Dear Client: Washington, Feb. 27, 2025
As Republicans negotiate a tax package They’ll have to consider business taxes. Business lobbying groups are pushing for an extension of the 20% qualified business income (QBI) deduction. They also want to bolster three business tax provisions that have been watered down over the last few years.
Let’s first turn to the 20% QBI write-off Self-employed people, independent contractors, farmers, some landlords, and owners of pass-through entities… such as partnerships, LLCs, and S corporations… can claim the break on line 13 of their Form 1040.
HIGHLIGHTS
In Congress Small bipartisan bills
Benefit Plans State-paid leave
Business Taxes Business vehicles
Payroll Taxes ERC refund delays
Disaster Losses Calif. wildfires
Enforcement IRS layoffs
This deduction ends after 2025, unless Congress acts. It was first enacted in the 2017 Tax Cuts and Jobs Act (TCJA) to provide some federal income tax parity between C corporations, which are taxed at a 21% rate, and pass-throughs, in which the individual owners pay income tax on earnings up to a 37% tax rate.
QBI is one’s allocable share of income less deductions from a business The rules can get complicated, especially for upper-income individuals… people with incomes greater than $394,600 for joint filers and $197,300 for others. Two special limitations apply. First, the break phases out for upper-incomers in specified service trades or businesses. Second, there is a W-2 wages-paid limitation.
Congressional GOPers want to make the 20% QBI deduction permanent. And they have support from lobbying groups representing Main Street businesses. Some tax professional groups want the write-off expanded. For example, the American Institute of CPAs wants the specified service trade or business limit for upper-incomers removed, or alternately, an increase to the monetary threshold. Extending the deduction would cost the government a boatload of money. This popular tax break is in the top 10 largest individual income tax expenditures rounded up by the staff of the bipartisan congressional Joint Com. on Taxation.
Lawmakers also want to fully restore three popular business tax breaks: Bonus depreciation. Prior to 2023, businesses could deduct the full cost of new and used qualifying assets with lives of 20 years or less. Now, the break is 40%, and next year it falls to 20%. Businesses want 100% bonus depreciation revived. R&D. Before 2022, firms could fully expense research and development costs in the year incurred. The TCJA changed this for tax years that started after 2021. Businesses are required to amortize their R&D expenses over five years…15 years for overseas research. House and Senate GOPers want the old rules resuscitated. Interest deductions on business debts of large companies. The TCJA limited many big firms’ net interest write-offs to 30% of adjusted taxable income (ATI), with disallowed interest carried forward. Starting with tax years that began in 2022, depletion and amortization write-offs are accounted for in computing a firm’s ATI. Eliminating these two deductions from the ATI calculation would increase ATI, thus letting firms deduct more interest than if the two deductions were included. Reported from Washington, D.C.
While congressional GOPers debate the best way forward for a big tax plan… There is some bipartisan consensus on smaller, procedural tax items. Our last Letter highlighted a discussion draft of proposed changes to IRS procedure and administration from the chairman and ranking member of the Senate Finance Com. And earlier this month, four bills to improve tax administration that were supported by IRS’s National Taxpayer Advocate sailed through the House Ways & Means Com. One would help taxpayers whose paper refund checks were stolen, by allowing them to request a replacement refund in the form of a direct deposit. A second proposal would let the National Taxpayer Advocate office hire its own lawyers. The third bill would add clarifying language on IRS’s math error notices. Under the fourth proposal, electronic payments or documents submitted to IRS by midnight on the due date would be timely even if IRS doesn’t receive or process the submissions on that day.
IRS gives guidance on state-paid family and medical leave programs. 13 states and D.C. have mandatory programs that provide paid leave for employees of firms for caregiving and medical reasons. Benefits are generally funded by taxes paid by employers and/or employees. An IRS ruling addresses the tax consequences. Employers can generally deduct contributions as excise tax payments. The employee contribution is treated as wages and is taxable to the worker. The employer contribution is excluded from an employee’s federal gross income. Employees can deduct contributions as state income taxes on Schedule A, provided they itemize and their state and local tax deduction doesn’t exceed $10,000. Employees are taxed on state-paid family leave benefits they receive. The amount that is attributable to the employer’s and employee’s contributions is taxable income to the employee. States must report the amounts on Form 1099. The tax rules on medical leave benefits received is more complex (Rev. Rul. 2025-4).
