Why Sell Now? Taxes Are About To Surge

If you are a small business owner, such as a shareholder in an S corporation or part of a partnership, you don’t want to be caught by surprise by what is to come. Your federal income tax rate is currently on pace to increase by 30% on the final day of 2025. This is due to the expiration of certain tax laws, such as the 199A deduction, and an increase in individual federal income tax rates. The tax rate for pass-through entity owners will increase from 30% to 39.6%. There is also the possibility that taxable income could see a spike if the Tax Cuts and Jobs Act provisions are allowed to expire. This includes: 

• Capitalization of research and experimental (R&E) expenditures 
• Bonus depreciation drops to 60% this year and to 40% in 2025 
• The application of more restrictive interest expense limitation calculations  

Doesn’t Congress Have to Vote on This? 

It’s easy for most business owners to assume that Congress will intervene in this situation. However, it should be noted that the U.S. Congress does not always have to pass a bill to change federal income tax law, and passing legislation in Congress in today’s political climate has proven to be a challenge. Laws can be passed under the budget reconciliation process, in which only a simple majority in the Senate is required. This process has been used by both political parties and was used to pass the Tax Cut and Jobs Act (TCJA) in 2017, with no need for bipartisan support, as long as the bill is not calculated to increase the deficit beyond a 10-year budget window.  

The TCJA reduced taxes significantly between 2018 and 2025, leading to an anticipated $1-2 trillion increase in the national deficit. Also, some provisions driving up taxable income have already been in place, such as the requirement for domestic R&E expenditures to be capitalized over a 5-year period starting in 2022. 

The above changes are more likely because the plan with the TCJA was to ensure the deficit did not extend past the 10-year budget window; the act included several provisions that seal its fate if there is no Congressional action before the end of 2025. Therefore, taxes are set to surge for many small and privately owned companies, even if Congress does not act to utilize its budget reconciliation shortcut to do so. 

Partner With the #1 Privately Held M&A Advisor – Learn More.

Tax Provisions to Sunset in 2026 

There are several provisions that will change at the end of 2025, including the following: 

• Expiration of the 20% 199A QBIT deduction 
• Bonus depreciation will be limited to 20% 
• The highest individual tax rate goes back to 39.6% 
• The individual AMT exemption amounts and phase-out threshold will revert to pre-TCJA levels 
• The estate tax exemption will revert to the pre-TCJA level of $5.6 million from the current $13.6 million (adjusted for inflation) 
• The estate tax will go up from 40% to 45% 
• The 199A 20% pass-through deduction will be eliminated 
• An increase in individual federal income tax brackets, with the highest rate going from 37% to 39.6% 

The harsh reality is that the government will have to make some critical decisions that will affect all business owners and U.S. citizens. The Congressional Budget Office estimates that if the TCJA provisions are extended, along with the Inflation Reduction Act tax credits that subsidize health insurance under the Affordable Care Act, the national deficit will increase by nearly $5 trillion from 2025 through 2034. This means that federal debt held by the public could reach 125% of the U.S.’s Gross Domestic Product (GDP) by 2034. This figure just topped 100% for the first time since World War II. Members of Congress could attempt to change the Internal Revenue Code to implement “fair” tax rates for all businesses and avoid a never-before-seen increase in the federal budget deficit.  

 What Are Your Options? 

Now is the time for you, as a business owner, to consider the impacts these tax changes will have on your company and your future. This includes capital investments, expansion efforts, and your ability to retain or hire talent. This is also where considering a merger or acquisition exit strategy could come into play and help you get out while the time is right. It takes several months and sometimes even years to complete the sale of a business, so starting the process now will allow you adequate time to execute your exit before the end of 2025, when taxes are slated to skyrocket. 

While, unfortunately, you can’t just assume that U.S. lawmakers will act in the best interest of small business owners regarding changing tax laws, you can trust that our team members at Benchmark International will do everything in their power to help you make the best decisions for the future of your business, whether it’s selling or finding another solution that works for you. 

Author

Clinton Johnston, Managing Partner, Benchmark International

Schedule a Call