Not All Sunsets Are Beautiful: The TCJA’s End

The end is near for the Tax Cuts and Jobs Act (TCJA). Enacted in 2017, most of the provisions of the TCJA expire December 31, 2025. The results of the upcoming election will give us guidance as to how things may play out, but there are no guarantees. As we approach the end of a year, your planning needs to consider the potential changes to tax rates and qualified business income deduction.

Tax rates affected by the TCJA

When TCJA was enacted, all taxpayers essentially saw an average 3% decrease in rates across brackets. The brackets were also widened at strategic spots. The below chart is a comparison of 2024 tax rates under TCJA and what the inflation indexed amounts will be if the act is allowed to expire.

As you engage in year-end planning conversations, keep this chart in mind.

• Increase in comparative rates averaging approximately 3% outside of the 10% bracket
• Significant decrease in the range of income currently taxed in the 24% bracket; this bracket increases 4% and narrows by nearly $100,000
• Reduction in the range of the 35% bracket by nearly $150,000 and kick in of the highest bracket of tax at a level $150,000 lower than today

Loss of the qualified business income deduction

The loss of the QBI deduction with the sunset of TCJA is likely a bigger issue than the changes in the brackets. Agriculture has seen several wonderful income years since 2018. Producers, cooperatives, and ag retailers and elevators have benefited immensely from this deduction.

In short, a deduction based on the lesser of 20% qualified income or several other alternative calculations that apply at higher income limits is allowed against income. In very simple terms, assume a farmer had Schedule F income of $200,000 and had no other income. With QBI, only $160,000 of that income is taxable at the federal level and $40,000 of income permanently escapes tax — no prepay, defer, or depreciate items required.

If QBI is allowed to expire, producers are looking at a very unexpected tax increase. For example, income in the 24% bracket with QBI is actually only at an effective rate of 19.2% (24% *.8). The increase in rates is worse at the higher brackets. For instance, 35% income with the combination is really only taxed at 28%.

If you ended up in the highest bracket — as many have the past couple of years whether it be due to high commodity prices or retirements — watch out. Without TCJA someone on the highest bracket will pay 39.6% on their final crop and equipment sale. With TCJA, income in the highest bracket would only cost the producer 29.6% ... that’s a 10% increase in tax solely because of the loss of QBI.

What does it look like in practice?

Assume a producer has $200,000 of taxable income before QBI deduction. How does their income tax compare in 2024 versus the projected new rates?

Same income, different rates, and a comparison of QBI results in an increase in taxes of $21,825. This is not an insignificant impact, especially in a year of challenging commodity prices, increasing interest rates, and devaluation of equipment.

What should you do to prepare for the TCJA sunset?

As you enter the season of year-end planning, consider the above. We can’t know for sure what’s going to happen in the future, but it’s very likely 2025 tax rates will not be lower than they are today. This has been a challenging year, especially for row crop and livestock producers, and many producers may see the silver lining as not having to pay income tax this year.

There are lots of levers that can be used to get a producer to an alternate position. Perhaps grain sales aren’t deferred and maybe you conserve cash by not doing a prepay. This allows for one more year of qualified business income and cheaper taxes overall.

In addition, be vocal. The QBI issue is where your trade associations, local farm bureau, or cooperative can help make it known that this deduction is very important to ag. Unfortunately, this sunset is not expected to be beautiful. Do what you can to plan for overcast skies.

How we can help

Join our upcoming webinar to identify key provisions of the TCJA scheduled to sunset and how they may affect your individual income tax, estate and gift tax, business tax, and valuation.