Paychex's Stephen Dombroski: Decoding Small Business Tax Changes for 2025

Gene Marks (00:00)

Hey, everybody, it's Gene Marks. On this week's episode, I am talking to Stephen Dombroski. He is a Senior Compliance Manager at Paychex. He is talking to me about all things taxes. There are a lot of changes that are coming up this year. Obviously, we know that the Tax Cuts and Jobs Act is going to be expiring, and a lot of provisions of that act are going to either go away or maybe be extended or made permanent. Things that will impact your business. We'll have a conversation, great conversation about how these provisions will impact your business. And Steven will give us a little bit of his thoughts on the chances of some of these more major provisions actually coming to fruition. So, let's get right to the conversation. 

Announcer (00:42)

Welcome to Paychex THRIVE, a Business Podcast where you'll hear timely insights to help you navigate marketplace dynamics and propel your business forward. Here's your host, Gene Marks. 

Gene Marks (00:59)

Stephen Dombroski, thank you so much for joining us. 

Stephen Dombroski (01:01)

Yes, pleasure to be here today, Gene. 

Gene Marks (01:03)

So, first of all, for you guys that might be watching this, this is a working session. So, Stephen has notes that he took on his laptop, which means that you might be even referring to some of these notes as we talk, because we want to make sure we get all this information exactly right for you. We're talking about the Tax Cuts and Jobs Act. Right. I mean, as we're speaking now, the Trump administration is now fully going on, and there are potentially a lot of changes for business owners. So, first of all, give us, give us your thoughts on what to expect. 

Stephen Dombroski (01:31)

Yeah. So, you know, I think a lot of people have, have forgotten about the Tax Cuts and Jobs Act. 

Gene Marks (01:37)

I have not. 

Stephen Dombroski (01:37)

It was enacted... You shouldn't. Right? Yes, yes. But you also help guide clients. But a lot of business owners forget that it was enacted back in 2017 and it did have a sunset date, you know, so as we progress through 2025, after 2025, the Tax Cuts and Jobs Act provisions are scheduled to expire. So, I think it's really important as we go through our conversation today, to what should a business owner have in mind with those expiring provisions? We know there's going to be a lot of tax policy discussion in the next few months with the new administration. So, what might that look like in conjunction with the TCJA? Because really, it's critical, I think, from a budget planning perspective for a business owner to be considering all of that. 

Gene Marks (02:20)

And now Trump himself has said that he fully intends for the TCJA. He wants to make it permanent or extend most of the provisions that are in there. We also know that there is a very, very thin margin in Congress for Republicans right now. So none of this is a done deal, right? I mean, it's not just because he says that's what he wants to do. That doesn't necessarily mean it's going to get through Congress. I'm curious as to what your thoughts are on what provisions of the TCJA do you think will actually be made permanent or extended? 

Stephen Dombroski (02:51)

Yeah, sure. So, one of the items that was contained within the TCJA and business owners are likely well aware of this, was that deduction for the Section 199A. You know so if you were a sole proprietorship or S corporation partnership, you may have been taking a deduction of up to 20% there that is scheduled to sunset. You know, but there's I think a lot of discussion on what would that mean to business owners if that was allowed to sunset. So, I think we're going to see that come up in the conversation. The other big thing that I think we're going to see come up is with regard to the bonus depreciation. You know, so with bonus depreciation back with the enactment of the TCJA, businesses at that point in time they were allowed to take 100% deduction on their business investments. And now I do want to preface this with it's still not at 100% today, that starting in 23 started to decrease by 20% every year. But here's the big hinge on tax year 2025 that business owners need to think about. Prior to the Tax Cuts and Jobs Act, that bonus depreciation amount, Gene, was at a 50% level. This year is going to be the first year per the TCJA that that drops to 40% for the first time. You know, it's going to be lower than TCJA and then it is going to be 20% in 2026 and sunset after that. So, I think we're going to see a lot of activity and discussion in that and we'll probably talk a little bit this afternoon about the bipartisan tax bill last year. But that was even one of the proposals that was included in the House-passed but bill, even though it didn't make it through the Senate, was that 100% bonus depreciation being re-upped through 2026. I mean, I think so. I really think that that's important for a business owner to be thinking about. 

