by Natalie Nguyen
As the holiday season kicks into full swing, it’s easy to get caught up in the festivities and put taxes on the back burner. But this is the perfect time to start thinking about how upcoming changes might affect your tax strategy in the new year. It’s essential to stay informed about the latest changes in tax laws, especially if you are a business owner. In this post, we’ll show you a couple of changes that are important to review as we approach 2025 relating to depreciation and pension plan credits.
Depreciation Changes
The 2017 Tax Cuts and Jobs Act (TCJA) introduced significant changes to depreciation rules, including enhanced bonus depreciation. While these provisions have provided substantial tax benefits for businesses since its inception, the bonus depreciation has been phasing out gradually for a few years and is currently scheduled to completely phase-out by December 31, 2026.
Key Changes for 2025:
- Bonus Depreciation Phase-Out: The bonus depreciation percentage, which allows businesses to deduct a significant portion of the cost of qualifying assets upfront, will decrease to 40% for eligible assets placed in service after December 31, 2024.
- Section 179 Deduction: Another method to recover all or part of the costs of certain property, up to a limit, is the Section 179 Deduction. The maximum Section 179 expense deduction is $1,250,000, and this expense is reduced by the amount of section 179 property is placed in service during the tax year that exceeds $3,130,000. For 2025, the maximum Section 179 expense deduction for sport utility vehicles over 6,000 pounds is $31,300.
Pension Plan Credits
While there are no significant changes to pension plan credits for 2025 compared to 2024, it’s crucial for businesses to stay informed about ongoing regulations and potential legislative updates.
Eligible employers may be able to claim a tax credit of up to $5,000, for three years, on ordinary and necessary costs of starting a SEP, SIMPLE IRA or qualified plan (ex. 401(k) plan).
You qualify for this credit if:
- You had 100 or fewer employees who received at least $5,000 in compensation from you for the preceding year;
- You must have at least one plan participant who was a non-highly compensated employee (NHCE); and
- In the three tax years before the first year you’re eligible for the credit, your employees weren’t substantially the same employees who received contributions or accrued benefits in another plan sponsored by you, a member of a controlled group that includes you, or a predecessor of either.
Amount of Credit
- Employers with 50 or fewer employees: If you have 50 or fewer employees who received at least $5,000, the credit it 100% of eligible startup costs, up to the greater of:
- $500; or
- The lesser of:
- $250 multiplied by the number of NHCEs who are eligible to participate in the plan,
- or $5,000.
- Employers with 51-100 employees: if you have 51-100 employees who received at least $5,000, the credit is 50% of your eligible startup costs, up to the greater of:
- $500; or
- The lesser of:
- $250 multiplied by the number of NHCEs who are eligible to participate in the plan,
- or $5,000
Eligible Startup Costs
You may claim the credit for ordinary and necessary costs to:
- Set up and administer the plan
- Educate your employees about the plan
Tax Credit for Plan Contributions
Small employers (less than 100 employees) may claim a tax credit for plan contributions made to a defined contribution plan, SEP or Simple IRA plan. The tax credit is not available for contributions to employees earning more than $100,000. (Maybe adjusted for inflation in the following years).
- For employers with 1-50 employees, the tax credit available for each participant is:
- First plan year: 100% of contribution, up to $1,000
- Second plan year: 100% of contribution, up to $1,000
- Third plan year: 75% of contribution, up to $1,000
- Fourth plan year: 50% of contribution, up to $1,000
- Fifth plan year: 25% of contribution, up to $1,000
- For employers with 51-100 employees, the tax credit available for each participant is:
- First plan year: 100% minus 2% for each employee exceeding 50 limit
- Second plan year: 100% minus 2% for each employee exceeding 50 limit
- Third plan year: 75% minus 2% for each employee exceeding 50 limit
- Fourth plan year: 50% minus 2% for each employee exceeding 50 limit
- Fifth plan year: 25% minus 2% for each employee exceeding 50 limit
Note that you cannot both deduct the startup costs and claim the tax credit for the same expenses. You are also not required to claim the allowable credit.
Auto-enrollment Tax Credit
An eligible employer that adds an auto-enrollment feature to their plan can claim a tax credit of $500 per year for a 3-year taxable period beginning with the first taxable year the employer includes the auto-enrollment feature. This tax credit is available for new or existing plans that adopt an eligible auto-enrollment plan.
Do You Need Assistance?
Navigating tax law changes can feel overwhelming, especially with everything else on your plate during the holidays. But you don’t have to feel alone. If you have questions about how the new tax laws will impact you and your business, we’re here to provide the guidance you need. Our team is ready to help you understand these changes and create a tax strategy that works best for your unique situation. Reach out to us today, and let’s ensure that you’re fully prepared for a successful 2025 tax year.
408-252-1800
Photo Credit to https://homethods.com/, CC BY 2.0, via Flickr.com.
