Tag Archives: TCJA

The Tax Cuts And Jobs Act Mainly Expires In 2025

April 29, 2024 | By: Robert A. Green, CPA | Read it on

Most of the tax changes in the 2017 Tax Cuts & Jobs Act (TCJA) expire (sunset) at the end of 2025. TCJA featured tax cuts and some tax hikes to help pay for it. Meanwhile, TCJA’s massive tax cut lowering the corporate tax rate to 21% does not expire.

Accountants and taxpayers have grown accustomed to TCJA, although they were whipsawed by the 2020 CARES Act, which temporarily forestalled several tax-hike provisions. Switching back to pre-TCJA law starting in tax year 2026 might be awkward, and it could become confusing if Congress turns tax law upside down again.

With a lame-duck-divided 2024 Congress, I don’t expect significant tax law changes until 2025, when most TCJA provisions expire. I also don’t expect Congress to implement substantial tax law changes until the last minute before the 2025 year-end fiscal cliff. The November 2024 presidential and Congressional election might give us clues about coming tax changes.

TCJA permanent provision:

The 21% corporate flat tax rate enacted under the TCJA is permanent and does not expire. Before the TCJA, the federal corporate income tax rate was graduated, with a top marginal rate of 35%. Lowering the corporate rate was the principal tax cut in TCJA.

Pass-through entities (PTE) like LLC/partnerships and S-Corps don’t qualify for the corporate tax break, so Congress equalized PTE businesses with a 20% qualified business income deduction (QBID). However, QBID sunsets in 2025.

Will the 2025 Congress consider extending QBID, provided they don’t increase the corporate tax rate? QBID has been a complex tax compliance issue for taxpayers and tax professionals. Many small businesses at all income levels benefit from QBI.

TCJA sunset provisions:

Most of TCJA’s tax cuts and tax-hike provisions were initially set to expire in 2025.

The list below includes some of these provisions. For a complete list of expiring tax provisions in TCJA, see Congressional Research Services (CRS) Reference Table: Expiring Provisions in the “Tax Cuts and Jobs Act.”

Marginal tax rates—The lower marginal tax rates in TCJA expire at the end of 2025. Individual tax rates will return to pre-TCJA levels starting in 2026. It’s important to note that lower TCJA tax rates apply throughout the marginal tax brackets, helping taxpayers at all income levels.

“Marginal rates will revert to their permanent pre-TCJA levels of 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. Aside from the first two brackets (10% and 15%) these rates apply over different ranges of taxable income than the TCJA rates. These income ranges are annually adjusted for inflation,” per the CRS report.

Increased standard deduction—TCJA’s roughly doubled standard deduction (indexed for inflation) returns to pre-TCJA levels on January 1, 2026. Looking back, Congress achieved its goal of more taxpayers using the standard deduction, making tax compliance more accessible and straightforward.

“The basic standard deduction amounts will revert to their TCJA levels and then be adjusted for inflation. For 2018, prior to the TCJA, the basic standard deduction amounts for 2018 would have been $6,500 for single filers, $9,550 for head of household filers, and $13,000 for married taxpayers filing jointly,” per CRS report.

Itemized deductions—Before the TCJA, taxpayers could deduct many more itemized deductions on Schedule A. This included “miscellaneous itemized deductions” over 2% of adjusted gross income (AGI), including investment expenses, unreimbursed employee business expenses, and tax compliance expenses. Before TCJA, alternative minimum tax (AMT) disallowed miscellaneous itemized deductions.

Of the few allowed itemized deductions, TCJA reduced and revised them. See the CRS report for mortgage interest deductions and changes in charitable deductions. TCJA suspended personal casualty losses as itemized deductions, except for losses in a federally declared disaster area.

Active traders eligible for trader tax status (TTS) deduct trading business expenses on Schedule C as sole proprietors, bypassing Schedule A. TTS traders also deduct business expenses on pass-through entity tax returns. TTS was better than investor status before and during the TCJA, and it should stand up well to tax changes coming next year.

State and local taxes— TCJA limits a SALT itemized deduction to $10,000, which led many taxpayers to take the roughly doubled standard deduction instead of itemizing. The SALT cap was not indexed for inflation.

Starting in 2026, the $10,000 cap will not apply, and taxpayers can deduct all eligible state and local income, sales (instead of income), property taxes, and foreign income taxes. They will also be able to deduct foreign real property taxes. AMT does not allow a state and local tax itemized deduction.

