As we wind down one tax season and prepare for the next, the importance of diligent tax planning cannot be overstated. Unless Congress acts, there will be higher tax rates and lower standard deductions in 2025.
For manufacturers, these changes could impact everything from production costs to investment in innovation. Understanding these shifts and their potential impacts on the manufacturing sector is crucial for optimizing your tax position, ensuring compliance, and leveraging potential benefits.
Pinion tax advisors provide a high-level overview to help you navigate the changes ahead and set your business up for success in the years to come.
Key 2025 Tax Changes Impacting Manufacturers
“As we edge closer to 2025, the landscape of tax provisions will undergo significant transformations, particularly with the expiration of key tax provisions like the New Market Tax Credit, Work Opportunity Tax Credit, and many others,” shares Donna Funk, a seasoned Pinion CPA. “Understanding these changes is not just about compliance; it’s about seizing the chance to optimize your financial strategies in light of new rules.”
Key tax provisions that will expire on December 31, 2024:
- New Market Tax Credit: The tax credit was designed to incentivize private investments into businesses and low-income communities. The current extension of the program will expire in 2025.
- Work Opportunity Tax Credit: A federal income tax credit available to employers that invest in American job seekers who have consistently faced barriers to employment. This includes veterans, ex-felons, those in rural low-income communities, and some participants in the SNAP program.
- Qualified Business Income Deduction (Section 199A): Based on qualified trade or business income, this deduction gives pass-through entities a way to get their business income closer to a flat 21% tax rate.
- Income tax brackets: The full scope of changes is uncertain at this point, but modifications will deal with inflation indexing.
- Higher child tax credits: There will be changes to refundability, reduced income thresholds and modifications to identification requirements.
- Enhanced Premium Tax Credit for the Exchange: A refundable tax credit to help individuals and families with low or moderate income afford health insurance through the Health Insurance Marketplace (known as the Exchange).
- Increased Alternative Minimum Tax exemption. The exemption currently allows for $85,700 for individuals and $133,300 for married couples. If the Tax Cuts and Jobs Act sunsets at the end of 2025, the amount of taxpayers affected by the AMT will jump from several thousand to several million.
- Increased standard deduction and suspended personal exemptions: In 2017, personal exemptions were suspended. However, personal exemptions are expected to return for those who do not itemize deductions, and there will be a step down in the standard deduction.
- Income exclusion for forgiveness of certain mortgage debt and student loan debt.
- End of deduction limitations:
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- State and Local Tax (SALT) cap
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- Itemized deductions
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- Personal casualty losses
- Increased estate and gift tax exemption. The Tax Cuts Job Act of 2017 doubled the 2011 estate and gift tax exemption; however, the exemption is due to sunset at the end of 2025, effectively cutting the exemption in half. We encourage everyone to pay attention to, and not get short-sighted, in their planning around estate and gifting.
Additional Provision Changes to Note
The 45Z Clean Fuel Production Tax Credit (2025-2027) – After January 1, 2025, this Inflation Reduction Act tax credit will encompass all biofuel production tax credits, replacing the following credits:
- Second-generation biofuel producer credit
- Biodiesel and renewable diesel tax credit
- Sustainable aviation fuel tax credit
Strategies to Refine Your Financial Planning This Tax Season
1. Review your business structure.
Are you in the right position for this tax season? Different entities, such as LLCs, S Corporations, or C Corporations, have different tax implications. For example, C Corporations currently have a flat 21% tax rate, whereas pass-through entities are taxed at the business owner’s personal tax rate, which can be anywhere from 10-37%. Ask your accountant if there is a better way to structure your operation.
2. Consider bonus depreciation when planning investments.
Bonus depreciation began phasing out at the end of 2022 and will continue decreasing each year until it phases out completely in 2027. As you create budget forecasts and investment plans, it’s important to strategize the timing of your purchases. If you can schedule some of your purchases for late 2024 or early 2025, you could capture the extra tax deduction by taking advantage of bonus depreciation before it sunsets.
3. Evaluate your personal estate situation.
We currently have an increased Estate and Gift Tax Lifetime exemption that is very favorable for estate planning. However, it is set to roll back to previous levels at the end of 2025, which could create a large tax bill on estate gifts if you are suddenly over the lower threshold. If you have a net worth above the threshold where your assets would be subject to estate tax, you should speak with a professional advisor about planning that can be done to mitigate that risk.
Focus on What You Can Control
As we approach tax planning season, connect with your tax advisor to talk through the items that are most important to your business and bottom line. For more tips to help you prepare for tax season, explore this checklist for important items to tackle before December.
While many uncertainties lay ahead in an election year, we encourage you to focus on what you can control by leveraging tax-saving opportunities wherever you can.
Reach out to a Pinion tax expert to refine your tax strategy and ensure your money works harder for you in 2025.
