.png){kind=logo}
Expiring Provisions Due to the Tax Cuts and Jobs Act and subsequent legislation, there are 35 tax provisions that expire on December 31, 2025.
The expirations are automatic unless there are future tax law changes. For planning purposes, the tax professional must use current law as the baseline; if there are subsequent changes, new planning should occur.
Individual Rates Individual tax rates increase in 2026:
• 37% → 39.6%
• 35% → 35%
• 32% → 33%
• 24% → 28%
• 22% → 25%
• 12% → 15%
• 10%
More sole proprietorships and pass-through entities will pay an average tax rate higher than the 21% C corporation tax rate in 2026. The §199A deduction close to expiring multiplies this effect as it helps to provide parity between individual rates and the C corporation rate.
Bonus Depreciation
Bonus depreciation phases out over several years:
• 2022 – 100%
• 2023 – 80%
• 2024 – 60%
• 2025 – 40%
• 2026 – 20%
• 2027 and forward – 0%
Taxpayers making large capital expenditures should accelerate those purchases, including real estate if a cost segregation strategy is being considered. A taxpayer should not make an asset purchase simply due to bonus depreciation being available.
§199A Deduction
The §199A deduction will no longer be available starting in 2026. However, because of the potential value of the §199A deduction over the next few years, it cannot be ignored for the next two years. For sole proprietorships, partnerships, and S corporations, this will require reevaluating the choice of entity for tax purposes in 2026 since the C corporation rate reduction to 21% was a permanent change.
State Pass-Through Entity Taxes
In 2026, the $10,000 cap on the state and local tax deduction ($5,000 married filing separately) no longer applies. In many states, their pass-through entity tax (PTET) systems will sunset in 2026 if the federal state and local tax deduction cap sunsets. It is still essential to evaluate the choice of entity for 2024 and 2025 to determine if switching to deduct state and local taxes is an option.
Credits
New markets tax credit. The §45D credit expires and will no longer be available in 2026. This credit attracts investment into low-income communities by permitting individual and corporate investors to receive a tax credit for making equity investments in specialized financial intermediaries called Community Development Entities (CDEs).
Employer credit for paid family and medical leave. The §45S credit expires and will no longer be available in 2026.
Work opportunity tax credit (WOTC). The §51 credit expires and will no longer be available in 2026. WOTC is a federal tax credit available to employers for hiring and employing individuals from certain targeted groups who have faced significant barriers to employment. Examples include veterans, the formerly incarcerated, and recipients of state assistance programs.
Energy Tax Credits The Inflation Reduction Act of 2022 (IRA 2022), which was passed in August 2022, was primarily designed to promote green energy and technology.
The following credits are new for tax year 2023:
§45W – Commercial clean vehicle credit. §45W Commercial Clean Vehicle Credit Sec. 13403 of the IRA 2022 created §45W to provide a tax credit for each qualified commercial clean vehicle placed in service by a business during the tax year.
This credit is part of the §38 general business credit and claimed on Form 8936-A, Qualified Commercial Clean Vehicle Credit. This provision is effective for vehicles acquired after December 31, 2022, and before January 1, 2033. Publication 5724-B provides a useful guide for a taxpayer’s credit eligibility. There is no income limitation or North American final assembly requirement for the §45W credit.
Opportunity Zones
Investing in an opportunity zone fund allows a taxpayer to defer recognition of capital gains. The deferral cannot extend past December 31, 2026 under existing law, and the deferral election is no longer available after 2026. Taxpayers who utilize opportunity zones must plan now for the 2026 gain recognition. The taxpayer can still potentially exclude gain on the appreciation of the fund investment if it is held for over 10 years.
Solar Tax Credits for Business & Rental Use
If the business or rental property is a residence, the taxpayer can claim the §25D credit; if the business or rental use exceeds 20%, the taxpayer must prorate the expense. If the rental property is not a residence, the taxpayer can claim the §48 energy credit, which starts at 6% but can increase to over 30% if a credit bonus applies to the project. It is claimed on Form 3468, Investment Credit. Solar electric systems are generally 5-year MACRS property. The Department of Energy maintains a detailed website explaining the available business credits.