Gene Marks (04:42)

You know, what makes it really tough, Steve, Stephen, is that, you know, like when it comes to this bonus depreciation and this is like It's a million dollar plus depreciation deduction you can take in the first year. If you could take 100% of it. Right. And now it's like you said, you can only take 40% of that. So, the question is like, if it does get made permanent by legislation in 2025, let's assume that if that happens, will it be retroactive, will it take effect in 2026? We just don't know. And it makes it really hard for businesses to plan out their capital investments . 

Stephen Dombroski (05:14)

Well, it really does. And you know, and that's where we, you know, not only does it have an impact on the business, you know, if a business owner was thinking about investments maybe that, you know, new computer hardware or software, maybe, you know, a large piece of manufacturing equipment, if they're not able to take that deduction, they might actually make the decision to not have that investment in their business. You know, and there's a trickle-down impact on their employees. Right. You know, if you're not going to invest in that new piece of equipment, employees are dealing with older equipment, it might be need repair, maintenance, it might break down. That can have a lot of impact on employee productivity as well. So, it's a lot to think about. 

Gene Marks (05:51)

Yeah, it really is. Well, it is. The only thing I can say is a bit of advice from an accounting standpoint is that you get the deduction when you put the asset into service. So, there is a scenario where if you, you do find a deal and you want to buy something, but you really want to maximize your deduction, you know, you might wait to put it into service until, if that deduction is restored at 100% and maybe that isn't until 2026, but you can get the deduction then. So, these are all different things that you can talk about with your accountant and figure out what is best. Now you had mentioned about this bipartisan deal as well. So, this might be a hint as to what tax, you know, benefits might, might actually survive these conversations. Tell us a little bit about this bipartisan deal and what impact you think it has on this year's discussion. 

Stephen Dombroski (06:35)

Yeah, so. So first let's clarify. That bipartisan deal was passed in the House. 

Gene Marks (06:41)

...but not in the Senate. 

Stephen Dombroski (06:42)

But not in the Senate. So that bill is effectively dead. But I think we can read some of the tea leaves here and take a look at that bipartisan bill from last year because some of the items that were contained in that we may see reintroduced with the whole tax policy debate, that bonus depreciation being one of them, where might that go? You know, so it's a lot of things that a business needs to consider that are very impactful for them. 

Gene Marks (07:11)

Research and development expense, I think, was another one that was discussed. 

Stephen Dombroski (07:13)

Yep, that was, that was included in it as well. Yeah, absolutely. 

Gene Marks (07:17)

Right. So, if you're a business and you're in the game, you know, you're, you're undertaking R&D activities, you used to be able to deduct those activities in the first year. And now a couple years ago actually this expired. They didn't even wait till 2025. Now you have to amortize that every five years. So, a lot of businesses are like, geez, you know, we want that deduction to come back in the first year. That might, you know, that might happen this year as well. But we have to say...there's some impacts on individuals as well. Talk to me a little bit about that. 

Stephen Dombroski (07:44)

Yeah, so on the individual side, and I think it's important that although it's individual, hey, let's be honest, we're all taxpayers, right? So even if I'm a business owner, I want to know what's going to happen with my individual income tax. But then I also really need to be thinking about potential impacts to my business if changes come to be. So, we know that with the Tax Cuts and Jobs Act expiration, there were significant changes that were enacted for personal income tax withholding. And a couple things we saw there, we saw a number of the tax brackets had decreased rates that were enacted as well as we saw them kind of take those tax brackets and set different margins for those. If the TCJA were to expire, all of that would revert to the pre–Tax Cut and Job Act initiative. But I will say this, that we should keep in mind is that there's other things that come into play here too, from a personal perspective. Standard deduction, for example, it's cut in half. It's a huge, huge amount. You know, right now the projections are, when you look at the inflationary adjustments for 2026, they're projecting that for a single filer Gene, that standard deduction will be somewhere in the range of $5,300 to $8,300. That's $15,000 for 2025. 