Pass-through entities (PTE), including partnerships (general, limited, and LLCs) and S-corps, can utilize a SALT cap workaround in more than 30 states. The workaround treats PTE state tax payments as business expenses rather than non-deductible SALT payments. The taxpayer takes a tax credit on their state tax return for the entity-level PTE payments, thereby avoiding double taxation. California’s SALT cap workaround expires in 2025 in sync with TCJA’s SALT cap expiration.  The SALT cap workaround in other states may expire as well.

20% qualified business income deduction (QBID)—The QBID for non-corporate business owners, including sole proprietors, partnerships, LLC/partnerships, and S-Corps, expires at the end of 2025. It is a significant tax cut for small businesses, especially those not classified as a “specified trade or business” (SSTB).

Traders eligible for TTS are SSTB. TTS expenses and Section 475 ordinary trading income or loss are included in QBI, excluding capital gains and losses, and portfolio income. Many traders have received a QBID tax benefit.

Excess business losses (EBL)—The TCJA created the EBL limitation for 2018 through 2025 as a tax hike to help pay for the TCJA tax cuts. Subsequent legislation extended the EBL expiration date to 2028. The 2020 CARES Act delayed the EBL, pushing the start date to 2021. 

Under TCJA, add the excess business losses over the EBL threshold to a net operating loss (NOL) carryforward.

The EBL is inflation-adjusted; it’s $610,000 (for joint returns)/$305,000 (for other taxpayers) for 2024. When this provision expires, there will be no EBL limitation.

EBL includes TTS expenses and Section 475 ordinary trading losses for TTS traders. Section 475 gains can offset other business losses before applying the EBL limitation.

Net operating losses (NOLs)—The TCJA, as a tax hike, repealed two-year NOL carrybacks and revised NOL carryforwards. However, CARES temporarily allowed five-year NOL carrybacks for 2018 through 2020. TCJA NOL rules came back in effect for 2021 through 2025.

TCJA limits NOL carryforwards to 80% of taxable income (100% pre-TCJA), with the balance carrying over to the subsequent year (limited to 20 years pre-TCJA). In 2026, two-year NOL carrybacks and the 100% NOL carryforward rules will apply.

Increased estate exemption—TCJA’s roughly doubled unified estate and gift tax exemption amount will return to the pre-TCJA amount of $5 million (indexed for inflation) as of January 1, 2026. That inflation-adjusted amount for 2026 is expected to be approximately $7 million. That’s a significant reduction from the 2024 unified estate and gift tax exemption of $13.61 million.

With an estate portability election, a married couple can have an exemption of up to $27.22 million for 2024. Post-TCJA, it could be around $14 million. The estate amount over the exemption amount is subject to a 40% federal estate tax.

Don’t overlook state estate taxes. Twelve states (and DC) have estate tax laws, and six have an inheritance tax. Eight states have an estate tax rate of 16%, a few are 12%, and Washington and Hawaii are 20%. For 2024, Connecticut matches the federal exemption amount but does not allow surviving spouse exemption portability. Other states range between $1 million for Oregon and $6.9 million for New York.

Star Johnson, CPA, contributed to this blog post.

Tax Cuts And Jobs Act

January 10, 2021 | By: Robert A. Green, CPA

The 2017 Tax Cuts and Jobs Act (TCJA) impacted investors, traders, and individuals positively and negatively, beginning in the tax year 2018. In this chapter, we explore TCJA’s impact on these groups. 

The 2020 pandemic relief CARES Act overrode many TCJA rules for 2018, 2019, and 2020, and TCJA returned in force for 2021.

QUALIFIED BUSINESS INCOME DEDUCTION

TCJA introduced a new tax deduction for pass-through businesses, including sole proprietors, partnerships, and S-Corps. Subject to haircuts and limitations, a pass-through business could be eligible for a 20% deduction on qualified business income (QBI). 

Traders eligible for TTS are a “specified service trade or business” (SSTB) activity, which means if their taxable income is above an income cap, they won’t receive a QBI deduction. The taxable income (TI) cap is $464,200/$232,100 (married/other taxpayers) for 2023 and $483,900/$241,950 (married/other taxpayers) for 2024. The phase-out range below the cap is $100,000/$50,000 (married/other taxpayers), in which the QBI deduction phases out for SSTB. The W-2 wage and property basis limitations apply within the phase-out range. Investment managers are also SSTB. 

QBI for traders includes Section 475 ordinary income and loss and trading business expenses. QBI excludes capital gains and losses, Section 988 forex ordinary income or loss, dividends, and interest income. 

