however, the Act provided that many of its beneficial tax provisions will be eliminated after 2025.

The Act also included a number of other provisions intended to offset the revenues lost on account of these tax benefits.[vii] Some of these offsets imposed new taxes while others reduced certain pre-TCJA tax benefits between 2021 and 2027; for example, the Act required that research or experimental costs paid or incurred in taxable years beginning after December 31, 2021 be amortized over a five-year period rather than deducted currently as under prior law.[viii]

TCJA Sunsets

The Joint Committee on Taxation recently issued a list Federal tax provisions that are scheduled to expire in the relatively near future.[ix] The list includes provisions that will terminate on a statutorily specified date, or by reference to a taxpayer’s taxable year.[x] It also includes provisions that will revert to the law in effect before the current version of the provision was enacted.

What follows is a brief description of only some of these expiring provisions – listed by year of expiration – that are probably of general interest to many closely held businesses and their owners.

2025

a. Modification of individual income tax rates [IRC Sec. 1]

1. The TCJA temporarily replaced the pre-2018 rate structure for individual taxpayers.[xi]
2. Prior to the TCJA, the maximum rate bracket of 39.6 percent applied to the married individuals filing jointly with taxable income over $470,000.
3. For tax years beginning after December 31, 2017, the TCJA set the maximum rate at 37 percent for a joint return with taxable income over $600,000. For tax year 2024, this top rate applies to married taxpayers filing jointly with taxable income over $731,200.[xii]
4. After December 31, 2025, the maximum rate for individual taxpayers will revert to 39.6 percent.
5. In addition, the income brackets, including the bracket at which this highest rate applies, will be reduced to their pre-2018 levels downward, though adjusted for inflation through 2025.

b. Suspension of miscellaneous itemized deductions [IRC Sec. 67]

1. The TCJA temporarily eliminated all miscellaneous itemized deductions that were subject to the two-percent floor under prior law. Thus, taxpayers may not claim such an itemized deduction.
2. Generally speaking, individuals may deduct all ordinary and necessary expenses paid or incurred in a taxable year: (1) for the production of income, or (2) for the management, conservation, or maintenance of property held for the production of income.[xiii] These ‘‘miscellaneous itemized deductions’’ are deductible only if, in the aggregate, they exceed two percent of the taxpayer’s adjusted gross income.
3. As a result of the TCJA, taxpayers may not claim an itemized deduction for any of these items.
4. The provision will cease to apply for taxable years beginning after December 31, 2025, at which point such expenses will once again become deductible, subject to the limitations under prior law.

c. Suspension of overall imitation on itemized deductions [IRC Sec. 68]

1. The Act temporarily eliminated the overall limitation on itemized deductions.
2. Prior to the TCJA, the total amount of most otherwise allowable itemized deductions[xiv] was limited for certain upper-income individuals. All other limitations applicable to such deductions (such as the separate floors) were first applied and, then, the total amount of otherwise allowable itemized deductions was reduced by three percent of the amount by which the taxpayer’s adjusted gross income exceeded a threshold amount.
3. The overall limitation will be reinstated for taxable years beginning after December 31, 2025.

d. Limitation on deduction for state and local taxes [IRC Sec. 164(b)]

1. Under the TCJA, the itemized deduction for the aggregate of an individual’s state and local income, property, and sales taxes – not paid or accrued in carrying on a trade or business, or an activity carried on for the production of income – was limited to $10,000 for a married couple filing a joint return.
2. Thus, a state or local tax paid or accrued by an individual in carrying on a trade or business is not subject to this limitation. It is on the basis of this premise that states (plus New York City) have afforded passthrough entities like partnerships and S corporations the opportunity to pay an entity-level income tax for which their individual members and shareholders may, in effect, enjoy the tax benefit of a deduction.[xv]
3. The limitation on the deduction of state and local taxes will cease to apply for taxable years beginning on or after January 1, 2026.[xvi]

e. Increase in percentage limitation on cash contributions to public charities [IRC Sec. 170(b)(1)(G)]

1. The Act increased to 60 percent the income-based percentage limit[xvii] for a charitable contribution of cash by an individual taxpayer to a public charity. To the extent such contribution exceeds the 60-percent limit for any taxable year, the excess is carried forward and treated as a charitable contribution that is subject to the 60-percent limit in each of the five succeeding taxable years in order of time.
2. Previously, charitable contributions of cash by individual taxpayers to public charities were limited to 50 percent of the individual’s contribution base.[xviii]
3. This provision of the Act applies to charitable contributions taken into account for taxable years beginning after December 31, 2017, and before January 1, 2026.
4. Thus, for taxable years beginning after December 31, 2025, the deduction for charitable contributions of cash by individuals to public charities will once again become subject to the 50 percent limitation under prior law.

f. Qualified business income deduction [IRC Sec. 199A]