Gene Marks (09:08)

That's amazing.

Stephen Dombroski (09:08)

So that drop in 2026 is huge. Even from the joint filer perspective, we're looking at drops from $30,000 for the deduction down to around $16,000. So that's, I think, really impactful. But then more so from that employer perspective and some folks might remember this back when the TCJA was enacted, it was pretty complex, and it took the IRS a significant period of time to figure out how they were even going to implement those changes. As a result, they ended up implementing a whole new withholding methodology and a new W4 form. And the big challenge with that, as we sit today, you might recall there's actually two methods in place, two tables in place to calculate federal income tax withholding today. And that was based on what W4 you had on file for your employee. So, if we fast forward, if all of this does expire, the big question becomes, now what do we do? Do the tables revert? Does the IRS implement yet another new W4 that employers need to accommodate? So that's where, when we turn to that part of the conversation, I think a key consideration for a business owner is making that the software provider they're working with for their payroll has an ability to quickly accommodate any of those changes. Because at the end of the day, the employer is the one that needs to be accurately withholding the federal income tax. 

Gene Marks (10:36)

So, depending on what happens over the next few months, we can have big changes coming up to withholdings. We can have big changes coming up individually to our, you know, our standard deduction that we're taking. We could have big changes to our tax rates, overall tax rates that we're paying in the brackets that we're in. If we're running a small business pass through, we might not be getting that deduction anymore. That 20% deduction that you mentioned. And big changes to research and development deductibility, big potential changes to whether or not we can deduct capital expenditures to the same levels that we want to... It's a lot that is all up in the air right now. So, before I ask you some of your thoughts as to what, if you think what's going to happen, is there anything I'm missing? Like, is there any other big, big tax changes? 

Stephen Dombroski (11:19)

So, I think, you know, a couple other things that come to mind for consideration. One, on that individual income tax front, one thing I will mention, and this was very controversial in some of the higher tax states was the SALT tax. 

Gene Marks (11:34)

Right. So, talk to us about that. 

Stephen Dombroski (11:35)

You know, that SALT deduction with the TCJA that actually put a cap of $10,000 on the deduction that an individual could take for the state and local taxes they had paid. 

Gene Marks (11:47)

And that really upset people in, you know, well, high-tax states like New Jersey. Not happy at the limit of that deduction. And the states did all sorts of workarounds to that as well, depending on the state. 

Stephen Dombroski (11:57)

A lot of creativity there, right? Yeah. So that's set to expire, but I think the jury's really out on what's going to happen with that because we know today there definitely are folks that would like to have that expire and not be renewed and brought into the conversation so that that cap potentially is lifted . So, we don't know where that's going to end up. And then, you know, to your question, I think another point that some employers really need to think about, and I hate to go back to some of the COVID era tax credits, but let's talk for a minute about the employee retention credit. The reason it's important to still be talking about this. 

Gene Marks (12:37)

I thought it was dead. I thought that was gone. Okay. 

Stephen Dombroski (12:40)

It was proposed in the bipartisan bill that was the American and Family and Workers Act last year, Tax Relief for American Families and Workers act proposed within that bill was the early sunsetting of the COVID program. Well, because that bill never came to be today as we sit, an employer can still file an amended return to claim that credit for tax year 2021. Now, why this is important, that was really used as a pay for, you know, anytime we're looking at tax policy, we've got to pay for it somehow. And they knew that with the incredible amount of refunds that needed to be issued through that program, that could be a huge pay for. Interesting. So, because that didn't come to be, there is a chance, because there were supporters of that, that we might see that included in a bill. And why it's important is from a retroactive perspective, if it is enacted retroactive originally, it would have sunsetted last January 2024. If they reintroduce it, make it retroactive, maybe not as is that that introduces not only a lot of complexity there, but the other thing to keep in consideration, if I was a business that over the past year did file an eligible claim for that refund, chances are I haven't received it yet. We all know IRS is really backed up. They slowed way down trying to prevent fraud and everything. But anything that's enacted retroactive, I may have filed an eligible claim, I may be earmarking those funds, not knowing when I'll get them, but thinking I will get them at some point and that retroactivity could wipe that all out. And you won't get that refund. 

