The Tax Cuts and Jobs Act (TCJA) of 2017 introduced several significant tax reforms, including lower tax rates and expanded deductions

These measures are due to expire in 2025.

Contrary to confusing political rhetoric, both individuals and small businesses will see significant increases in their tax liabilities.

Here’s a detailed look at what might happen when these tax cuts expire:

Tax Rates & Exemptions Under the TCJA

Under the TCJA, the U.S. tax system saw a broad based reduction in tax rates and adjustments to tax brackets, which provided tax relief for most Americans.

• Tax rates were reduced across almost every slab (see table below)
• Standard deductions were doubled (from $6,500 and $12,700 to $13,000, and $25,400 respectively)
• 20% deduction was allowed for pass through businesses (S-Corps, LLCs, partnerships)
• Corporate tax was reduced from 35% to 21%

See full list of tax rates below.

Here’s what this could mean for taxpayers and small businesses.

Personal tax at different family incomes:

• For a family earning $75,000 of taxable income (after 401K deductions), will face an additional tax bill of about $1,830.
• For a family earning $145,000 taxable income, tax liability would increase by about $4,945.
• For a family earning $225,000 taxable income, tax liability would increase by approximately $5,508.
• A family making $425,000 would see an additional tax liability of about $4,439

Even if we bring back the personal exemptions, it would still result in a higher tax.

Further, if TCJA expires, entrepreneurs and business owners who can now pass on up to $11.7 million to their children without incurring estate taxes, will be limited to $5.5 million. This results in in a tax bill of $2.6 million on estates valued at $12 million ($6.5 million taxed at 40%)!

Impact on Small Businesses and Pass-Through Entities

Pass-through entities, including sole proprietorships, partnerships, S-corporations, and limited liability companies (LLCs), are businesses where income “passes through” to the individual owners or shareholders.

The Tax Cuts and Jobs Act (TCJA) introduced a 20% deduction on Qualified Business Income (QBI) for pass-through entities.

Without the 20% deduction, the taxable income for small business owners increases.

For instance, if the business owner is in the 24% tax bracket, the absence of the QBI deduction means they are taxed on the full $100,000 instead of $80,000. This results in an additional tax burden of $4,800 ($100,000 × 24% — $80,000 × 24%).

This increase is in addition to the tax increases in the individual rates.

Overall Impact on Economy

Financial Strain on Small Businesses: Higher taxes can strain the finances of small businesses. Increased tax liabilities may reduce the available funds for reinvestment or expansion making it harder to compete with larger firms that benefit from other tax advantages.

Impact on Hiring and Wages: With less disposable income due to higher taxes, businesses might delay or reduce hiring, wage increases, or employee benefits. This can affect the overall economic environment and job market, especially in regions with a high concentration of small businesses.

Conclusion

Despite political rhetoric from both sides, the expiration of the TJIC will lead to higher tax liabilities.

Taxpayers and small businesses should be looking to adjust their financial strategies. Planning and preparation will be key to navigating these changes and mitigating their impact.