Major Tax Policy Changes in 2025:
How to Prepare?
An Essential Guide for Retailers

 

Key provisions of the Tax Cuts and Jobs Act (TCJA), enacted in 2017, are scheduled to expire at the end of 2025. This development could eliminate crucial tax credits that many small businesses, including beauty supply companies, have relied on for financial stability. Among the most significant changes is the expiration of the Qualified Business Income (QBI) deduction, which would substantially increase tax burdens, particularly for high-income earners and small business owners. This article explores pivotal tax-related topics, including the expiration of the business deduction, the potential reinstatement of the state and local tax (SALT) deduction, the decline in bonus depreciation, and upcoming changes to personal income tax rates. It also offers specific strategies to help you prepare for these significant tax policy changes.

 

Major Tax Policy Changes for Individuals and Businesses

Individual Tax Changes

• Income tax rate reinstatement: The TCJA’s lower individual income tax rates are set to expire at the end of 2025. The top rate is expected to increase from 37% to 39.6%, with rates for middle-income brackets also rising.
• Reduced standard deduction: The standard deduction, currently $15,000 for single taxpayers and $30,000 for married couples filing jointly in 2025, will drop to $8,350 and $16,700, respectively, in 2026 if not extended.
• SALT deduction cap: The $10,000 cap on deductions for state and local taxes (SALT) may be removed upon expiration.
• Reduced child tax credit: The credit per child will decrease from $2,000 to $1,000, with the income eligibility threshold potentially being lowered.

 

Business Tax Changes

• Qualified business income deduction (QBI deduction) expires: The deduction of up to 20% of business income for pass-through* businesses is set to be eliminated.
• Reduced Bonus Depreciation: The ability to fully deduct capital expenditures in the first year will be phased out, ending entirely after 2027.

 

Are you aware of your business structure?

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What Is a Pass-Through Business?

A pass-through business is a type of business structure where the business itself does not pay income tax. Instead, the net profits or losses “pass through” to the owner’s personal income tax return, where they are taxed at the individual level.

Main types of pass-through businesses:

• Sole Proprietorship
• Partnership
• S-Corp (Small Corporation)
• LLC (Limited Liability Company)

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How will these tax policy changes impact beauty supply businesses?

1. The Qualified Business Income (QBI) deduction for pass-through businesses is set to expire

The Qualified Business Income (QBI) deduction is a critical tax benefit designed to help small businesses reduce their tax burden and create financial flexibility. This deduction applies exclusively to pass-through businesses, allowing eligible businesses to deduct up to 20% of their qualified business income. Since many small businesses, including beauty supply retailers, operate as pass-through entities, the QBI deduction has been a significant advantage. For example, consider a husband-and-wife beauty supply business generating $300,000 in net income annually. With a 20% QBI deduction, they can deduct $60,000, lowering their taxable income to $240,000. This results in a reduced federal income tax burden and enables the business to retain more capital for operations. (Note: The QBI deduction is calculated based on net income after operating expenses, not the business’s gross revenue.) However, this valuable tax break is highly likely to expire at the end of 2025. When the QBI deduction is no longer available, taxable income for businesses will increase, potentially raising their tax liabilities. This change will particularly affect small businesses like beauty supply companies, which have relied heavily on this deduction to ease their financial obligations.

2. Rising personal income tax rates are another factor impacting small businesses

With the introduction of the TCJA, individual income tax rates were lowered across income brackets. For example, the top income tax rate dropped from 39.6% to 37%, and the middle-income brackets also saw reductions across the board. However, if the TCJA expires, individual income tax rates will likely return to pre-2017 levels. The top rate is expected to rise back to 39.6%, with middle bracket rates also increasing. Since pass-through business income is taxed at personal income tax rates, small business owners will be particularly affected by these changes, making them highly sensitive to any rate increases.

 

3. Corporate tax rate remains permanent: Large beauty chains and manufacturers with a corporate structure still enjoy tax benefits

The TCJA significantly reduced the corporate tax rate from 35% to 21%, providing a substantial tax advantage for corporations, including large beauty chains and hair product manufacturers. This lower rate enabled these companies to reinvest more in their businesses, expand operations, and remain competitive in the market. Unlike other provisions of the TCJA, the corporate tax cuts are permanent. As a result, large beauty chains and manufacturers with an incorporated structure will continue to benefit from the reduced tax rate. This offers companies with larger operations, or those considering incorporation, an opportunity to utilize this favorable tax structure as a long-term tax-saving strategy.

