The Countdown to 2026: A Guide for Businesses Facing Trump Tax Law Expirations

In the ever-evolving landscape of tax regulations, small and midsize businesses must be proactive in their tax planning strategies. This article outlines three crucial considerations to help businesses optimize their financial standing and prepare for changes in tax policies, particularly those set to expire in the next few years.

1. R & D Tax Credits: Maximizing Innovation for Financial Gain

Research and Development (R&D) tax credits provide a lucrative opportunity for businesses investing in innovation. Section 174 outlines the items that can be capitalized over time, impacting tax brackets, payments, and estimated payments. To leverage this opportunity effectively, businesses need to:

Evaluate Impact: Understand the implications of Section 174 on your tax bracket, payment schedules, and estimated payments.
Allocation Accuracy: Review accounts to ensure accurate allocation of costs between Section 41 and Section 174. Documenting a methodology for future allocations ensures compliance.

2. Sunsetting Tax Policies: Proactive Measures for Trump Tax Law Changes

The impending expiration of Trump tax laws over the next three years calls for proactive measures to mitigate potential increases in tax rates for businesses. Key considerations include:

Income Tax Planning: Given the shift in income tax brackets after 2025, businesses should reevaluate their cash flow management. Consider pulling income into 2025 and deferring expenses to 2026 to capitalize on deferral benefits.
Capital Gains Strategy: With capital gains taxes reverting to old levels in 2026, businesses contemplating a sale should expedite the process within the next two years to preserve after-tax earnings.
Estate Tax Preparedness: Prepare for higher estate taxes and assess their impact on cash flow and debt management. Rethink cash management strategies in alignment with short and long-term goals.

3. Estate Tax Changes: Urgent Decisions for Business Preservation

The changes in Estate Tax Exemption demand urgent attention. The current exemption amount of $25 million is set to decrease to $13 million next year and further to $7 million the following year. Businesses must act promptly to:

Gift Planning: Consider gifting the business into a trust today to capitalize on the current higher estate tax exemption. This strategic move can help businesses avoid potential tax burdens that might jeopardize their financial stability.

In Conclusion: 5 Essential Questions for Your CPA

As these considerations may seem overwhelming, it is crucial to engage in meaningful discussions with your CPA. Here are five questions to address in your tax planning strategy:

R&D Tax Credit Impact: Understand how Section 174 affects your tax bracket, payments, and estimated payments.
Cost Allocation Review: Ensure accurate cost allocation between Section 41 and Section 174, and document a consistent methodology.
Income Tax Planning: Evaluate the need to pull income into 2025, considering the sunsetting of Trump tax laws.
Capital Gains Strategy: If contemplating a sale, assess the benefits of selling in 2025 to preserve after-tax earnings.
Estate Tax Exemption Planning: Discuss gifting strategies with your CPA to take advantage of the current higher estate tax exemption.

By addressing these critical tax planning considerations, small and midsize businesses can navigate the complexities of changing tax landscapes and secure a more stable financial future.