TCJA favors non-service businesses, which are not subject to an income cap. The W-2 wage and property basis limitations apply above the TI threshold of $364,200/$182,100 (married/other taxpayers) for 2023 and $383,900/$191,950 (married/other taxpayers) for 2024. The IRS adjusts the annual TI threshold for inflation each year. 

Sole proprietor TTS traders cannot pay themselves wages and likely cannot use the phase-out range. (See more on QBI in chapter 9.)

EXCESS BUSINESS LOSSES AND NET OPERATING LOSSES

TCJA introduced the “excess business loss” (EBL) limitation and revised the net operating loss (NOL) rules. TTS traders with Section 475 MTM, ordinary loss treatment, can generate EBL and NOL carryforwards. TTS traders without 475 have capital loss limitations. 

EBL can offset all types of income on a joint or single filing, whereas capital losses only offset capital gains. Plus, business expenses and ordinary trading losses comprise an NOL carryforward. Whether you are a trader or not in a carryforward year doesn’t matter. Business ordinary trading loss treatment is the most significant contributor to federal and state tax refunds for traders. 

TCJA repealed the two-year NOL carryback, except for certain farming losses and casualty and disaster insurance companies. TCJA carries forward NOLs indefinitely (20 years before the TCJA changes), and the deduction of NOLs is limited to 80% of the subsequent year’s taxable income.           

TCJA’s 2018 EBL limitation was $500,000 for married and $250,000 for other taxpayers. Add the losses above the EBL to an NOL carryforward. 

The inflation-adjusted EBL threshold for 2023 is $578,000 (for married)/$289,000 (for other taxpayers), and the 2024 EBL is $610,000 (for married)/$305,000 (for other taxpayers).

The 2020 CARES Act for COVID-19 relief suspended TCJA’s EBL rules for 2018, 2019, and 2020 and allowed five-year NOL carrybacks. Taxpayers could recalculate their NOLs without the EBL limitation and file an NOL carryback refund claim. For example, they could carry back a 2020 NOL to 2015 and an unused NOL to 2016 and subsequent years. TCJA’s NOL and EBL rules apply again in 2021 through 2025. Other recent tax acts extended EBL further to 2028. (See examples of EBL and NOL for Chapter 9.)

Excerpt from Green’s Trader Tax Guide Chapter 17 Tax Cuts and Jobs Act.

A Rationale For Using QBI Tax Treatment For Traders

June 4, 2019 | By: Robert A. Green, CPA | Read it on

There are two opposing arguments made by tax professionals for applying Section 199A qualified business income (QBI) treatment on 2018 tax returns for traders with trader tax status (TTS).

Those for say Section 199A applies because Section 864(b)(2) is limited to nonresident traders only. U.S. resident TTS traders meet the requirements of Section 864(c)(3) “Other income from sources within United States.” As a result, a U.S. resident TTS trader has effectively connected income (ECI) and therefore, QBI. In this blog post, I refer to this stance as the affirmative or positive rationale.

Those against say Section 199A does not apply to U.S. resident TTS traders because Section 864(b)(2) applies to all traders. This scenario means that “trading for taxpayer’s own account” does not constitute ECI and therefore, QBI does not apply. In this blog post, I refer to this stance as the contrary or negative argument.

Here is what we know. Section 199A labeled TTS trading a “specified service trade or business” (SSTB). The contrary argument would lead to conflict: Why would 199A recognize TTS trading as an SSTB, if 864(b)(2) denied a QBI deduction to U.S. resident TTS traders? With the positive rationale, QBI includes TTS trading business expenses and Section 475 ordinary income/loss. QBI expressly excludes capital gains/losses, interest and dividend income, and forex and swap contract ordinary income/loss. A taxable income threshold, phase-in range, and income cap apply to SSTBs, which leads to some high-income taxpayers not receiving a 20% QBI deduction. (The QBI deduction rules are complex and beyond the scope of this blog post.)

Many traders filed 2018 tax extensions on March 15 (entities) and April 15 (individuals). Their tax preparers are waiting to resolve uncertainty over this issue before the tax return deadlines of Sept. 16, 2019, for partnerships and S-Corps and Oct. 15, 2019, for individual sole proprietorships.

A positive rationale to apply 199A to U.S. resident TTS traders
If you search the 199A final regs, you will find mention of 864(c) beneath the heading “Interaction of Sections 875(1) and 199A.” Section 875(1) states “a nonresident alien individual or foreign corporation shall be considered as being engaged in a trade or business within the United States if the partnership of which such individual or corporation is a member is so engaged.”