 

4. SALT deduction cap repealed: Good news for retailers in high-tax states

Currently, the SALT deduction is capped at $10,000 for state and local tax payments. However, with the expiration of the TCJA at the end of 2025, this cap could be removed, allowing the full amount of state and local taxes to be deducted. This change is expected to benefit higher-income owners of large chains and businesses operating in high-tax states such as New York and California.

< Learn with an example>

Consider a beauty supply store in New York with $20,000 in annual state and local tax payments:

• • Under current law: Only $10,000 is deductible.
  • After the expiration of the TCJA in 2025: The full $20,000 could become deductible, as the SALT deduction cap will be removed.

 

5. This is the ideal year to upgrade your store, before bonus depreciation shrinks

Bonus depreciation allows businesses to take a full deduction in the first year of purchasing an asset, providing a valuable opportunity to reduce upfront costs. However, this benefit begins to phase out in 2023, with the deduction decreasing to 20% in 2026 and disappearing entirely by 2027. For those planning significant investments, such as upgrading store equipment or Point-of-Sale (POS) systems, it is advisable to act before 2025.

 

Strategies to safeguard businesses before and after the TCJA expiration

What can be done before the TCJA expires

1. Maximize the Qualified Business Income (QBI) deduction

Utilize the QBI Deduction: Currently, the QBI deduction is a “use it or lose it” benefit. Maximizing this deduction before it expires can help reduce tax burdens.

Adjust Income Levels: Since the deduction is subject to income limits, consider strategies such as contributing to a retirement account (e.g., SEP-IRA, SIMPLE IRA) or implementing income diversification to remain within the allowable limits.

Example: For those married and filing jointly, the deduction limit is $500,000. Filing separately may help maintain deduction eligibility if income exceeds this threshold.

2. Optimize capital expenditures

Take full advantage of bonus depreciation: Bonus depreciation, which phases out through 2025, provides an opportunity to purchase significant assets such as store fixtures, POS systems, and displays upfront, maximizing first-year deductions.

3. Review the SALT deduction limits

Maximize state and local tax deductions: With the expiration of SALT deduction limits, it may become possible to deduct the full amount of state and local taxes. For businesses in high-tax states, maintaining detailed and accurate tax records is crucial to ensuring maximum deductions.

4. Work with a professional tax strategist

• Optimize filing status: Analyze the advantages of married filing jointly versus married filing separately to identify the most beneficial approach.
• Review tax strategies: Engage with a professional to create a customized plan for tax savings, including strategies such as optimizing W-2 wages, spreading income, and effectively utilizing retirement accounts.

 

How to prepare if the TCJA expires without an extension

1. Prepare for higher income tax rates: Optimize taxes by strategically timing income and adjusting expenses to mitigate the impact of reinstated individual income tax rates.

Example of countermeasures: Deferring additional income to the following year or making necessary equipment or capital investments earlier in the year can help reduce taxable income. Additionally, contributing to retirement accounts such as SEP-IRAs or SIMPLE IRAs can further lower taxable income.

2. Develop a long-term financial plan: Create a comprehensive financial strategy that aligns with anticipated tax law changes.

Example of countermeasures: Individuals with significant assets may consider transferring assets to take advantage of current exemption limits before the TCJA expires. Reassessing the income structure of a business to distribute the tax burden more effectively can also be a valuable approach.

3. Optimize expenses: Efficiently manage expenses to maximize net income and prepare for potential increases in tax liabilities.

Example of countermeasures: Improve inventory management and operational efficiency to optimize fixed and variable costs. Eliminate unnecessary expenses and plan major capital or service expenditures over the long term to enhance operational stability

 

Expectations and variables for the Tax Cuts and Jobs Act of 2025 (TCJA) extension

Congress is currently debating the extension of key provisions of the TCJA. Following the election of Donald Trump, the Republican Party has expressed intentions to lower the corporate tax rate to 15% and extend the TCJA within the first 100 days of his presidency. However, the fiscal implications and ongoing political disagreements introduce significant uncertainty. In this climate of unpredictability, beauty supply companies must prepare for potential tax changes. Conducting a thorough review of current tax strategies and developing a well-structured financial plan will be critical for minimizing tax burdens and maintaining long-term business stability.