Critical TCJA tax provisions in 2025: What business owners need to know now
Change is in the air — especially when it comes to taxes.
Among the biggest potential game-changers are modifications to the Tax Cuts and Jobs Act (TCJA). While TCJA was scheduled to sunset at the end of 2025, the new administration and Congress already are developing proposals to extend various provisions. Estimates suggest full extension of the TCJA would add $4.6 trillion to the deficit over 10 years, making some modifications likely.
Despite uncertainty, now is the time to prepare. Let’s look at the biggest potential changes, and how they could impact businesses.
Section 199A Qualified Business Income Deduction
The Section 199A QBI deduction, which allows qualifying pass-through business owners to deduct up to 20% of their business income, is scheduled to expire. This increases marginal rates by 7.4% for qualifying business owners at the top bracket. When combined with higher statutory rates in 2026, pass-through business owners could see effective rates increase by nearly 10%.
The bottom line? Given the changing rate dynamics between pass-through and corporate taxation, businesses should consider reevaluating their structure.
Business interest limitations
While not directly a TCJA sunset provision, the Section 163(j) business interest limitation significantly impacts businesses. Since 2022, businesses have been limited to deducting net interest expenses up to 30% of their adjusted taxable income (ATI) calculated on an EBIT basis, rather than EBITDA. This creates a particularly challenging dynamic for capital-intensive businesses where depreciation significantly reduces EBIT, and businesses may want to evaluate alternative financing structures to optimize their interest limitation position.
Business entertainment and meals
The treatment of entertainment expenses may revert to pre-2018 rules. Current law provides no deduction for business entertainment expenses, 50% deduction for business meals, and separate tracking requirement for meals versus entertainment.
If the TCJA expires without modification, entertainment expenses would return to 50% deductibility for activities directly related to or associated with business. To prepare, businesses should consider system changes to properly track and document entertainment expenses that may become partially deductible.
Pass-through loss limitations
The excess business loss limitation, currently restricting losses to $289,000 (single)/$578,000 (joint), indexed for inflation, is scheduled to expire. This limitation currently applies after passive activity loss and at-risk rules, converts disallowed losses to net operating loss carryforwards, applies at the individual level for pass-through income, and interacts in a complex way with basis limitations and self-employment income. If you have major purchases or loss-generating investments coming up, you may want to consider their timing based on the expiration of these limitations.
R&D expense treatment
While not a direct TCJA sunset provision, the required capitalization of R&D expenses under Section 174 may be modified in comprehensive tax legislation. Current rules require five-year amortization of domestic and 15-year amortization of foreign R&D expenses, capitalization of software development costs, and complex rules for allocating mixed-purpose expenditures. Businesses should structure their R&D investment strategies to optimize tax treatment under the potential legislative scenarios.
Individual tax rate changes
The return to pre-TCJA tax brackets represents one of the most significant changes. Beyond the top rate increasing from 37% to 39.6%, every tax bracket threshold will shift downward, creating a “bracket compression” effect. This means many taxpayers will find more of their income taxed at higher rates.
To prepare for the shift, calculate what portion of your income will move into higher brackets; then, see if you can accelerate income recognition in 2025.
Next steps
While substantial legislative activity is expected throughout 2025, businesses and individuals should take a proactive approach to tax planning that considers multiple scenarios. This includes modeling your specific tax situation under various scenarios, identifying opportunities to maximize current tax benefits while maintaining flexibility, developing contingency strategies for different legislative outcomes, and creating a timeline for implementing recommended changes that can adapt to legislative developments.
This planning is particularly crucial given the scale of potential changes and the compressed timeline for year-end planning once final legislation emerges. Change is in the air; and with the right planning, you can be ready.
• Andrew Schmidt is a principal at Dugan + Lopatka CPAs in Warrenville. For more information, visit duganlopatka.com. This article is provided for informational purposes only and should not be construed as legal or tax advice. Consult with your tax adviser regarding your specific situation.