1. Although the TCJA eliminated the graduated corporate rate structure and reduced the income tax rate for corporate taxable income to a flat 21 percent, Congress felt that it still had to address the federal income tax burden on what generally may be characterized as the “capital income” (as distinguished from “labor income”) from passthrough businesses.
2. In order to treat corporate and noncorporate business income more similarly to each other under the federal income tax, the Act provided, generally, that an individual taxpayer may deduct 20 percent of “qualified business income” with respect to a partnership, S corporation, or sole proprietorship of which they are an owner. Qualified business income is separately determined for each “qualified trade or business” of the taxpayer, meaning any trade or business other than a “specified service trade or business.”
3. The 20 percent deduction is available for taxable years beginning after December 31, 2017, and before January 1, 2026.
4. The deduction will cease to be available to individual taxpayer-owners for taxable years beginning on or after January 1, 2026.

g. Increase in estate and gift tax exemption [IRC Sec. 2010(c)(3)(C)]

1. The TCJA doubled the estate and gift tax (“transfer tax”) exemption for estates of U.S. decedents dying, and gifts made by U.S. individuals, after December 31, 2017 and before January 1, 2026.
2. Because the generation-skipping transfer tax exemption[xix] is set by reference to the basic exclusion amount in effect for estate tax purposes, the increase to the basic exclusion amount also increased the amount of generation-skipping transfer tax exemption available to be allocated from January 1, 2018, through December 31, 2025.
3. As a result on this increase to the basic exclusion amount and the post-2010 indexing of such amount, the transfer tax exemption from 2018 through 2024 has been as follows:
   • $11.18 million in 2018,
   • $11.4 million in 2019,
   • $11.58 million in 2020,
   • $11.7 million in 2021,
   • $12.06 million in 2022,
   • $12.92 million in 2023, and
   • 13.61 million in 2024.
4. Barring any changes by the 119^th Congress (which starts in January 2025), the basic exclusion amount will be reduced to its pre-TCJA level for gifts made and decedents dying after December 31, 2025. The actual 2026 exemption amount will be determined by adjusting the reduced basic exclusion amount for inflation through 2025.[xx]
5. Because the increase in the basic exclusion amount does not apply for estates of decedents dying after December 31, 2025, the Act directed the IRS to issue – and the IRS has responded with – regulations[xxi] that will prevent the estate tax computation[xxii] from recapturing or ‘‘clawing back’’ all or a portion of the benefit of the increased basic exclusion amount used to offset gift tax for decedents who make taxable gifts between January 1, 2018, and December 31, 2025, and die after December 31, 2025.

2026

h. Additional first-year depreciation with respect to qualified property [IRC Sec. 168(k)]

1. The TCJA extended[xxiii] and modified the additional first-year depreciation deduction through 2026. The 50-percent allowance was increased to 100 percent for qualifying property acquired and placed in service after September 27, 2017 and before January 1, 2023.
2. The 100-percent allowance[xxiv] is phased down by 20 percent per calendar year for property acquired after September 27, 2017, and placed in service in taxable years beginning after 2022.[xxv]
3. Prior to the Act, an additional first-year depreciation deduction was allowed equal to 50 percent of the adjusted basis of qualified property acquired and placed in service before January 1, 2020. The 50- percent allowance was phased down for property placed in service after December 31, 2017. Property qualified for the additional first-year depreciation deduction if the property was subject to MACRS and had an applicable recovery period of 20 years or less; the original use of the property commenced with the taxpayer; and the property was placed in service before January 1, 2020.

2028

i. Limitation on excess business losses of noncorporate taxpayers [IRC Sec. 461(l)]

1. Under the Act, for taxable years beginning after December 31, 2017, and before January 1, 2026, an “excess business loss” of a taxpayer other than a corporation is not allowed for the taxable year.
2. The disallowed excess business loss is treated as a net operating loss (‘‘NOL’’) for the taxable year for purposes of determining any NOL carryover to subsequent taxable years.
3. An excess business loss for the taxable year is the excess of aggregate deductions[xxvi] of the taxpayer attributable to trades or businesses of the taxpayer over the sum of aggregate gross income or gain attributable to trades or businesses of the taxpayer plus a threshold amount.[xxvii]
4. The limitation applies after the application of the passive loss rules.[xxviii]
5. The excess business loss limitation was extended to tax years beginning before January 1, 2029 by the Inflation Reduction Act.[xxix]

More of the Same In the Wings

While businesses and their owners have been considering their response to the anticipated effects of the foregoing (as well as other) expiring provisions, Congress has been busy trying to further complicate matters.

Don’t get me wrong, most members of Congress mean well,[xxx] but the introduction of retroactive or temporary changes such as those being contemplated is not a step in the right direction, at least insofar as tax policy is concerned.

For example, Congress is working on a bipartisan bill[xxxi] (released last week) that, among other things,[xxxii] would delay the date when taxpayers must begin deducting their domestic research or experimental costs over a five-year period until taxable years beginning after December 31, 2025(a two-year extension). Thus, if the bill is enacted, taxpayers may deduct currently domestic – but not foreign (which would remain subject to amortization) – research or experimental costs that are paid or incurred in taxable years beginning after December 31, 2021 and before January 1, 2026.[xxxiii]

The bill would also extend 100-percent bonus depreciation for qualified property placed in service after December 31, 2022 and before January 1, 2026, though it would retain 20-percent bonus depreciation for property placed in service after December 31, 2025 and before January 1, 2027.

