Business Owner Tax Changes Ahead: Now Is the Time to Plan

When it was enacted in 2017, the Tax Cuts and Jobs Act (TCJA) was the largest overhaul to the U.S. tax code in decades. And while some of the legislation’s provisions were intended to create permanent changes to the way our tax system works, others were temporary. Unless Congress intervenes (more on that in a moment), the temporary provisions will sunset on Dec. 31, 2025.

Among the expiring provisions are personal and business income tax changes. Unless Congress acts, owners of pass-through business entities (like sole proprietorships, partnerships, S Corporations and LLCs) may experience a substantial income tax increase.

Your financial advisor can help you take advantage of today’s lower rates and optimize your tax strategy for the future.

The Political Environment

While TCJA provisions affecting personal and business income taxes are scheduled to expire at the end of 2025, it is possible Congress could act to prevent at least some of the taxes from increasing. Of note, we anticipate that there will be a major debate on Capitol Hill about tax policy in 2025, and lawmakers will likely pass some type of tax bill that year.

That said, lawmakers could go in different directions, and this debate will largely be shaped by who has control of the House of Representatives, Senate and White House in 2025. Given the uncertainty ahead, now is an opportune moment for owners of pass-through business entities to take advantage of today’s lower income tax rates while they’re still on the table.

4 Key Tax Changes for Business Owners

With the goal of lowering taxes, the TCJA made several temporary changes to the way business and personal income taxes work. They included:

Should these provisions expire as currently planned, here’s what you can expect.

1. Changes to Income Tax Rates and Tax Brackets

TCJA reduced individual income tax rates beginning in 2018. In 2026 the rates will revert to the 2017 rates, and the brackets will be adjusted for inflation. Here are today’s rates and projected rates¹ for 2026:

2. Standard Deduction

When preparing your taxes, you can either itemize your deductions (writing off things like mortgage interest, charitable donations, and state and local taxes), or you can take the standard deduction (whichever is higher). Under TCJA, the standard deduction almost doubled, taking it to 2024’s all-time high of $14,600 (or $29,200 if married filing jointly). After the sunset, the standard deduction will be cut roughly in half.

Whether or not the standard deduction will affect your taxes depends on your ability to itemize. If you cannot itemize, this change will likely result in an increase in income tax.

3. QBI Tax Deduction

Under current law, the QBI tax deduction allows you to deduct up to 20 percent of business income earned from pass-through entities if your income is less than $383,900 for those married filing jointly or $191,950 for other filers. Depending on the type of business you own, once you reach this threshold, either the deduction is phased out completely, or certain limitations are phased in over the next $100,000 of business income for those married filing jointly or $50,000 for other filers. After the sunset, the QBI tax deduction will go away completely.

4. Bonus Depreciation Phaseout

Bonus depreciation allows you to accelerate the deduction of asset depreciation in excess of the amounts normally available. This amount was increased to 100 percent of fixed assets placed in service after 2017. However, the deduction began phasing out in 2023 and will be fully phased out after 2026. This may translate into fewer deductions and higher income taxes.

6 Planning Opportunities

While it’s hard to get excited about tax increases, acting early is key. By doing so you can make the most of today’s lower tax rates and optimize your tax strategy for the future. Here are six potential planning opportunities.

1. Accelerate Deductions

If your QBI tax deduction is limited, there may be an opportunity to lower your income in 2024 and/or 2025 by accelerating deductions. Doing so may enable you to take better advantage of the deduction while it’s still on the table.

2. Accelerate Income

In tax planning we typically think about deferring income to avoid current taxes. But in 2024 and 2025 it may be advantageous to do the opposite: Accelerate your income. Doing so could enable you to benefit from the QBI tax deduction, lower tax rates and increased standard deduction while they are still available.

3. Implement a Qualified Plan

While implementing a qualified retirement plan (like a 401(k) or cash balance pension) can be a means of reducing income in 2024 and 2025, it can also help reduce taxable income after QBI and bonus depreciation are gone, and the tax rates and standard deduction have reverted to their previous amounts.

4. Implement an Executive Bonus Plan

Rewarding employees through bonus plans can reduce business income now and in the future. Typically, a bonus plan is structured so that an employee buys and owns a permanent life insurance policy, but the business pays the premiums. Because these premium payments are treated as compensation, it is generally a deductible business expense. The premium is taxable income to the employee.

5. Set Up a Plan to Pay for Long-Term Care

If you set up a plan to pay for long-term care through your business for yourself, other owners and spouses, some or even all of the expenses may be deductible.

6. Set Up Group Disability Insurance

You can set up a group disability insurance plan for all employees or a disability wage continuation plan for key employees. Not only is the entire premium deductible; the plan also provides a needed fringe benefit for key employees.

Your Northwestern Mutual Financial Advisor Can Help You Get Started

At Northwestern Mutual, we believe the best solutions start with your goals and plans as a guide. Then we take a team approach to devising and implementing solutions. We know these changes could have a substantial impact on your business. By planning ahead, your Northwestern Mutual financial advisor can help you take advantage of today’s tax environment while preparing for the future to help ensure the best results for you and your business.

This publication is not intended as legal or tax advice. This information was compiled by The Northwestern Mutual Life Insurance Company. It is intended for the information and education of Northwestern Mutual’s financial representatives, their customers, and the legal and tax advisors of those customers. It must not be used as a basis for legal or tax advice and is not intended to be used and cannot be used to avoid any penalties that may be imposed on a taxpayer. Northwestern Mutual and its financial representatives do not give legal or tax advice. Taxpayers should seek advice regarding their particular circumstances from an independent legal, accounting or tax advisor. Tax and other planning developments after the original date of publication may affect these discussions.