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Critical TCJA Tax Provisions Set to Sunset at the End of 2025: What Business Owners Need to Know Now

For business owners and high net-worth individuals, 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 provisions are scheduled to sunset at the end of 2025, the new administration and Congress are already developing proposals to extend various provisions. Current estimates suggest full extension of the TCJA would add approximately $4.6 trillion to the deficit over ten years, making some modifications likely. Some members of Congress, concerned about the program’s deficit impact, are pushing for a more scaled-back approach, while others advocate for a comprehensive bill.

Despite this legislative uncertainty, prudent business owners and tax planners must prepare for multiple scenarios while closely monitoring developments. The upcoming “sunset” of numerous TCJA provisions could impact everything from individual tax rates to business deductions, potentially resulting in substantial tax increases for many taxpayers.

In that spirit, we’re taking a closer look at how potential changes could impact businesses and individual taxpayers, while providing some key planning questions to consider along the way.

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. The change effectively creates a “bracket compression” effect.

Current vs. 2026 Brackets (estimated, inflation-adjusted):

  • Top rate (37% → 39.6%): Currently starts at $609,350 (joint), will start at approximately $580,000
  • 35% rate: Currently $462,500-$609,350 (joint), will shift to $431,900-$580,000
  • 32% rate: Currently $364,200-$462,500 (joint), will shift to $340,100-$431,900
  • And so on through lower brackets

This compression means many taxpayers will find more of their income taxed at higher rates, even if their income stays the same.

Key Planning Question: What portion of your income will shift into higher brackets, and can you accelerate income recognition into 2025?

Key Business Provisions

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. Currently, this provision:

  • Provides 20% deduction of qualified business income
  • Phases out for specified service businesses (SSTBs) between $191,950 – $241,950 (single)/$383,900 – $483,900 (married filing jointly)
  • For non-SSTBs, limits deduction to greater of:
    • 50% of W-2 wages, or
    • 25% of W-2 wages plus 2.5% of qualified property basis

The expiration effectively increases marginal rates by 7.4 percentage points for qualifying business owners at the top bracket (37% rate becomes an effective 29.6% on qualifying income). When combined with higher statutory rates in 2026, pass-through business owners could see effective rates increase by nearly 10 percentage points.

Key Planning Question: Should your business structure be reevaluated given the changing rate dynamics between pass-through and corporate taxation?

Business Interest Limitations

While not directly a TCJA sunset provision, the Section 163(j) business interest limitation continues to significantly impact business planning. Since 2022, businesses have been limited to deducting net interest expenses up to 30% of 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
  • Companies with cyclical income that may trigger limitation in down years
  • Growing businesses relying on debt financing for expansion
  • Real estate enterprises with significant depreciation and debt service

Key Planning Question: Have you evaluated alternative financing structures (like operating leases) that might optimize your interest limitation position?

Business Entertainment and Meals

The TCJA’s treatment of entertainment expenses may revert to pre-2018 rules. Current law provides:

  • No deduction for business entertainment expenses
  • 50% deduction for business meals
  • 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. This would affect:

  • Client entertainment at sporting events, theaters, clubs
  • Facility costs for entertainment venues used for business
  • Recreation expenses for customers or employees
  • Entertainment-related travel and tickets

Key Planning Question: What system changes will be needed to properly track and document entertainment expenses that may become partially deductible?

Pass-Through Loss Limitations

The excess business loss limitation, currently restricting business 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
  • Interacts in a complex way with basis limitations and self-employment income

Key Planning Question: Should major purchases or loss-generating investments be timed differently based on the expiration of these limitations?

R&D Expense Treatment

While not a direct TCJA sunset provision, the current required capitalization of R&D expenses under Section 174 (effective since 2022) may be modified in any comprehensive tax legislation. Current rules require:

  • 5-year amortization of domestic R&D expenses
  • 15-year amortization of foreign R&D expenses
  • Capitalization of software development costs
  • Complex rules for allocating mixed-purpose expenditures

Key Planning Question: How should R&D investment strategies be structured to optimize tax treatment under potential legislative scenarios?

Key Individual Provisions

SALT Deduction Cap and Pease Limitation

Two significant changes to itemized deductions will occur simultaneously:

  1. The $10,000 cap on state and local tax (SALT) deductions expires
  2. The Pease limitation on itemized deductions returns

Under the Pease limitation, total itemized deductions will be reduced by 3% of the amount by which AGI exceeds an inflation-adjusted threshold (approximately $340,000 joint, adjusted for 2026). The reduction is capped at 80% of total itemized deductions.