Business Needs Consistency

How can a business owner make long-term plans for their business without being able to rely upon the continuity or stability of the tax laws?

After all, the tax consequences of a particular decision may, in no small part, influence the owner’s decision whether to pursue one strategy over another. For example, the tax consequences arising from a particular investment or other expenditure may inform the owner’s decision as to the timing and amount of investment.[xxxiv]

Congress seems to have lost sight of this fundamental fact. As a result, it has been enacting tax legislation of an ephemeral nature, which in turn has hamstrung many businesses in their decision-making and allocation of resources.

It’s time for a change.

The opinions expressed herein are solely those of the author(s) and do not necessarily represent the views of the Firm.

[i] Conversely, tax policy seeks to discourage certain behaviors that Congress has determined will have a deleterious effect upon the economy.

[ii] And their owners.

[iii] Of course, I am referring to the Senate’s budget rules dealing with the reconciliation process, including the Byrd Rule.

[iv] The Economic Growth and Tax Relief Reconciliation Act; Pub. L. 107-16. Among the changes included were a reduction of the income tax, the phaseout of the estate tax (for one year), and the reduction of the tax rate on capital gains.

[v] The 2003 Jobs Growth Tax Relief Reconciliation Act (Pub. L. 108-27) accelerated the phase-in of certain EGTRRA provisions while also enacting additional tax cuts. The 2001 Act’s tax sunset remained in place.

[vi] The TCJA or the Act. Pub. L. 115-97.

[vii] For example: the imposition of a one-time tax on the unrepatriated earnings of foreign subsidiary corporations, the reduction of the dividends received deduction, the elimination of the NOL carryback, the limitation of NOL carryforwards to 80% of the taxable income for the carryforward year, the limitation of interest deductions, the limitation of itemized deductions, etc.

[viii] More on this later.

[ix] Joint Committee on Taxation, List of Expiring Federal Tax Provisions 2024-2034 (JCX-1-24), January 11, 2024.

[x] What follows assumes a calendar year taxpayer.

[xi] An individual taxpayer generally must apply the tax rate schedules to their taxable income. The rate schedules are broken into several ranges of income (income brackets), and the marginal tax rate increases as a taxpayer’s income increases. The brackets are adjusted annually for inflation.

[xii] According to Rev. Proc. 2023-34.

[xiii] Including a taxpayer’s share of deductible investment expenses from passthrough entities.

[xiv] Other than the deductions for medical expenses, investment interest, and casualty, theft or gambling losses.

[xv] IRS Notice 2020-75.

[xvi] Attempts to SALT relief has not fared well in recent discussions in Congress regarding a bipartisan tax bill – see below.

[xvii] Contribution base – i.e., the taxpayer’s adjusted gross income for a taxable year, disregarding any net operating loss carryback to the year.

[xviii] In general, the deduction for charitable contributions by an individual taxpayer of cash to a nonoperating private foundation may not exceed 30 percent of the taxpayer’s contribution base.

[xix] Under IRC Sec. 2631(c).

[xx] Many owners of closely held businesses are determined to utilize as much of their transfer tax exemption as they reasonably can before the reduction of the basic exclusion amount.

[xxi] T.D. 9884, REG-106706-18.

[xxii] Under IRC Sec. 2001(g).

[xxiii] For example, the Act expanded the definition of qualified property to include certain qualified property for which the original use did not commence with the taxpayer. Thus, the provision applied to purchases of used as well as new items. However, qualified property only included used property if such property was not previously used by the taxpayer prior to acquisition.

[xxiv] Which was intended to encourage investment by businesses.

[xxv] Thus, the bonus depreciation drops to 80% in 2023 and is reduced to 0% after 2026.

[xxvi] The aggregate deductions taken into account to determine the excess business loss of the taxpayer for the taxable year that are attributable to trades or businesses of the taxpayer are determined without regard to the deduction for NOLs or the 20-percent of qualified business income deduction.

[xxvii] The threshold amount for a taxable year beginning in 2018 was $250,000 (or twice the otherwise applicable threshold amount in the case of a joint return, i.e., $500,000). The threshold amount is indexed for inflation in taxable years beginning after 2018.

[xxviii] Meaning after application of the basis limitation rules (IRC Sec. 704(d) and 1366(d)) and at-risk rules (IRC Sec. 465).

[xxix] Pub. L. 117-169.

[xxx] Though I have to question the loyalty or sanity of many others.

[xxxi] The Tax Relief for American Families and Workers Act of 2024. Talk about a mouthful.

[xxxii] Other changes include increasing the maximum amount a taxpayer may expense under IRC Sec. 179 for property placed in service in taxable years beginning after December 31, 2023.

[xxxiii] As mentioned earlier, the Act required that research or experimental costs paid or incurred in taxable years beginning after December 31, 2021 be amortized over a five-year period rather than deducted currently as under prior law.

[xxxiv] The quicker the owner can recover the investment, whether by expensing the outlay or through some other cost-recovery method, the less expensive the investment becomes.