A director at an advisory and accounting services company discussed what challenges businesses and tax practitioners should prepare for when payroll-related provisions in the Tax Cuts and Jobs Act expire or continue and suggested multiple plans for possible outcomes.
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Compliance and having multiple plans |
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Possibility of retroactive changes |
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IRS funding may help either way |
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Some expiring provisions may be positive |
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The back-to-office effect |
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Potential impact of changes |
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Ideal situation for advisors |
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Changes may come “late in the game” |
The Tax Cuts and Jobs Act (TCJA; P.L. 115-97) of 2017 brought about significant changes to the U.S. tax system, including provisions affecting both individuals and businesses. Among these were several payroll-related provisions that are set to expire at the end of 2025, presenting challenges and opportunities for employers and employees alike. As these provisions approach their expiration date, it’s important for businesses to prepare accordingly.
However, preparation could prove to be a more difficult task since Congress is examining certain provisions of the TCJA for continuation. As such, employers may need to research multiple tax plan approaches to forecast for the best possible outcome, and while the sunset date for these measures is more than one and a half years away, answers may come late in the game, leaving employers to scramble for solutions regarding this far-reaching law.
“The TCJA, like most big tax laws, is like the spokes of a wheel,” John Rose, J.D., Director of Federal Tax Quality Control at Aprio, began. “It splinters out into so many different areas of business and life – employment, your hiring practices as an employer, [and] how you structure your business.”
The TCJA took effect on January 1, 2018 and many of its provisions remain in effect through 2025. According to the IRS, this includes changes in deductions, expensing, tax credits, and other items that affect businesses and individuals. For federal income tax withholding, the TCJA adjusted the tax brackets, the supplemental and backup withholding rates, and the use of allowances on an employee withholding certificate.
Compliance and having multiple plans
As when these provisions initially took effect, a major issue for businesses and tax practitioners will be to keep up with the changes from a compliance standpoint. Rose feels that a number of the payroll provisions “are going to create some compliance costs” for businesses since there would be new forms and publications with new instructions for employers to follow if withholding tables and the use of allowances are reverted back to the way they were before the TCJA became law.
He added that the uncertainty of what will happen on January 1, 2026 prompted many tax practitioners to start thinking about various scenarios now to be ready to implement one option or another to prevent an unfavorable tax consequence from a partial or total lapse of provisions in the law.
“Some of our clients, especially those that are in cutting-edge industries or activities, they’re very mindful of the idea that they could have two very different sets of outcomes depending on whether the law continues in total, whether it is piecemeal, [or] whether some provisions are allowed to lapse and others are allowed to extend,” Rose noted.
Possibility of retroactive changes
He also believes that “from a payroll perspective…whatever changes come, they’re going to come late.” Rose said that although practitioners are making efforts to come up with a plan ahead of any expiration or extension to advise clients from a payroll standpoint, there may be the possibility of retroactive changes to the law after these provisions expire.
“That’s the greatest concern is that they’re going to make this retro, they won’t get around to passing it until the fire alarms are sounded…and then for payroll departments, that’s just going to be a mess,” Rose stressed.
IRS funding may help either way
However, he is hopeful that the IRS funding from the Inflation Reduction Act will continue to help with modernization efforts at the Service to aid taxpayers, regardless of whether certain TCJA provisions will expire in 2026. “We hope that the largest component of the funding goes to [the] modernization of systems to…reestablish an emphasis on taxpayer service…because as a tax law becomes more complex…so too does the compliance cost of just having to wait around until they know what forms to file, when to file them, and where to file them,” Rose said.
Some expiring provisions may be positive
While there are some TCJA provisions that certain businesses may like to see extended, such as the new employer credit for paid family and medical leave or the Code Sec. 199A deduction for the qualified business income (QBI) of pass-through entities, Rose believes that the expiration of other provisions will be welcomed by both employers and employees. “From a payroll standpoint, there is one provision, that if it is continued, will create a lot of issues,” he said, referring to the suspension of the exclusion for qualified moving expense reimbursements through 2025.
“Previously, you were able to account [for] the cost of travel, the moving of household goods, mileage to the new location, [and] house hunting trips,” Rose started. “The TCJA changed all of those to where they are taxable.”
The back-to-office effect
Rose said that an additional wrinkle to missing out on this tax deduction can be seen from the number of employers “finding the value in having people come back to the office” after the massive change to remote work during the COVID-19 pandemic. “In a lot of cases [businesses] have a remote staff and if they want to move employees to an office location, those costs aren’t deductible for the business and they’re taxable to the employees.”
He explained that “this is huge” from an employee retention standpoint because “if an employer really wants to maintain an employee, and that employer really wants the employee to be in an office and the employee is remote, they have to gross that up to cover the tax impact.” Rose said that allowing this TCJA provision to lapse would be beneficial for both employers and employees and “will facilitate the back-to-office movement” that Rose thinks “is going to continue.”
Potential impact of changes
As far as which industries may be affected by any changes to the TCJA, Rose posits that it is more challenging “to isolate the payroll impacts by industry, as opposed to [the] region and character of a company and the types of activities within the industry that the company is engaged in.”
He noted again that industries looking to scale back on remote work are going to be impacted, but thinks that another place where payroll could see an impact is if the Code Sec. 199A TCJA provision is let to expire. “Part of how the 199A qualified business income deduction is calculated is against W-2 wages,” Rose said, noting that both partnerships and S-corporations could be impacted by Code Sec. 199A, should the provision sunset after 2025.
Ideal situation for advisors
When it comes to Congress taking action on these expiring provisions, Rose thinks that the hope from an advisor point-of-view is that the federal legislative body “will do this surgically” by taking “those provisions that are generally taxpayer-favorable and continue those, especially the ones that drive business investment…and get rid of some of the negative provisions.”
Changes may come “late in the game”
Rose expressed his reservations about legislation passing to address the expiring provisions due to the current political landscape, but again stated that “if it does happen, it’s going to happen at the last minute.”
Congress is currently mulling over the Tax Relief for American Families and Workers Act ( H.R. 7024) of 2024, though there has been little action in the Senate after the bill passed the House with bipartisan support on January 31, 2024. The bill would address several of the expiring provisions in the TCJA.
Rose again noted to be prepared early for TCJA changes, but that the uncertainty will force businesses and advisors to “have separate plans that you’re going to have to implement very late in the game.”
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