Year-End Tax Planning: Navigating Complexities with Trump’s Proposed Changes
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Year-end tax planning typically relies on understanding current tax law and assuming that it will remain substantially the same in the following year. But this year is different. President-elect Donald Trump is expected to make significant changes in the tax code that could be in place soon after his January 20, 2025, inauguration.
Consequently, year-end tax planning for businesses and individuals should be done this year with an eye toward the future and changes that may impact both your business and your personal tax situation.
As we wrote about in September, Trump’s tax plan largely builds on the framework of his 2017 Tax Cuts and Jobs Act (TCJA). This may include:
Reinstating 100% bonus depreciation retroactively
Bonus depreciation allows businesses to immediately deduct a large portion of eligible asset costs rather than spreading the deductions over several years. Originally introduced under the TCJA, it has been gradually phasing out by 20% per year. It stands at 60% for 2024 and is scheduled to drop to 40% in 2025. However, if the Trump administration takes it back to 100% and makes it retroactive, business owners who purchase and place equipment into service before December 31, 2024, could reap a big tax benefit.
What you should do for year-end tax planning:
Consider Timing Purchases: If you are planning to invest in equipment or other qualifying property, purchasing and placing it in service before year-end could result in significant tax savings if 100% bonus depreciation is reinstated.
Review Your Cash Flow: Ensure you have the resources to make year-end purchases without straining your financial position.
Restore ability to deduct eligible expenses in the year incurred under Section 174
The Research and Development tax credit is a powerful federal tax incentive designed to reward organizations that engage in qualified innovation activities. Specifically, Section 174 allowed the deduction of eligible expenses paid in the year incurred. This was extremely useful for many businesses because they could immediately recoup costs and use the tax benefit to fund ongoing innovation. However, when the TCJA was passed in 2017, one of the ways it funded the corporate tax rate cut was to change Section 174 expensing. In 2022, the rule was changed, requiring companies to amortize these expenses over a 5-year period (for domestic expenses) and a 15-year period (for international costs). The change means that companies must wait a minimum of five years to receive the tax benefits that would previously have been received in the same year, as well as report higher taxable income. Legislation to restore immediate expensing retroactive to 2023 failed to pass last year, but there’s optimism for its revival under the new administration.
What you should do for year-end planning:
Accelerate Spending: If immediate expensing is reinstated, consider accelerating planned R&D activities to maximize deductions in 2024.
Strategic Planning: Coordinate with your team to prioritize projects with high-cost components for earlier completion.
Capital Gains Considerations
Long-term capital gains are profits from the sale of assets held for more than one year, such as stocks, bonds, real estate, or business interests. Under the current TCJA provisions, long-term capital gains are taxed at preferential rates of 0%, 15%, or 20%, depending on your taxable income. However, the Trump administration has proposed reducing the long-term capital gains tax rate to 15% across the board, potentially retroactive to January 1, 2024. If enacted, this could create significant tax-saving opportunities for taxpayers looking to realize gains.
What you should do for year-end tax planning:
Evaluate Timing of Capital Gains: If you plan to sell appreciated assets, consider deferring the sale to 2025 to take advantage of potentially lower capital gains rates. However, if you need to lock in gains this year, factor in the possibility of retroactive rate reductions.
Harvest Losses to Offset Gains: Review your portfolio to identify underperforming investments that can be sold to offset realized gains. Tax-loss harvesting can minimize your overall tax liability.
Consider Gifting Appreciated Assets: If charitable giving is part of your strategy, donating appreciated assets can help you avoid capital gains taxes while providing a charitable deduction.
Energy tax credits
Many businesses have taken advantage of tax credits tied to clean energy efforts that were contained in the Biden administration’s Inflation Reduction Act (IRA) of 2022. One IRA program, in particular, provided enhanced tax credits to taxpayers who ensured that Davis-Bacon Act prevailing wages were paid to workers and that registered apprentices were utilized for the construction of energy-efficient commercial buildings, energy-efficient homes, electric vehicle (EV) charging infrastructure and other clean energy projects. Some of the activities that qualified for these credits are multi-year activities, but since clean energy is not a priority of President-elect Trump, any business that relies on these activities and related tax credits would do well to plan for their disappearance. These credits will be available for the 2024 tax year but will likely be phased out in the future.
What you should do for year-end planning:
Accelerate Green Investments: If you’re planning energy-efficient upgrades or renewable energy projects, consider completing them by year-end to secure current tax credits.
Evaluate Long-Term Plans: Be cautious about committing to projects that rely on future incentives, as these may no longer be available.
We’re here to help
Business owners who are in the midst of year-end tax planning should review their plans and seek guidance from their trusted advisors since the tax situation will likely change significantly next year.
If you want to discuss your year-end tax planning, contact your JLK Rosenberger team member or click here to contact us. We look forward to speaking with you soon.
