The House Ways and Means Committee is busy managing its 10 Tax Teams in an effort to salvage what it can from the 2017 Tax Cuts and Jobs Act (TCJA), which is set to expire at the end of 2025. And there’s a lot to try to salvage if family businesses are to come out ahead before the so-called tax cliff gets too close for comfort.
Items on their agenda include avoiding increased income and capital gains taxes, halting a decrease in estate tax lifetime exemptions and restoring research and development expensing, to name just a few big ones.
Earlier this year, committee Chairman Rep. Jason Smith (R-Mo.) and Tax Subcommittee Chairman Rep. Mike Kelly (R-Pa.) earlier this year formed 10 official Tax Teams to study all the key tax provisions stemming from the TCJA, which was enacted under the Trump administration in 2017.
The 10 Tax Teams are named after their areas of focus: American Manufacturing, Working Families, American Workforce, Main Street, New Economy, Rural America, Community Development, Supply Chains, U.S. Innovation and Global Competitiveness. Nearly all of these will affect family-owned businesses. The goal, Smith says, is to “identify legislative solutions that will continue to help families, workers and small businesses.”
But family businesses may be more anxious than usual as they consider the potential expiration of major provisions of the TCJA. Among these provisions is the $13 million-plus estate tax exemption, which may get rolled back to $5 million to $8 million after 2025.
If action is not taken, according to Smith, the average family of four earning $75,000 would see their taxes increase by $1,500 a year, while a family of five with two earners making around $100,000 would see a tax increase of nearly $7,500 a year.
Unfortunately, increases often fall on the shoulders of America’s family businesses, which collectively account for 83.3 million jobs.
According to research from nearly 800 family businesses conducted earlier this year, more than 80% of family businesses are “pass-through” entities. These businesses are already disadvantaged compared with corporations. Corporations pay a low 21% in federal taxes, while pass-through entities pay up to 37%.
Making the Math Work
Extending the TCJA would come at a cost.
Originally, the Congressional Budget Office (CBO) estimated the TCJA would add $1.8 trillion to deficits (excluding interest) through Fiscal Year 2028 on a conventional basis, or $1.3 trillion after accounting for faster economic growth.
Extending the expiring TCJA tax cuts, CBO says, will dig a $3.4 trillion hole over the course of a decade, or more than $4 trillion with existing corporate tax rates. As a result, lawmakers are looking for new money — and expenditure cuts — should the Trump-era tax rates remain in effect beyond 2025.
The Senate sees billionaires as a big target.
Sen. Ron Wyden’s (D-Ore.) “Billionaire Tax Act” is aimed at overhauling carried interest, creating a minimum corporate income tax on foreign profits, raising taxes on stock buybacks, enacting minimum taxes on the richest Americans and increasing estate and gift tax exemption amounts, among other proposals.
The Senate Finance Committee has set up its own Tax Teams. The majority Senate members include Wyden, Debbie Stabenow (D-Mich.) and Maria Cantwell (D-Wash.). Members from the Republican side are Mike Crapo (R-Idaho) and Chuck Grassely (R-Iowa). Both sides are working within their own committees for the time being, but Wyden says he’s meeting with all members individually.
Mirroring the House, Senate Republicans have launched working groups in preparation for what the Hill is unofficially calling “the 2025 tax cliff.”
Those groups are organized around six areas of focus: Individual Taxes, Business Taxes, International Taxes, Retirement, Community Development and Energy Taxes.
And, not to be left out of the conversation, the White House has its own ideas, having introduced several measures aimed at billionaires and corporations. That proposal would raise the corporate tax rate to 28%, from its current 21%. The White House budget would also raise the Inflation Reduction Act’s corporate minimum tax rate on billion-dollar corporations from 15% to 21%.
Another proposed White House measure would require ultra-high-net-worth individuals to pay a minimum 25% tax on income. The proposal would also bring the top marginal tax rate to 39.6% for single filers earning over $400,000 a year and married couples making more than $450,000 per year.
House Rules
Of course, the outcome of the presidential election will shift momentum, since House committees will be the ones writing the next tax bill.
If Democrats take over the House, it’s predicted the current TCJA provisions will be extended to those taxpayers earning $400,000 or less. Those earning more will likely see their tax rules revert to pre-2018 levels.
If Republicans stay in control, it’s likely that TCJA provisions will be extended, but such action will create a $3 trillion-plus hole.
Tax legislation, if nothing else, is a complex dance of priorities.
To help balance out the lower tax rate, lawmakers are considering tossing out the TCJA’s 199A deduction for pass-through entities. There is also a call to restore bonus depreciation, as well as a growing chorus to establish an overall wealth tax, as many countries have tried.
Tax experts, like Matt Brown, a partner at the Irvine-Calif.-based law firm Brown & Streza, see the rest of this year and the first half of 2025 as the critical time to plan for the tax cliff, though not all the potential changes will be negative.
For example, the TCJA’s SALT deduction cap may go away, he says. And this may be good news. SALT stands for “State and Local Tax” deduction, and it was previously capped to limit itemized deductions for state and local taxes to $5,000 for a single tax filer and $10,000 for all others.
In addition, there may be changes in the mortgage interest deduction cap, increasing it from the current figure of $750,000 to $1 million of mortgage balance, according to Brown. And the ability to deduct interest on equity loans would be increased or would come back into existence at $100,000, he adds.
Nobody knows what Congress or the next presidential administration will ultimately agree on when it comes to taxes, or how they will manage the growing gap between revenues and expenses. But they will have to act.
The only way to state your case is to voice your concerns.
The next Congressional Family Business Caucus Meeting, scheduled for Sept. 18, will address pass-through taxes, enterprise structure and possible wealth tax legislation.
It will be the last chance this year to speak up about your concerns. Don’t let it pass.