199A regs state, “Section 199A(c)(3)(A)(i) provides that for purposes of determining QBI, the term qualified items of income, gain, deduction, and loss means items of income, gain, deduction and loss to the extent such items are effectively connected with the conduct of a trade or business within the United States (within the meaning of section 864(c), determined by substituting ‘qualified trade or business (within the meaning of section 199A’ for ‘nonresident alien individual or a foreign corporation’ or for ‘a foreign corporation’ each place it appears).”

A U.S. resident TTS trader meets the definition of Section 864(c)(3) “Other income from sources within United States.”

“All income, gain, or loss from sources within the United States (other than income, gain, or loss to which paragraph (2) applies) shall be treated as effectively connected with the conduct of a trade or business within the United States.”

A U.S. resident TTS trader has Section 162 trade or business expenses. It’s consistent with 199A stating a TTS trading activity is an SSTB.

A U.S. resident TTS trader also meets the definition of 864(c)(2) “Periodical, etc., income from sources within United States—factors.”

“In determining whether income from sources within the United States of the types described in section 871(a)(1), section 871(h) , section 881(a), or section 881(c), or whether gain or loss from sources within the United States from the sale or exchange of capital assets, is effectively connected with the conduct of a trade or business within the United States, the factors taken into account shall include whether—

(A) The income, gain, or loss is derived from assets used in or held for use in the conduct of such trade or business, or

(B) The activities of such trade or business were a material factor in the realization of the income, gain, or loss. In determining whether an asset is used in or held for use in the conduct of such trade or business or whether the activities of such trade or business were a material factor in realizing an item of income, gain, or loss, due regard shall be given to whether or not such asset or such income, gain, or loss was accounted for through such trade or business.”

A U.S. resident TTS trading business uses the capital for the sale of capital assets to derive its income, and money is a material factor.

Section 871(a)(2) provides that a nonresident individual residing in the U.S. for more than 183 days per year is subject to a 30% tax on U.S.-source capital gains. (A tax treaty may provide relief.)

Some accountants think that Section 864(b)(2) prevents all traders, U.S. residents, and nonresidents, from using QBI treatment.

“Section 864(b) – the term a “trade or business within the U.S.” does not include:

Section 864(b)(1) – Performance of personal services for foreign employer.

Section 864(b)(2) – Trading in securities or commodities.

(A): Stocks and securities.
(i)   In general. Trading in stocks or securities through a resident broker, commission agent, custodian, or other independent agent.
(ii)   Trading for taxpayer’s own account. Trading in stocks or securities for the taxpayer’s own account, whether by the taxpayer or his employees or through a resident broker, commission agent, custodian, or other agent, and whether or not any such employee or agent has discretionary authority to make decisions in effecting the transactions. This clause shall not apply in the case of a dealer in stocks or securities.
(C) Limitation. Subparagraphs (A)(i) and (B)(i) (for commodities) shall apply only if, at no time during the taxable year, the taxpayer has an office or other fixed place of business in the United States through which or by the direction of which the transactions in stocks or securities, or in commodities, as the case may be, are effected.”

The (C) Limitation relates to (i) nonresident investors engaging a U.S. broker. This exception applies if the nonresident does not have an office in the U.S. The exemption does not apply to (ii) “trading for taxpayer’s own account.”

In the 1.864-2 reg, there are several examples under “trading for taxpayer’s own account,” and all of the cases are for nonresident individuals and nonresident partnerships. If you read 864(b)(2)(A)(ii) as applying to nonresidents only, then it supports the affirmative rationale for using 199A on U.S. resident TTS traders.

Reg § 1.864-2(a) states:

“(a) In general. As used in part I (section 861 and following) and part II (section 871 and following), subchapter N, chapter 1 of the Code, and chapter 3 (section 1441 and following) of the Code, and the regulations thereunder, the term “engaged in trade or business within the United States” does not include the activities described in paragraphs (c) (trading in stocks or securities) and (d) (trading in commodities) of this section, but includes the performance of personal services within the United States at any time within the taxable year except to the extent otherwise provided in this section.”

