The Tax Cuts and Jobs Act of 2017 was always designed to expire. Most of its individual provisions sunset after December 31, 2025 — meaning 2026 is a transitional year, and 2027 is the first full year under the old tax rules. For small business owners operating as LLCs, S-Corps, or sole proprietors in Texas, this matters enormously. Several of the most valuable deductions you've relied on are disappearing, and income tax rates are going up.
The window to act is 2026 — not 2027, when it's already too late. Here's what's changing, what it means for your business, and what you should be doing about it now.
Why 2027 Is the Year That Changes Everything
When Congress passed the TCJA in 2017, it used a budget reconciliation process that required most individual and pass-through provisions to expire after ten years. The corporate tax rate cut to 21% was made permanent — but the cuts that benefit small business owners operating as pass-throughs were not.
Congress could extend these provisions. As of the time this article was written, that debate is ongoing. But a business owner who plans around a legislative outcome that doesn't happen is in a worse position than one who plans for the law as it's currently written. We plan for what the law says — and right now, the law says the following changes take effect in 2027.
Individual Tax Rates: The Top Rate Returns to 39.6%
Under the TCJA, the top individual rate dropped from 39.6% to 37%. Starting in 2027, that rate reverts — along with adjustments to all the brackets below it. The 32% bracket largely disappears; income that currently falls there will be taxed at 33% or 36%.
Why does this matter to small business owners? Because most small businesses are pass-through entities — LLCs, S-Corps, sole proprietorships, and partnerships. Their business income flows through to the owner's individual return and is taxed at individual rates. A jump from 37% to 39.6% at the top bracket translates directly into a higher tax bill on the same income.
For an S-Corp owner taking $400,000 in business income, the rate increase on income above the current top bracket threshold could mean an additional $10,000–$15,000 in federal tax — before any state considerations. Texas has no state income tax, so your federal liability is your total income tax exposure. That also means there's no state-level offset to cushion the federal increase.
The QBI Deduction (§199A) Disappears
The Section 199A qualified business income deduction was one of the most significant benefits the TCJA created for pass-through owners. It allowed qualifying business owners to deduct up to 20% of their qualified business income on their personal return — effectively reducing their marginal rate on business income by 20%.
For a business owner in the 37% bracket, the QBI deduction brought the effective rate on business income down to roughly 29.6%. That's a meaningful difference. Starting in 2027, this deduction goes away entirely.
Who is affected? Any owner of a sole proprietorship, partnership, LLC, or S-Corp who has been benefiting from this deduction. If you've been receiving a 20% deduction on your business income, your effective tax rate on that income is about to increase by roughly 7–10 percentage points — before the bracket rate changes are even factored in.
"The QBI deduction going away is, for many of our clients, the single biggest tax dollar impact of the TCJA sunset. It's also the change with the most planning options available — if you act before 2027." — Darshi Kasotia, CPA
Planning options to consider before 2027: accelerating income into 2026 while the deduction is still available, making larger retirement contributions to reduce taxable income, and reviewing your entity structure for whether conversion makes sense given your specific situation.
The planning window closes sooner than you think
Most of the strategies available to soften the 2027 tax increases require action in 2026. Schedule a planning session now — not in January of 2027.
Bonus Depreciation Falls to Zero
Bonus depreciation allows businesses to deduct a percentage of the cost of qualifying assets in the year they're placed in service — rather than depreciating them over their useful lives. The TCJA set this at 100% in 2018, but Congress has been phasing it down.
Here's the current schedule:
- 2024: 60% bonus depreciation
- 2025: 40% bonus depreciation
- 2026: 20% bonus depreciation
- 2027 and beyond: 0% (returns to pre-TCJA rules)
If you have equipment purchases planned for 2027 or beyond, moving them into 2025 or 2026 — while there's still meaningful bonus depreciation available — can significantly front-load the deduction. Under standard depreciation, an asset with a 5-year life would be deducted over five years. Under 2025 rules, 40% of that cost is deducted in year one.
