Tax professionals followed the 2024 elections especially close, since from a tax perspective the results are expected to significantly impact the fate of the portions of the Tax Cuts and Jobs Act (TCJA) scheduled to expire on December 31, 2025.
With President Trump’s victory and now a slim Republican majority in both the House and Senate, it’s anticipated that portions of the TCJA may be extended. Here’s a summary:
Qualified Business Income Deduction (Section 199A Deduction)
For businesses that operate as pass-through entities (generally S corporations and partnerships), the most significant item scheduled to expire is the Section 199A Deduction, which reduces the highest effective tax rate on qualified business income from 37% to 29.6% (a 20% deduction).
Research and Experimentation Expense Capitalization Requirement (Section 174)
Prior to the TCJA, businesses were able to deduct certain research and experimentation (R&E) expenses under Section 174. Beginning in 2022, the TCJA required taxpayers to capitalize and amortize those expenses over five years, a requirement that substantially increased the taxable income for many taxpayers claiming R&E credits.
It’s uncertain if the new administration will move to modify or delay the Section 174 capitalization requirement, but there’s been recent bipartisan support to delay. In fact, the Tax Relief for American Families and Workers Act of 2024 (TRAFWA) would have allowed taxpayers to immediately deduct domestic R&E expenses through 2025. TRAFWA easily passed in the House but stalled in the Senate. Taxpayers will have to monitor future legislation for any changes to this requirement.
Energy-Efficient Commercial Building Deduction (179D Deduction)
Section 179D provides a tax deduction for owners and designers of energy-efficient commercial buildings. The deduction is calculated based on the square footage of the building and the extent of energy-efficient improvements made to the lighting, HVAC and building envelope systems.
Under Section 179D, taxpayers achieving the required energy savings can qualify for deductions of up to $1.16 per square foot. If certain prevailing wage and apprenticeship requirements are met, the deduction could go as high as $5.81 per square foot.
Section 179D also allows architects, engineers and design-build contractors to be allocated deductions from non-taxpaying entities, including federal and state governments, local municipalities, universities, K-12 schools and nonprofit organizations.
These are just a few issues contractors should consider when developing their tax planning strategy. Legislation is certain to change as President Trump’s administration moves forward, and the extent of those potential changes is beyond the scope of this article. The tax professionals at Schneider Downs are ready to help your company navigate these changes and ensure you’re taking advantage of any available tax savings strategies.
About Schneider Downs Tax Services
Schneider Downs’ tax advisors have experience and expertise in a wide range of industries, including Automotive, Construction, Real Estate, Manufacturing, Energy & Resources, Higher Education, Not-for-profits, Transportation and others. Our industry knowledge and focus ensure the delivery of technical tax strategies that can be implemented as practical business initiatives.
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