Retirement-Related Tax Changes
The SECURE 2.0 Act of 2022, which was passed in December 2022, was primarily designed to enhance retirement savings. Changes occurring in the next few years:
Increased retirement account contributions
• Increased Roth account access
• New tax credits available
Automatic Enrollment
The SECURE 2.0 Act requires certain 401(k) and 403(b) plans to automatically enroll participants upon becoming eligible. This is effective for plan years beginning after December 31, 2024. Exceptions to the requirement include:
• SIMPLE plans
• Plans established before December 29, 2022
• Businesses with 10 or fewer employees
• Businesses in existence less than three years
• Certain church and governmental plans
Existing §45T provides an auto-enrollment tax credit of $500 per year for up to three tax years. An eligible employer that is required to auto-enroll employees under this provision may qualify for this tax credit. An eligible employer for §45T is one with no more than 100 employees who received at least $5,000 of compensation from the employer for the preceding year. The §45T credit is claimed on Part II of Form 8881, Credit for Small Employer Pension Plan Startup Costs, Auto-Enrollment, and Military Spouse Participation.
Student Loan Payment Matching
The SECURE 2.0 Act allows employers to make retirement matching contributions under a 401(k), 403(b), or SIMPLE IRA with respect to an employee’s qualified student loan payments. This is effective for contributions made for plan years beginning after December 31, 2023.
Nonelective SIMPLE Contributions
Employers with SIMPLE plans must make contributions to employees of either 2% of compensation or 3% of employee elective deferral contributions. The SECURE 2.0 Act permits employers to make additional contributions to employees in a uniform percentage that does not exceed the lesser of $5,000 (indexed) or 10% of compensation. This is effective for tax years beginning after December 31, 2023.
Elective SIMPLE Contributions
In tax year 2024, an employee can defer up to $16,000 into a SIMPLE plan. The SECURE 2.0 Act increases that limit to $17,600 in two circumstances:
1. Employers with less than 26 employees who receive at least $5,000 in compensation, or
2. Employers with 26 to 100 employees make either a 4% matching contribution or a 3%
nonelective contribution.
The 10% increase would also apply to the age 50+ catch-up amount. This is effective for tax
years beginning after December 31, 2023.
Domestic Employee Retirement Plan
The SECURE 2.0 Act permits employers of household employees to provide retirement benefits
under a SEP. This is effective for tax years beginning after December 29, 2022.
Retroactive Sole Proprietor Deferrals
Under the original SECURE Act, an employer could establish a new 401(k) plan prior to the tax
return filing date and elect to treat the plan as established on the last day of the tax year. Plans
subject to this election could be funded by employer contributions up to the tax return filing
date, but employee contributions were not permitted retroactively.
The SECURE 2.0 Act allows an individual who owns an unincorporated business (including a
single-member LLC) 401(k) plan and is the sole participant in the plan to make employee
contributions up to the tax return filing date for the plan’s initial year if the prior year election is
made. This is effective for plan years beginning after December 29, 2022.
SIMPLE and SEP Roth Contributions
The SECURE 2.0 Act permits SIMPLE IRAs to accept Roth contributions, and SEP employee
(SARSEP) and employer contributions can be Roth in whole or in part. Employer Roth contributions are taxable to employees. This is effective for tax years beginning after December 31, 2022.
Employer Roth Contributions Under current law, employer contributions to a 401(k), 403(b), or governmental 457(b) are required to be pre-tax. The SECURE 2.0 Act allows defined contribution plans to allow participants to receive matching and/or non-elective contributions as Roth contributions included in the participant’s gross income. This is effective for contributions made after December 29, 2022.