This revenue raiser in the 2022 SECURE 2.0 law is set to begin next year: Requiring high earners to put 401(k) catch-up contributions into Roth 401(k)s In 2025, 401(k) participants who are 50 and older can opt to put their catch-up payins in a pretax 401(k) account, an after-tax Roth 401(k), or a combination of the two, provided their employers offer the Roth savings option. Beginning in 2026, employees who are 50 and older, and whose annual compensation exceeds $145,000 in the preceding year, can make catch-up contributions only to a post-tax Roth 401(k). The tax impact is that this will slash the up-front tax savings of those catch-ups for many employees who decide to max out their annual 401(k) contributions. In Jan., IRS proposed regulations that provide guidance to employers on how to interpret and implement this change. See www.kiplinger.com/letterlinks/catchup for the rules.
Here are two more SECURE 2.0 provisions that are slated to start in 2026: More people with disabilities can set up ABLE accounts. Presently, tax-advantaged ABLE accounts can be opened only for individuals who become blind or disabled before reaching age 26. The SECURE 2.0 legislation raises the age to 46. $2,500 from 401(k)s can be used penalty-free to pay long-term-care premiums Pre-age-59½ 401(k) distributions used for this purpose won’t be hit with a 10% fine.
The annual gift tax exclusion is $19,000 per donee this year. This means in 2025, you can give up to $19,000 to each person without paying gift tax, tapping your lifetime estate and gift tax exemption, or filing a federal gift tax return. If your spouse agrees, you can gift up to $38,000 per donee. But if you and your spouse decide to do this, you are required to file a federal gift tax return on Form 709 to elect to split the gift. You won’t owe gift tax, but you’ll have to report the gift. Larger gifts over $19,000 per donee are also a smart tax move this year. You will have to file a gift tax return on Form 709, but you won’t owe any gift tax unless you use up the $13,990,000 lifetime estate and gift tax exemption for 2025.
Many buyers of business vehicles get generous income tax breaks in 2025. For new and used cars. If bonus depreciation is claimed, the first-year cap for a car first placed in service in 2025 is $20,200. The second- and third-year caps are $19,600 and $11,800. For each succeeding year, the depreciation deduction cap is $7,060. If no first-year bonus depreciation is taken, the first-year cap is $12,200. Buyers of heavy SUVs also get write-offs. Up to $31,300 of the cost of SUVs with vehicle weights exceeding 6,000 pounds can be expensed. 40% of the balance of the cost of the heavy SUV (after reducing the cost by the $31,300 amount) gets bonus depreciation, and the rest may qualify for regular five-year depreciation. The tax break is larger for big pickup trucks…those over 6,000 pounds, with a cargo bed at least six feet long and not accessible from the cab. Up to 100% of the cost, depending on business use, can be expensed under higher expensing limits. Note this limitation when expensing business assets: The amount expensed cannot exceed taxable income from the taxpayer’s business. Keep this in mind when buying a heavy SUV or large truck. Bonus depreciation doesn’t have this limit.
Processing delays on the employee retention credit continue to plague IRS And frustrate businesses, tax pros and IRS’s National Taxpayer Advocate. This COVID-19-related federal payroll tax break, which was first enacted in 2020, was designed to help eligible businesses whose operations were fully or partly halted, or whose gross receipts fell significantly, during the height of the pandemic. Firms had been swamping the service with Form 941-X filings, seeking refunds for prior-year employment taxes that they paid and any excess refundable ERCs. IRS says the break is rife with fraud, in large part because of shady promoters. It halted processing of refund claims in late 2023. Although processing has restarted, many businesses are still waiting for the Service to process their refund claims.
1.2 million ERC refund claims remained unprocessed as of late Oct. 2024, according to the National Taxpayer Advocate’s office, which named ERC delays as one of the most serious problems facing taxpayers in its annual report to Congress. Firms awaiting ERC refunds haven’t heard from IRS, and NTA is chiding the agency for having claimants wait indefinitely, and for lacking transparency and a plan to handle the unprocessed Forms 941-X. The NTA wants IRS to be more transparent and provide expedited processing of ERC refunds that prioritizes economic hardship.
