Many current tax savings for self-employed individuals and small businesses are temporary parts of the Tax Cuts and Jobs Act. That means you could see a major tax increase starting in 2026.
What is the Tax Cuts and Jobs Act and why does it expire?
The Tax Cuts and Jobs Act was a major overhaul of the tax law under President Trump. As the name suggests, most of the changes cut taxes on both individuals and businesses in an effort to create economic growth.
Most of the changes took effect for the 2018 tax year. An important aspect of the Tax Cuts and Jobs Act is that many of its provisions expire after 2025. That was due to Senate budget reconciliation rules.
Under Senate rules, the number of votes needed for a tax bill to pass depends on the bill’s financial impact. Large changes need 60 votes, while smaller changes can be passed with a simple majority through the annual budgeting process.
The Tax Cuts and Jobs Act was projected to cause a large deficit, and Republicans supporting the law couldn’t reach 60 votes. To limit the financial impact of the bill and allow it to pass with a simple majority, many of the tax cuts were made temporary rather than permanent.
What happens when the Tax Cuts and Jobs Act expires?
If Congress doesn’t take action, the temporary changes to the tax code under the Tax Cuts and Jobs Act will return to what they used to be. That means your 2026 tax return will have many of the same rules as your 2017 tax return.
Just for clarity, when you hear that the Tax Cuts and Jobs Act expires after 2025, the key word is after.
When you file your calendar year 2025 tax return in April 2026, you’ll file under the Tax Cuts and Jobs Act rules. When you file your calendar year 2026 tax return in April 2027, you’ll file under the old tax rules.
Of course, there will be a lot of pressure on Congress to extend many of the rules or make them permanent. What they’ll do will depend on the current financial state of the country and which party is in power.
What tax cuts expire after 2025?
The most important things that self-employed workers and business owners need to be aware of include the following.
Increases in Personal Income Tax Rates
Most personal income tax rates were lowered under the Tax Cuts and Jobs Act. Remember that these rates are also what you’ll pay on your business income if you have a pass-through entity such as an LLC, S-corporation, or partnership.
The current rates are:
- 10%
- 12%
- 22%
- 24%
- 32%
- 35%
- 37%
The rates for 2026 will go back to:
- 10%
- 15%
- 25%
- 28%
- 33%
- 35%
- 39.6%
While there were some changes to the income ranges for the income tax brackets, most taxpayers won’t see much change there. Remember that the income levels for each bracket automatically change each year with inflation.
Qualified Business Income Deduction Expiration
Another important change is that the Qualified Business Income deduction will expire after 2025. This deduction falls under Section 199A of the tax code.
The QBI deduction currently allows independent contractors, sole proprietors, and other pass-through entities to pay individual income tax on only 80% of their business income. Since C-corporations got a flat 21% tax rate, other businesses got a 20% QBI deduction.
Unlike the QBI deduction, the corporate tax rate of 21% is permanent.
So when you look at your current tax brackets, your tax rates on your business income actually work out to:
- 8%
- 9.6%
- 17.6%
- 19.2%
- 25.6%
- 28%
- 29.6%
That means when individual income tax rates go back up, you’ll see an even bigger increase in your federal income tax.
So what should you do? If you think tax rates will definitely go up, you might want to try to delay deductions until 2026 to get a bigger tax savings.
Depreciation Rule Changes
The Tax Cuts and Jobs Act created more ways for small businesses to immediately deduct expensive assets in the year of purchase rather than taking a depreciation deduction over time.
Changes included:
- Expanding which assets can be immediately deducted
- Raising the annual limit on the deductions on qualified assets (instead of using depreciation)
- Increasing the annual limit on vehicle depreciation deductions allowing a larger portion of the purchase price to be deducted sooner
- Reducing the depreciation timeline for certain assets (allowing a bigger deduction sooner instead of spreading out the deduction over more years)
The depreciation rules are somewhat complicated and many businesses fall under multiple sets of Internal Revenue Service rules. These can include the Section 179 rules, de minimis rules, and special rules for vehicles.
Most independent contractors and small businesses that don’t have heavy machinery probably won’t see much of a change. Even when the temporary depreciation rules sunset, you’ll still probably qualify for exceptions to the depreciation rules if you choose to use them.
Because there are so many nuances to the depreciation rules, I don’t want to get into the dozens of factors and exceptions in this post. If you rely on depreciation deductions, have been immediately expensing expensive assets, or are planning large capital investments, schedule a meeting with your tax advisor.
There are two main things I would suggest keeping on your radar.
First, if you make a major purchase now, do you want to expense it now or depreciate it over time?
If tax rates do increase, using depreciation can move some of your deduction to years with higher tax rates. Of course, that would increase your taxes and reduce your cash flow today.
Second, should you delay or speed up a major purchase?
You might look to delay deductions until there are higher tax rates. You might also make a purchase to take advantage of expiring tax benefits.
Again, the purpose of this post is just to make you aware of general issues that you may want to discuss with your accountant.
Expiration of the Increased Standard Deduction
While business deductions are never itemized deductions, the expiration of the increased standard deductions will affect your personal taxable income.
Before the Tax Cuts and Jobs Act, you got the standard deduction plus an exemption for yourself and your dependents. The personal exemptions reduced your taxable income similar to the standard deduction.
The Tax Cuts and Jobs Act eliminated exemptions and replaced them with a larger standard deduction. It also increased the child tax credit to offset losing the exemption for dependent children.
After 2025, the tax code will go back to having exemptions with a smaller standard deduction and smaller child tax credit.
One piece of good news is that exemptions don’t affect your itemized deductions. While you can’t claim the standard deduction and itemized deductions, you can claim exemptions and itemized deductions.
So if you currently have potential itemized deductions that you can’t use because your standard deduction is bigger, lowering your standard deduction can actually help you. Your itemized deductions plus exemptions might be more than your current standard deduction.
Tax Changes and Retirement Planning
Besides taxes on your business income, the tax changes will also indirectly affect your retirement planning.
One key decision is whether you want to use a traditional or Roth 401(k) or IRA.
The usual rule of thumb is to use a Roth IRA if you think your tax rate is lower now than it will be when you withdraw the money. If you think your tax rate will be lower when you withdraw the money, use a Traditional IRA.
With tax rates potentially going up, that might tip the scale towards Roth IRAs and Roth 401(k)s.
Another aspect of retirement planning is deciding when you want to:
- Sell taxable investments
- Withdraw from your IRA or 401(k)
- Start your pension
- Start your Social Security benefits
- Convert traditional IRAs or 401(k)s to Roth accounts
The usual goal is to spread out your retirement income to keep yourself in a lower tax bracket. If you don’t plan ahead, you might be forced to take more income than you need in a given year and end up paying more in taxes.
With lower tax rates now, you might want to speed up some of your plans.
Of course, there is no guarantee that taxes will actually increase. The tax law only goes back to the old rules if Congress does nothing.
Congress will probably be under a lot of pressure to keep federal income taxes low, but they may need to bring in more revenue. And if they do start changing things, there are always winners and losers.
But if you wait to see what Congress does, you might run out of time. Sometimes, the best tax strategy requires you to make moves over a few years rather than all at once.
There are no exact answers here. When you’re planning for uncertainty, you’re balancing the immediate benefit, what you think will happen in the future, and the risk versus reward of each potential option.
Summary
The current tax law is only temporary. If Congress doesn’t act, many tax rules for the 2026 tax year will go back to how they were in 2017.
You should be aware of what’s set to change and consider making moves to prepare. However, because Congress can and likely will make changes to the federal tax code, exactly what you should do is a little bit of a guessing game.