Part-Time Employee Retirement Access
Under the original SECURE Act, individuals who work at least 500 hours in three consecutive years are eligible to participate in a company retirement plan. This change was effective with the 2024 plan year. The SECURE 2.0 Act modified this rule, requiring that long-term, part-time employees be allowed to participate in a company’s plan after working at least 500 hours for two consecutive years. This change is effective starting with the 2025 plan year. The IRS issued proposed regulations with respect to these changes.
§45E Retirement Plan Startup Credit
Existing §45E provides a 50% tax credit for certain qualified startup costs of an employer retirement plan, with a maximum $5,000 per year credit. The credit is available for up to three tax years. Qualified startup costs include expenses for the establishment or administration of an eligible employer plan and retirement-related education of employees for such plan.
An eligible employer has no more than 100 employees who received at least $5,000 of compensation during the tax year preceding the first credit year. A creditable expense does not include any expense in connection with a plan that does not have at least one employee eligible to participate who is not a highly compensated employee (HCE). This credit is part of the §38 general business credit and is claimed on Part 1 of Form 8881.
For tax years beginning after December 31, 2022, the SECURE 2.0 Act makes two enhancements to the §45E credit:
1. The base credit increases to 100% for employers with up to 50 employees, and
2. There is an additional credit for employer contributions (not to defined benefit plans) up to $1,000 per employee.
For the additional credit for employer contributions:
• It is a 100% credit in years one and two, 75% in year three, 50% in year four, 25% in year five, and no credit in year six and later.
• The credit per employee is reduced for employers with 51 to 100 employees by 2% for each employee over 50 employees.
• The credit excludes employees earning more than $100,000 (inflation-adjusted starting in tax year 2024).
§45AA Military Spouse Retirement Credit The SECURE 2.0 Act created new §45AA to incentivize small employers to give military spouses early retirement plan access. The tax credit is part of the §38 general business credit and claimed on Form 8881. This is effective for tax years beginning after December 29, 2022.
To qualify, an eligible small employer must meet three requirements:
1. Make military spouses immediately eligible for plan participation within two months of hire,
2. Upon plan eligibility, make the military spouse eligible for any matching or nonelective contribution that they would have been eligible for otherwise at two years of service, and
3. Make the military spouse 100% immediately vested in all employer contributions.
An eligible small employer is one with no more than 100 employees who received at least $5,000 of employer compensation in the preceding tax year. The credit is $200 per military spouse plus 100% of all employer contributions (up to $300) made on behalf of the military spouse, for a maximum tax credit of $500.35 This credit applies for three years for each military spouse who is not a highly compensated employee.
Employee Retention Credit
The employee retention credit (ERC) was a COVID-19 pandemic relief credit that was available for certain businesses for tax years 2020 and 2021. Even though the pandemic has ended, businesses continue to claim billions of dollars of ERC refunds – some of which are unreasonable claims. The IRS has dramatically increased scrutiny of past and current ERC claims.
Overview
An employer must meet one of three tests with respect to a calendar quarter between March 13, 2020 through December 31, 2021:
1. Fully or partially suspended operations due to orders from a governmental authority limiting commerce, travel, or group meetings due to COVID-19 (not applicable for the 4th quarter of 2021),
2. Experienced a significant decline in gross receipts during the calendar quarter (not applicable for the 4th quarter of 2021), or
3. Qualified as a recovery startup business (only applicable for the 3rd and 4th quarters of 2021).
For tax year 2020 quarters, the credit is 50% of an employee’s qualified wages. There is a maximum credit of $5,000 per employee for all of 2020. For tax year 2021 quarters, the credit is 70% of an employee’s qualified wages. There is a maximum credit of $7,000 per employee per quarter. For a recovery startup business, there is an overall $50,000 maximum credit per quarter.
An employer must reduce the wage deduction by the ERC amount earned on the 2020 and/or 2021 returns. The ERC refund amount is not gross income in the year of receipt. Interest paid is income based on the method of accounting, but generally in the year of receipt for a cash method taxpayer.
