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Small business owners are heading into 2025 with more tax uncertainty than they’ve seen in years. Smart accounting automation will be crucial for businesses to track and adapt to these changes efficiently.
With key provisions of the 2017 Tax Cuts and Jobs Act (TCJA) set to expire at the end of 2025, the future of business taxation hangs in the balance. At the same time, changes to Internal Revenue Code Section 174 have already started hurting small businesses, particularly those engaged in research and development.
In practice, this archaic change has caused a few small businesses to have to lay off employees.
The biggest question on everyone’s mind is: Will President Trump extend the TCJA or even make it sweeter? Time will tell, but recent congressional action shows us there will be a lot of tax changes coming this year. Some will be positive, some negative, but change always brings about opportunities.
These complex tax changes underscore the importance of working with qualified tax professionals and experienced accounting partner who can help you navigate these changes and optimize your tax position.
Understanding the TCJA
The Tax Cuts and Jobs Act of 2017 delivered major tax cuts to all businesses – large corporations and mom-and-pop small businesses. Key benefits include:
- The 20% qualified business income (QBI) deduction for pass-through entities (S corporations, partnerships, and sole proprietorships).
- Lower individual tax rates, which impact small business owners who report business income on personal tax returns.
- Increased Bonus Depreciation
- Lower C Corp Tax Rates down to 21% (this is permanent)
But here’s the catch: most of these provisions expire after 2025 unless Congress takes action. That means personal tax rates could go up, and key deductions such as QBI could disappear. Most business owners we work with have become accustomed to the QBI deduction, and they may be shocked to see a 20% increase in their taxable income if no action is taken.
Will Congress extend TCJA?
President Trump and key members of Congress have promised to extend the TCJA permanently.
Given that every single Republican in Congress supported the TCJA in 2017, it’s likely that this Republican-led government would push to renew it. However, TCJA is very expensive and they will need to find key tax revenue raisers to offset this.
Recent reports suggest that some may face higher tax bills to pay for the extension of the original tax cuts. Further, there has been little progress and movement for startups anxious about the lack of Research and Development expensing.
What happens if TCJA expires or Congress enacts new laws?
If the TCJA expires, small business owners could see:
- Higher tax rates on personal income (which affects pass-through business owners), especially those with higher income.
- The loss of the 20% QBI deduction, increasing taxable income for LLCs, sole proprietors, and S-corps. This will be a massive problem for small business owners who have come to expect this deduction for the past several years.
- A reduced Section 179 deduction and Phased Down Bonus Depreciation, making it harder to write off equipment and property costs immediately.
As an example, let’s say you own an S-corp and earn $150,000 in taxable income. Under the current TCJA rules, you can take the 20% QBI deduction, lowering your taxable income to $120,000.
If QBI expires, you’ll be taxed on the full $150,000, which would increase the business owner’s personal tax bill.
Tip: You can save significant time during tax season by having your books automated throughout the year. Automated bookkeeping means your transaction data is already categorized and organized when your CPA needs to analyze various tax scenarios.
The IRC 174 problem
While the TCJA tax cuts have been beneficial, one provision is now hurting small businesses, particularly those investing in innovation. This provision has reportedly led to businesses closing and forced layoffs.
Before 2022, businesses could deduct research and development (R&D) expenses immediately. Under new IRC Section 174 rules, businesses must amortize R&D costs over five years (or 15 years for foreign research). Not to be confused with the R&D credit, the R&D expense amortization issue came about due to a deal Congress made when writing TCJA in 2017.
Why is this a problem?
Small businesses and startups often rely on immediate deductions to manage cash flow. If a startup spends $500,000 on R&D, it could previously deduct the entire amount that year, which makes logical sense to most.
After the 2022 change stemming from TCJA, they can only deduct $100,000 per year over five years, even if they spent $500,000 in cash.
This change is creating significant problems, especially for industries like:
- Tech startups developing new software.
- Manufacturers investing in process improvements.
- Biotech and pharmaceutical companies conducting medical research.
The results many of us CPAs have seen is that many small businesses face higher taxable income and cash flow problems simply because they can’t deduct their R&D costs as they used to.
Multiple efforts have been made to reverse the Section 174 amortization rules, including bipartisan bills in Congress in 2023 and 2024.
However, no fix has passed yet, and recent reports in Congress do not look promising for this to be part of a TCJA extension.
How to prepare your business for tax changes
While 2025 is shaping up to be an uncertain year for taxes, there are steps small businesses and startups can take now to prepare.
1. Monitor the TCJA debate closely
With an uncertain year ahead, we can provide some certainty to our businesses by being proactive.
Business owners should stay informed and work with tax strategists or accounting firms to model different scenarios for 2026 based on possible tax law changes. It may make sense to pull income into 2025 for some and for others, defer income.
2. Don’t buy all the hype
If we learned anything from TCJA in 2017, there will be a lot of false reports and information floating around. We even saw some businesses jump the gun and convert their entities under false pretenses. Do not make any drastic tax moves until the President signs a bill and you’ve met with your CPAs and tax strategists. Otherwise, you may intentionally cause harm based on rumors or misreporting of tax law.
3. Adjust R&D spending plans in 2025
With Section 174 amortization in place, businesses can’t rely on immediate R&D deductions anymore. It is not wise to sit and hope Congress will fix this, as they have now had three years and have failed to act.
Some potential strategies include:
- Spreading out R&D cash expenses over multiple years to align with amortization.
- Exploring tax credits, such as the R&D tax credit, which is still available. This credit can help ease the burden but the R&D credit will not fully fix your problem.
- Considering different expense classifications, since not all innovation costs fall under Section 174. Work closely with your CPA to ensure you are 100% accurate in your expense classifications and allocate expenses out of R&D where possible.
Next steps for your tax strategy
2025 is set to be a pivotal year for small business taxes. The potential changes also bring great opportunities for small businesses to work with their CPAs to find new strategies to lower tax bills.
The potential expiration of the TCJA could bring higher taxes, while the Section 174 amortization rules are already causing headaches. However, with a Republican Congress in place, many tax policy experts are expecting an extension or possible expansion of TCJA which can lead to certainty for years to come.
Understanding these changes early helps you make informed decisions about expense timing, entity structure, and long-term tax planning. You can streamline this preparation by automatically tracking and categorizing business expenses—Ramp accounting automation helps ensure your expense data is accurately classified and ready for tax planning discussions with your CPA.
The information provided in this article does not constitute accounting, legal, or financial advice and is for general informational purposes only. Please contact an accountant, attorney, or financial advisor to obtain advice with respect to your business.
