The House Ways and Means Committee voted early Wednesday to advance a nearly 400-page tax bill that includes many of President Donald Trump’s policy priorities, including an increase in the lifetime estate tax exemption to $15 million and a permanent extension of the current income tax brackets.
Also included in the bill are two provisions that are of consequence to financial advisors with small-business owner clients. One would reinstate the 100% bonus depreciation policy that was created by the 2017 tax overhaul known as the Tax Cuts and Jobs Act, and the other would increase and make permanent the qualified business income deduction.
Writing about the development on X, the financial planning expert Jeff Levine noted that the bonus depreciation policy is important, but it’s not a “permanent fix.” That is, the legislation would only extend 100% bonus depreciation through 2029, and the same is true for related provisions that would allow for the full expensing of research and experimental costs.
Also notable is a provision to allow 100% deductibility of the cost of certain new factory developments and existing facility updates, set to sunset in 2028.
Despite the limited timeframe, Levine said, these developments are a “BIG deal,” especially for advisory clients who are real estate professionals or manufacturers.
100% Bonus Depreciation
As ThinkAdvisor has previously reported, bonus depreciation is an additional amount of first-year depreciation that businesses can take on the purchase of qualifying business equipment. The Tax Cuts and Jobs Act expanded the types of equipment on which additional depreciation could be taken to include not only new equipment but some used equipment as well.
Qualified property eligible for bonus depreciation generally includes depreciable assets with a recovery period of 20 years or less, such as vehicles, furniture, manufacturing equipment and heavy machinery. The list also includes computer software, water utility property, and qualified film, television or live theatrical productions.
In many cases, the TCJA allowed for 100% bonus depreciation, but it also set time limits on the policy, such that equipment purchases placed in service between Sept. 27, 2017, and Jan. 1, 2023, were eligible. Beginning in 2023, the amount of bonus depreciation started to decrease by 20% each year — effectively phasing it out in full beginning in 2027.
A new analysis published by the center-right American Action Forum puts the price tag of extending 100% bonus depreciation through 2029 at $37 billion. The policy allowing full expensing of research and experimental costs through 2029 would cost another $23 billion, the policy institute reports.
Qualified Business Income Deduction
As noted, the House tax proposal seeks to make Section 199A deductions for qualified business income (QBI) both permanent and more generous — increasing the potential deduction to 23% from 20%.
The 2017 tax reform legislation has allowed pass-through entities (such as partnerships, S corporations and sole proprietorships) to deduct 20% of qualified business income. Like many TCJA provisions, the rules are set to expire at the end of this year.
Importantly, “service businesses” (including attorneys, accountants, doctors, financial advisors, and certain other service-related professionals) are currently not entitled to the full 20% deduction if the business owner's taxable income exceeds certain threshold amounts.
Extending the QBI deduction and increasing the maximum from 20% to 23% will cost some $820 billion, according to the AAF report.
Brackets and the Alternative Minimum Tax
The current tax bill would maintain the individual Alternative Minimum Tax (AMT) but make permanent the TCJA’s increase in the AMT exemption and the income levels at which the exemption phases out.
On the individual side, as described in the AAF report, the bill would make permanent the currently reduced individual income tax rate structure of 10%, 12%, 22%, 24%, 32%, 35% and 37%. It would maintain the use of the chained consumer price index for the annual cost-of-living adjustment (COLA), though it would add an additional year of inflation into the calculation of the COLA.
Further, the bill would make the TCJA’s increased standard deduction permanent and maintain the use of the chained CPI for the annual COLA. For tax years 2025 to 2028, the bill would increase the standard deduction by an additional $1,000 for individuals, $1,500 for heads of households, and $2,000 for couples.
A Big Deal for Advisors?
Responding to a request for comment from ThinkAdvisor, Matthew Chancey, a tax specialist certified financial planner and author, said the extension of the 100% bonus depreciation and QBI policies is a significant development for clients — but not one he expects will have a big impact on most advisors’ practices.
“Are they good for business owner clients? Yes,” Chancey said. “But it will primarily [affect] clients that are already doing things in their business to benefit from [these policies] and not advisors bringing ideas to their clients attention as opportunities to do things differently in a more tax smart way.”
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