The following expenses incurred in a taxpayer’s business, including those related to the ERC, are generally §162(a) deductions: tax preparation, tax advisory, and examination representation. Expenses are deducted based on the method of accounting, but generally in the year of payment for a cash method taxpayer.
For 2020 quarters, in general, the refund statute end date for ERC claims is April 15, 2024. For 2021 quarters, in general, the refund statute end date for ERC claims is April 15, 2025. ERC claims must be received by the IRS by these dates.
Current Issues
The proliferation of so-called ERC “mills” has led taxpayers to file ERC claims that are not supported by the law or the IRS’s guidance on the ERC. The IRS added “widely circulating promoter claims involving ERC” as part of its “Dirty Dozen” list of common tax scams.
Unreasonable qualifications include:
• “Everyone qualifies”
• COVID-19 disaster declaration
• General supply chain disruption
• CDC/OSHA guidance
• Customer shutdowns
• Chinese government orders
• Mask/vaccine mandates
Unreasonable calculations include:
• ERC for wages used for PPP loan forgiveness
• ERC for wages paid to a disqualified related party (i.e. related to >50% owner)
• Claim ERC refund as income in lieu of reducing wage deductions
The IRS released a Chief Counsel Memorandum analyzing whether general supply chain disruption is a basis for claiming ERC. In the memorandum, the IRS indicated a general supply chain disruption does not cause a partial suspension of operations to allow a business to qualify for the ERC.45 See Notice 2021-20, Q&A 12 for a limited circumstance when a business’s suppliers have suspended operations due to a government order. The IRS released a Chief Counsel Memorandum analyzing whether general OSHA guidance is a basis for claiming ERC. In the memorandum, the IRS indicated that general OSHA guidance does not cause a partial suspension of operations to allow a business to qualify for the ERC.
Corporate Transparency Act
Congress passed the Corporate Transparency Act (CTA) as part of the Anti-Money Laundering
Act of 2020. The CTA establishes uniform beneficial ownership information reporting
requirements for certain types of corporations, limited liability companies (LLCs), and other
similar entities created in or registered to do business in the United States.
The CTA authorizes the Financial Crimes Enforcement Network (FinCEN) to collect and disclose
that information as permitted under the law. The goal of the law is to prevent the hiding of
illicit money or other property in the United States.
Each reporting company must submit a report to FinCEN identifying each beneficial owner of
the reporting company and applicant with respect to the reporting company. The beneficial
ownership information (BOI) to be reported consists of four pieces of information.
Miscellaneous Business Updates
The following items affect business taxpayers in 2023 and beyond.
§174 Amortization
For tax years beginning after December 31, 2021, a taxpayer cannot deduct §174 research and
experimentation expenses. They are amortized over five years using a half-year convention; any
foreign research expenses are amortized over 15 years. Many businesses impacted by this
provision went on extension hoping Congress would change the provision. Congress has not
acted.
What is a §174 expense? “…expenditures incurred in connection with the taxpayer's trade or
business which represent research and development costs in the experimental or laboratory
sense… Expenditures represent research and development costs in the experimental or
laboratory sense if they are for activities intended to discover information that would eliminate
uncertainty concerning the development or improvement of a product…”
The IRS finally issued §174 guidance in September 2023:
• The IRS outlines methods for allocating incidental expenses to specified research
expenditures.
• §174 is applicable to software development activities; upgrades and enhancements to
purchased software are not subject to §174.
• The IRS provides guidance on when research performed under a contract by a research
provider may be subject to §174.
• The disposition, retirement, or abandonment of property does not change the §174
amortization period.
New E-file Requirements
If a business receives more than $10,000 in cash in a single transaction or in related
transactions, it must file Form 8300, Report of Cash Payments Over $10,000 in a Trade or
Business. Starting January 1, 2024, the form must be electronically filed, but businesses can
request a waiver on Form 8508, Application for a Waiver from Electronic Filing of Information
Returns. Form 8300 is electronically filed via the BSA E-filing System on the FinCEN website.