New Tax Policies May Impact Professional Services Industry

With the election results in, many in the professional services industry are paying close attention to the impact the new administration’s tax policies may have. Explore a high-level overview of potential tax changes from an industry standpoint.

Individual income tax provisions

Probably one of the foremost concerns for many in the industry is what’s going to happen with the individual marginal income tax rates and other current tax provisions.

Background on the Tax Cuts and Jobs Act

One of the significant policies during Trump’s first presidency was the passage of the Tax Cuts and Jobs Act (TCJA) in 2017. TCJA lowered the marginal tax rates for most income groups, with the top marginal rate currently at 37%, and reduced the number of tax brackets.

TCJA also introduced the 20% business income deduction (199A deduction) allowing business owners under a certain income level in the industry to take an additional significant tax deduction. For the professional services industry, business owners with joint income north of $484,000 in 2024 are limited under specified trade or business thresholds and are not eligible to take the 199A deduction.

TCJA also capped the state and local tax (SALT) deduction for itemized deductions at $10,000, which forced a lot of taxpayers to take the standard deduction.

Looking ahead to potential tax provision changes

Key TCJA provisions are set to expire December 31, 2025, reverting tax laws to pre-TCJA rules for 2026 — unless Congress acts to prevent this.

The new administration has suggested making the TCJA individual provisions permanent, which would allow business owners to continue with their current rates and deductions.

One key change being floated around is eliminating or increasing the $10,000 SALT cap, which will allow many more taxpayers to claim itemized deductions. Trump also suggested keeping the existing capital gain rates the same at 0%, 15%, and 20%.

Corporate income tax provisions

Under TCJA, the C corporation tax rates were lowered from a top 35% tax rate down to a 21% flat rate. The C corporation provisions were made permanent — unlike the temporary 8-year individual tax provisions. The reduction in corporate rates were designed to boost economic investment and growth by making the United States more competitive worldwide.

The new administration has suggested reducing the C corporation tax rate even lower, down to 15% or 20% for domestic manufacturing from the current 21% rate. The rate drop would make C corps more attractive from a tax standpoint and could cause professional services organizations and business owners to reevaluate their business structure if currently operating as a pass-through entity.

Estate tax set to be halved

Under TCJA, the estate and gift tax exclusion per person doubled from about $5.5 million to about $11 million in 2018. Currently, the exclusion for 2025 is about $13.99 million per person. With the 8-year sunset of TCJA provisions on the horizon, the estate exclusion would cut in half to about $7 million if no congressional action is taken.

Making the TCJA provisions permanent would keep in place the large estate exclusions, but there’s no guarantee it will happen. Speak with your estate attorneys and CPAs to plan for a potential sunset of current estate exclusions as related to business succession planning and estate planning for the future.

How CLA can help

Understanding suggested tax proposals and their direct implications on the professional services industry can help you adapt and potentially leverage these changes for you, your business, and your family.

CLA tax professionals will be keeping a close eye on the situation, so watch for more details to come as the new administration sets its policies when taking office.