A nontax beneficial ownership reporting regime for small firms is back on. They must e-file their beneficial ownership interest (BOI) reports by March 21 with the Financial Crimes Enforcement Network. The 2021 Corporate Transparency Act requires many small corporations, LLCs and other state-recognized entities to electronically report information about themselves and their beneficial owners to FinCEN. There is an important exception for firms with over 20 full-timers, more than $5 million in gross receipts and a U.S. office. Companies in existence before 2024 were originally required to e-file reports no later than Dec. 31, 2024, and new companies had 90 days after formation to comply. Lots of lawsuits have been filed against the CTA, with some decisions for and against the government, and court injunctions have come and gone. But as of now, BOI reporting is required.
Third strike, you’re out. A court again rejects a whistle-blower award. In 2021 and 2023, the Tax Court and an appeals court nixed a whistle-blower’s claim that he was entitled to an award based on the proceeds IRS collected. They both relied on a rule that lets IRS treat probes into unrelated tax issues of the same taxpayer as separate administrative actions for purposes of the whistle-blower statute. The whistle-blower argued that the regulation contravened the text of the statute. An appeals court again reviewed the challenged regs, without giving deference to IRS, and ruled that IRS correctly interpreted and applied the statute (Lissack, D.C. Cir.).
Take note of state and local income taxes in retirement. They vary widely, depending on where you live or where you’re thinking you might move to. Luckily, you needn’t research income taxes in all states. Kiplinger has done it for you. The online tax team has prepared a guide with details on how the 50 states and D.C. tax retirees on their income. See www.kiplinger.com/kpf/50states-taxes for details.
Expanded disaster loss relief doesn’t apply to victims of 2025 Calif. wildfires, based on language in IRS Publication 547 and the instructions to Form 4684. In early Dec., Congress passed easings for personal disaster loss write-offs akin to those given to victims of federally declared disasters in 2018-20. The rules let filers deduct losses from federally declared disasters, even if they don’t itemize. Individuals can deduct uninsured personal losses in excess of a $500 threshold without regard to the 10%-of-adjusted-gross-income offset that generally applies. This “qualified disaster loss” is treated as an additional standard deduction. The language in Pub. 547 and the 4684 instructions says that the easings apply to disasters declared between Jan. 1, 2020 and Feb. 10, 2025, with the incident period beginning on or after Dec. 28, 2019, and on or before Dec. 12, 2024. Additionally, the incident period of the disaster must have ended no later than Jan. 11, 2025. The recent Calif. wildfires began Jan. 7, excluding them from qualified disaster losses.
PREPARERS
Preparers are at risk from phishing scams. And the crooks are quite crafty. They’re sending fake e-mails seeking electronic filing information numbers. Preparers must protect their EFINs and other passwords from unauthorized use, and not share them with, or transfer them to, someone else. Use IRS’s e-Services tools to check how many tax returns have been electronically filed under your EFIN.
Know the rules if claiming the earned income tax credit on your return
It’s an audit red flag. Many errors involve the eligibility of a qualifying child. He or she must be a son, daughter, stepchild, foster child, sibling, niece, nephew or grandchild who lived with you for more than half the year and is under age 19. There are two exceptions to the age requirement: Full-time students may be younger than 24, and permanently and totally disabled qualifying children can be any age. Additionally, each qualifying child that you claim for the EITC must have an SSN. The vast majority of, if not all, EITC audits are done via correspondence, meaning that IRS will send you a notice in the mail, instructing you to respond back.
The first round of layoffs at IRS will put a dent in its enforcement priorities Earlier this month, the agency, as part of the federal government’s downsizing efforts led by the Dept. of Government Efficiency, fired approximately 7,000 IRS new hires and others newly promoted to their positions. Many of the people axed are tax pros, data scientists, attorneys, and new college graduates, most of whom were hired as part of IRS’s plan to conduct more audits of wealthy individuals, large companies, cross-border activities, and other key areas in which audit coverage had fallen. Others were hired as revenue officers as part of IRS’s goal to collect unpaid tax debt. And then you have employees who were hired to improve taxpayer assistance. Some workers who were terminated were still in training when they were let go.
Yours very truly,
Feb. 27, 2025
Joy Taylor, Editor
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