Preparing for Potential Tax Changes: What Partnerships and S Corporations Should Know
As we approach the end of 2024 and prepare for 2025, many partnerships and S corporations are closely watching the potential expiration of key tax provisions that have significantly impacted their tax bills since 2017. The primary concern? The possible end of the 20% deduction for pass-through businesses, a benefit that has provided substantial tax relief but is set to expire at the end of 2025 unless Congress acts to extend it.
What’s at Stake?
The 20% deduction, introduced as part of the 2017 Tax Cuts and Jobs Act, has been a cornerstone of tax planning for pass-through entities. This deduction, along with reduced individual income tax rates, has allowed many businesses to reduce their overall tax burden. However, with the upcoming expiration of these provisions, businesses are now faced with the uncertainty of what the future holds.
The outcome of the 2024 election will play a significant role in determining whether these tax breaks are extended or allowed to lapse. While many Republicans advocate for making the deduction permanent, some Democrats have voiced concerns, particularly regarding its benefits to high-income individuals.
The Importance of Proactive Planning
Given the potential changes, tax advisors are emphasizing the need for proactive planning. While it’s essential to remain patient and avoid hasty decisions, businesses should start preparing for various scenarios.
One approach being considered by some taxpayers is accelerating income into 2025 while deferring deductions. This strategy, although unconventional, could help minimize tax liability if the pass-through deduction does indeed expire. Understanding how these changes might impact future tax returns is crucial for making informed decisions.
Considering Structural Changes
Another strategy that some businesses are exploring is converting from a pass-through entity to a C corporation. Historically, many businesses have favored the pass-through structure due to the single level of tax at the individual income rate. However, with the corporate tax rate now permanently set at 21%, and the potential expiration of the 20% pass-through deduction, the appeal of the C corporation structure may increase for certain businesses.
This option, however, is not without risks. Converting to a C corporation comes with significant implications, including the requirement to wait five years before converting back to an S corporation and the potential tax consequences if converting back to a partnership. It’s a decision that requires careful consideration and, in many cases, the guidance of a knowledgeable tax advisor.
The Role of a Tax Advisor
Navigating these potential changes can be challenging, but working with a tax advisor can provide invaluable insights and strategies tailored to your specific situation. Tax advisors can help you model different scenarios, understand the potential impacts on your tax liability, and develop a plan that positions your business for success regardless of the outcome.
As the political landscape continues to evolve, staying informed and being prepared to act quickly will be key. By consulting with a tax advisor, you can ensure that your business is ready to adapt to whatever changes may come.
At Tonneson + Co, our team of experienced tax professionals is here to help you navigate these uncertainties. Whether you’re considering accelerating income, evaluating your business structure, or simply want to understand your options, we’re here to provide the guidance and support you need. Reach out to us today to start planning for the future with confidence.
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