Key Planning Question: Should your tax residency strategy be reevaluated given the return of unlimited SALT deductions offset by Pease limitations?

Alternative Minimum Tax Changes

The AMT system will undergo substantial changes as exemption amounts and phase-out thresholds revert to lower, pre-TCJA levels:

Current (2025) vs. Post-TCJA AMT Parameters (estimated):

  • Exemption amount: $84,800 → $62,000 (single), $133,000 → $86,000 (joint)
  • Phase-out threshold: $609,000 → $460,000 (single), $1,218,000 → $720,000 (joint)

Key Planning Question: For taxpayers with significant preference items (ISOs, private activity bonds, or accelerated depreciation), should exercise or realization be accelerated before exemption amounts decrease?

Standard Deduction and Family Credits

The standard deduction will revert to pre-TCJA levels, approximately halving current amounts:

  • Single: $8,300 (estimated 2026) from $15,000 (2025)
  • Joint: $16,600 (estimated 2026) from $30,000 (2025)

Simultaneously, family-related credits will change significantly:

  • Child Tax Credit returns to $1,000 per child (from $2,000)
  • Lower income phase-out thresholds: $75,000 single/$110,000 joint (from $200,000/$400,000)
  • Elimination of the $500 credit for non-child dependents
  • Changes to credit refund-ability rules

Key Planning Question: How will the interplay between reduced standard deductions and changed family credits affect your withholding and estimated tax payment strategy?

Qualified Small Business Stock

While the 100% gain exclusion remains permanent, other TCJA-modified QSBS provisions will change:

  • AMT preference treatment modifications expire
  • Interaction with recomputed basis provisions changes
  • Impact on state tax treatment in conforming states

Key Planning Question: Should QSBS disposition strategies be reevaluated given the changing AMT treatment and state tax implications?

State Tax Implications

When analyzing federal tax legislation’s impact on state taxes, taxpayers must be mindful of each state’s level of conformity to the Internal Revenue Code, which could result in differences between the federal and state income tax treatment of new or amended federal income tax provisions.

  • Rolling Conformity – The state automatically updates its tax code to match federal tax law changes as they occur.
  • Static (Fixed-Date) Conformity – The state conforms to the federal tax code as of a specific date and requires legislative action to adopt future changes.
  • Selective (Partial) Conformity – The state adopts only certain federal tax provisions while choosing to decouple from others.

Key State Conformity Approaches

Illinois (Rolling Conformity)

  • Automatically conforms to most federal tax base changes
  • Decoupled from federal bonus depreciation (maintains own schedule)
  • Starting point is federal AGI for individuals
  • No separate state AMT system

California (Selective Conformity)

  • Maintains separate depreciation system
  • Has own NOL rules and carryforward provisions
  • Maintains separate AMT system
  • Complex state-specific modifications

New York (Static Conformity)

  • Generally conforms to federal code (as of 2017)
  • State-specific modifications for business income
  • Complex residency rules affect taxation
  • Special NYC considerations for city tax purposes

Midwest Regional Considerations

  • Wisconsin: Static conformity, adopted some TCJA provisions
  • Minnesota: Rolling conformity with specific decoupling provisions
  • Michigan: Rolling conformity, separate flow-through provisions
  • Indiana: Selective conformity
  • Iowa: Recently modernized conformity, transitioning systems

Legislative Outlook and Planning Considerations

Competing Legislative Approaches

The House and Senate are considering different approaches to tax legislation. While House leadership favors a comprehensive bill combining tax extensions with other priorities, Senate leadership advocates for a more measured, two-step approach. This procedural difference could impact both the timing and scope of any tax legislation.

Cost and Deficit Considerations

Extending the TCJA provisions would add approximately $4.6 trillion to the deficit over 10 years, according to current estimates. To address these fiscal impacts, House Republicans have proposed offsetting spending reductions of up to $5.7 trillion over the same period. The scope of these proposed cuts and their political viability will likely influence the final shape of tax legislation.

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.

A comprehensive tax planning approach should include:

  • Modeling your specific tax situation under various scenarios, including full sunset, full extension, and partial extension of key provisions
  • Identifying opportunities to maximize current tax benefits while maintaining flexibility
  • Developing contingency strategies for different legislative outcomes
  • 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.

This article is provided for informational purposes only and should not be construed as legal or tax advice. Consult with your tax advisor regarding your specific situation.

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