With potential federal, state, and international tax changes, and the expiration of critical Tax Cuts and Jobs Act (TCJA) provisions at the end of this year, significant shifts in tax policy are likely ahead. From navigating state and local tax strategies to adapting to new federal and international tax requirements, the following guide outlines key areas that demand attention as we approach year-end and look ahead to 2025.

State and local tax concerns around Pass-Through Entity Tax (PTET)

The TCJA imposed a $10,000 cap on the state and local tax deduction for individual taxpayers. In response, many states enacted PTETs as a workaround, allowing taxes to be paid at the entity level and shifting the deduction away from separate owners, thus bypassing the federal cap.

Key considerations:

• Election process: Evaluate the benefits of PTET against potential higher entity-level tax rates and increased compliance burdens. Verify election deadlines (often March 15 or April 15) and identify authorized representatives required to make the election, as some states require approval from most owners.
• Compliance and estimated taxes: Businesses with tiered partnerships should carefully assess how PTET credits apply across structures.

Nexus implications of remote work

The widespread adoption of remote work has created new tax nexus implications for businesses. Employees working in states where businesses previously did not have nexus can trigger new filing obligations for various taxes (income, sales, payroll, etc.).

Actionable steps:

• Nexus Studies: Conduct or refresh Nexus studies to identify new obligations and ensure timely registration and filing to avoid penalties.
• Public Law 86-272: Reevaluate reliance on this law if remote employees perform activities beyond sales solicitation, as it may no longer provide protection from state income taxes.
• Sales and Payroll Tax Compliance: Ensure proper registration for sales tax collection and payroll tax withholding in states where new nexus is established, as state tax departments often cross-check compliance.

International tax considerations for BEAT, FDII, and GILTI rate increases

BEAT (Base Erosion and Anti-Abuse Tax):

• Purpose: Ensures that U.S. corporations making deductible payments to foreign affiliates meet a minimum tax threshold. The current rate is 10%, rising to 12.5% by the end of 2025.
• Planning strategies: Waive certain deductions to stay below the 3% threshold that triggers BEAT liability. Move eligible expenses into COGS to reduce below-the-line deductions and confirm service cost method payments to avoid falling into BEAT.

FDII (Foreign-Derived Intangible Income):

• Overview: Encourages export activities by U.S. companies by offering a reduced tax rate on certain income. The effective rate, currently about 13%, will increase to approximately 16% in 2025.
• Strategic planning: Review expense allocations and model the impact of this rate change to determine whether to maintain operations domestically or shift them internationally, considering the global minimum tax of 15%.

GILTI (Global Intangible Low-Taxed Income):

• Current benefit: A 50% deduction results in an effective rate of about 10.5%, but this will drop to 37.5% in 2025, increasing the rate.
• Key actions: Reevaluate high-tax election strategies, balance cross-crediting of foreign income, and review expense allocations to optimize the use of foreign tax credits.

Impact of federal tax changes on company-owned life insurance

Due to the decision in United States v. Connelly, extra care must be taken with regards to buy-sell agreements where company owned life insurance is involved.

Planning steps:

• Review current shareholder agreement and buy-sell agreements where company-owned life insurance is involved.
• Consult with tax advisors to determine if it is beneficial to implement any adjustment to the current strategy.

Latest on bonus depreciation, Section 174, and Section 163(j)

Bonus depreciation:

• Phasing out: Bonus depreciation reducing by  20% per year, from 100% in 2002 to 60% by 2024, with further reductions expected through 2027. This reduction could significantly impact businesses accustomed to taking total deductions for asset purchases.
• Offset strategies: Cost segregation studies can reclassify assets to shorter depreciation periods, offsetting the loss of bonus depreciation. Tangible Property Regulations (TPR) studies provide another means to deduct certain capitalized expenses immediately.

Section 174 (R&D Capitalization):

• Change overview: TCJA provisions require capitalizing R&D expenses over five years (15 years for foreign-incurred costs), creating significant book-to-tax differences.
• Current guidance: The IRS is expected to issue more comprehensive guidance in winter 2024, which may address questions about contract research and internally developed software classification.

Section 163(j) (Interest Deduction Limitation):

• Pre- and post-2017: Previously, depreciation and amortization could be added back to ATI to increase interest deductions. Post-2021 rules no longer allow this, reducing ATI and limiting interest expense deductions.
• Strategies: Review potential accounting method changes and evaluate actual property trade or business elections for possible benefits.

Estate and gift planning for potential TCJA sunset in 2025

The TCJA increased the lifetime unified estate, gift, and GST exemption to the highest level in history (13.61 million per person in 2024 and 13.99 million per person in 2025).  The increased exemption is set to be cut in half at the end of 2025 if no congressional action is taken.

Planning recommendations:

• Maximize current exemptions: For impacted individuals, there is an opportunity to achieve significant estate tax savings by taking advantage of the increased exemption.
• Consult with advisor team: Consult with an advisor team to see if gifting makes sense, and how to best structure and implement any wealth-transfer planning strategies.

As the sunset of key TCJA provisions approaches and potential policy changes loom, understanding and acting on these opportunities and challenges can make all the difference. Strategic decisions made today will set the foundation for navigating 2025 with confidence and stability, ensuring that businesses and individuals are prepared for whatever comes next.

^{Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute legal or professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice specific to, among other things, your individual facts, circumstances and jurisdiction. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick, its partners, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.}