This applies to machinery, equipment, vehicles, computer hardware, furniture, and certain qualified improvement property. Section 179 is a separate provision that provides first-year expensing up to its annual limit — it doesn't sunset in the same way, but the combination of both tools is most powerful when bonus depreciation is still available.
The Standard Deduction Drops — Itemizing Returns
The TCJA roughly doubled the standard deduction, which caused millions of taxpayers who previously itemized to switch to the standard deduction. For business owners, this affected decisions about charitable giving, mortgage interest deductions, and state/local tax deductions.
In 2027, the standard deduction reverts to pre-TCJA levels (adjusted for inflation — but still roughly half the current amount). Many business owners who currently take the standard deduction will find it worthwhile to itemize again. That means tracking and documenting deductible expenses — mortgage interest, charitable contributions, medical expenses, investment interest — becomes worth doing again.
The SALT deduction cap (currently $10,000 for state and local taxes) also expires. For Texas business owners, this is less impactful since there's no state income tax — but those with property tax bills above $10,000 may see additional itemized deductions available.
Estate and Gift Tax: The Exemption Cliff
The TCJA doubled the federal estate and gift tax exemption from approximately $5.5 million to $11 million per person (adjusted for inflation — currently around $13.6 million per person). In 2027, this reverts to approximately $7 million per person (inflation-adjusted).
For most small business owners, this won't create an immediate problem. But for those with closely held businesses with significant value, family-owned real estate portfolios, or any estate planning that assumed the higher exemption, this is a material change. The time to complete gifting strategies, family limited partnerships, irrevocable trusts, and business succession planning that relies on the higher exemption is before December 31, 2025 — not after.
If your business is worth $5 million or more, or you have family members who would inherit significant assets, this conversation needs to happen with both your CPA and your estate attorney in 2025.
What Doesn't Change: Texas State Taxes
The TCJA sunset is a federal law change. Texas state tax obligations are not affected. Specifically:
- Texas franchise tax (margin tax): Still due annually for most Texas businesses, regardless of federal changes. The no-tax-due threshold remains at $2.47 million in gross revenue. Report filing is still required below that threshold.
- Sales tax compliance: Texas sales tax filing obligations, rates, and deadlines are entirely separate from federal tax law and are unchanged.
- Use tax: Still owed on taxable out-of-state purchases where the vendor didn't collect Texas tax.
- No Texas income tax: Texas remains one of nine states with no personal income tax. The rate increases above are entirely federal — there's no state layer to compound them.
The silver lining for Texas-based business owners: the federal increases are painful, but you're absorbing them from a lower combined rate than owners in California, New York, or other high-income-tax states. A top-bracket owner in Texas will still pay considerably less combined tax than an equivalent owner in those states — even after 2027.
What to Do Now: A 2027 Planning Checklist
The time to respond to 2027 tax changes is 2025 and 2026. Here's a prioritized list of conversations to have with your CPA:
- Run a multi-year projection. Compare your expected 2025, 2026, and 2027 tax liability under current law versus post-TCJA law. Understand exactly how much is at stake for your business.
- Evaluate income acceleration. If you can pull income into 2025 or 2026 — through timing of invoices, S-Corp distributions, or recognition of deferred income — you may benefit from doing so while rates are lower and the QBI deduction is still available.
- Review retirement plan contributions. Maximizing contributions to SEP-IRAs, Solo 401(k)s, or defined benefit plans reduces taxable income and is one of the most tax-efficient moves available.
- Accelerate equipment purchases. Any significant business equipment you're considering for 2027 or 2028 — move it to 2025 or 2026 to capture remaining bonus depreciation.
- Review your entity structure. The expiration of the QBI deduction changes the calculus on whether an S-Corp election, C-Corp conversion, or other restructuring makes sense. This is entity-specific and requires a detailed analysis.
- Estate planning review. If you have a closely held business with significant value, engage your estate attorney and CPA together before the end of 2025.
- Build your tax reserve. If you can't fully offset the increases, at minimum you should be setting aside cash to cover the higher liability — not discovering it in April of 2028.