Gene Marks (14:18)

Okay, very interesting. Very interesting. All right. And there are two final things that we did not mention. And don't, you know, I just don't know of it. One, estate taxes could change. I know that's outside of the HR realm, but just so you guys know that are watching or listening, that, you know, the estate tax exemption limits themselves could be cut in half, which would then expose a lot of assets for people that are of a certain, you know, wealth level to potential estate taxes. So that's number one. 

Stephen Dombroski (14:45)

Well, and on that up front, if I can jump in, also keep in mind a number of states tie their whole income tax withholding structure to the federal provisions. So, you see a change in the federal provisions... 

Gene Marks (14:57)

And the states themselves. That's exactly right. So, so estate tax is also a big deal for people that are in that industry. They're keeping a close eye on things. The Work Opportunity Tax Credit is another one. Just to throw this out here, which is an amazing tax credit that businesses get if they hire people that are off of welfare, out of prison or whatnot, that's stated to expire at 2025. At the end of 2025. And that is another thing that we're hoping gets extended. And there's a lot that's going on. There's a lot that's going on. Okay, so here we are, we're talking about taxes. Everything is up in the air. What are you telling your customers? I mean, what do we do? 

Stephen Dombroski (15:34)

Yeah, you know, so I think first and foremost, as I started out, our conversation, awareness is the big thing. Right. You don't want to be caught off guard. So, I think it's important. Maybe it's your thing to keep up with all of it. But it's a lot to keep up with if you're running your business. So, if you have a trusted advisor, probably really talking with them about, hey, I've heard that all of this could potentially, you know, be coming. I'd like to play out some different scenarios based on what could happen with tax policy, on where this might go. You know, I think the corporate tax rate, you know, that's, that's a big one. You know, we saw revert back up decrease from 35% to 21% with the TCJA. Now, I will say the one thing with that provision in the TCJA, it was in essence made permanent. It doesn't actually expire with the TCJA. But we all know there's a lot of conversation already, especially we saw on the campaign trail. President-Elect Trump has mentioned he'd like to drop that rate down to 15% for businesses that produce their products within the borders of the United States, of course, the big question there becomes how do you pay for that reduction? So, I think we're going to end up somewhere in the middle. But if I'm running my business, sure, I'd love to know what my tax rate is going to be, but that's not realistic. So, playing out those scenarios with my advisor, maybe my CPA, it's probably a good idea. So, you kind of just have a couple different playbooks of where you might take your business based on the tax changes we see coming. And Gene, I really don't think it's going to be quick. 

Gene Marks (17:17)

I think it's going to be something that is going to take us into the middle of this year. So, we're just going to have to keep an eye out and make sure that we do our planning. Most of my clients, they don't even start doing their tax planning until the middle of the year anyway. Not that that's the right answer, but, you know, that might dovetail into what their normal plans are anyway. But Stephen, thank you very much for your time. This great information. 

Stephen Dombroski (17:37)

Yeah, absolutely. Delighted to be here and talk about it with you, Gene. 

Gene Marks (17:39)

Do you have a topic or a guest that you would like to hear on THRIVE? Please let us know. Visit payx.me/thrivetopics and send us your ideas or matters of interest. Also, if your business is looking to simplify your HR payroll, benefits or insurance services, see how Paychex can help. Visit the resource hub at paychex.com/worx. That's W-O-R-X. Paychex can help manage those complexities while you focus on all the ways you want your business to thrive. I'm your host, Gene Marks, and thanks for joining us. Till next time, take care. 

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