The code sections in this heading are all for nonresidents:
861 – Income from sources within the United States
871 – Tax on nonresident alien individuals
Subchapter N – Tax based on income from sources within or without the United States
Chapter 3 – Withholding of tax on nonresident aliens and foreign corporations
1441: Withholding and reporting requirements for payments to a foreign person

Reg § 1.864-2(c) is for “trading in stocks or securities,” and (d) is for “trading in commodities.” Those sections discuss nonresident individuals and nonresident partnerships with U.S. brokerage accounts and explain that no matter how significant the volume of trades, that a nonresident trader does not have ECI in the U.S. This reg displays several examples, and all of them are for nonresidents. Again, this reg and related code Section 864(b)(2) is for nonresident traders only. A U.S. resident TTS trader is covered in Section 864(c), not in Section 864(b)(2).

The essential point is that the 199A regs do not state to “substitute qualified trade or business for nonresident or foreign” in Section 864(b) – so that code section remains applicable to nonresident traders only. The 199A regs required this substitution for 864(c) only.

Tax attorney Johnny Lyle J.D. weighs in:

“To read IRC Section 864(b) into the equation, you have to determine that the language ‘In the case of a qualified trade or business (within the meaning of section 199A) engaged in trade or business within the United States during the taxable year…’ requires you to determine ‘qualified trade or business under Section 199A,’ but then turn around and determine ‘trade or business within the United States’ under IRC Section 864(b),” Lyle said.

Further, Treasury Regulation Section 1.864-4, titled “U.S. source income effectively connected with U.S. business” states: “This section applies only to a nonresident alien individual or a foreign corporation that is engaged in a trade or business in the United States at some time during a taxable year beginning after December 31, 1966, and to the income, gain, or loss of such person from sources within the United States.”

Treasury Regulation Section 1.864-2, titled “Trade or business within the United States” uses only nonresident aliens and foreign corporations in its examples.

Lyle said two arguments could be made regarding Congress using the language specifically referencing IRC Section 864(c) in IRC Section 199A. First, if Congress wanted to incorporate Section 864(b) into the equation, it would have said effectively connected with the conduct of a trade or business within the United States (within the meaning of section 864) without reference to 864(c). Second, under the Treasury Regulations, 864(b) only applies to nonresident aliens. Therefore, the restriction in 864(b)(2)(A)(ii) would only apply to nonresident aliens, and a taxpayer who was a day trader, but not a nonresident alien, would not be excluded from ECI.

“If Congress intended to exclude all trader income, it would have done so under IRC Section 199A(c)(3)(B) rather than a more roundabout, back door way, rendering IRC Section 199A(d)(2)(B) meaningless,” Lyle said. “If Congress wanted to specifically incorporate Section 864(b), it would have worded it this way: …effectively connected (within the meaning of section 864(c)) with the conduct of a trade or business within the United States (within the meaning of section 864(b)), determined by substituting ‘qualified trade or business (within the meaning of section 199A)’ for ‘nonresident alien individual or a foreign corporation’ or for ‘a foreign corporation’ each place it appears.”

It gives me some pause that some big-four accountants prepared a few 2018 hedge fund partnership K-1s without applying 199A tax treatment. Their K-1 notes indicated reliance on Sections 864(c) and or 864(b) to skip the application of 199A. When we asked some big-four tax partners for clarification, they said they were not wedded to that position. Did these accountants take an easy way out, by reading Section 864(b)(2) out of context? The hedge fund investors would have been hurt with QBI treatment since they would have QBI losses from TTS trading business expenses. The hedge fund had capital gains, which QBI excludes. The hedge fund did not elect Section 475 ordinary income or loss, which QBI includes.

On the other side of the debate, I’ve seen some K-1s from proprietary trading firms, and all of those K-1s did report 199A information. They reported QBI income since they elected Section 475 on securities. I asked their tax preparers about it, and they said 864(b)(2) applies to foreign partnerships, not these U.S. trading partnerships.

I spoke with a tax attorney in IRS Office of Chief Counsel listed on the Section 199A regs, and he thought the positive rationale makes sense. He even accommodated my request to add Section 475 by name to inclusion in QBI in the final 199A regs. The IRS attorney did not raise Section 864(c) or 864(b)(2) as being a problem for U.S. resident TTS traders.

It’s time to complete 2018 tax returns even with remaining uncertainty. I suggest that U.S. resident TTS traders, living, working, and trading in the U.S. consider applying 199A to their trading business. Consult your tax advisor.

CPAs Darren Neuschwander and Adam Manning, and tax attorney Johnny Lyle contributed to this blog post.

See my prior blog posts on 199A for traders at https://greentradertax.com/uncertainty-about-using-qbi-tax-treatment-for-traders/