Important Tax Changes Proposed in the ‘One Big Beautiful Bill Act’

We are writing to update you on significant tax law changes that were recently passed in the One Big Beautiful Bill Act (OBBBA) by the 119th Congress. The Bill now moves to the U.S. Senate for debate and vote. If ultimately signed into law, this new legislation extends and modifies key provisions of the 2017 tax reform law and introduces new measures that will affect business owners. 

Below we summarize the major changes, their effective dates, and what they mean for your tax planning. We also highlight potential state tax implications and next steps to consider. Our goal is to explain these updates in practical terms so you can make informed tax planning decisions.

Extension of Key Tax Cuts for Businesses and Owners 

• Permanent Lower Tax Rates: The individual income tax rate cuts from 2017 are made permanent, so the top individual rate will remain at 37% instead of reverting to the old 39.6% rate. This is important for owners of pass-through businesses whose profits are taxed on individual returns.  

• Pass-Through Business Income Deduction (Section 199A): The 20% qualified business income (QBI) deduction for sole proprietors and owners of S-corps, partnerships, and LLCs is now permanent and increased to 23% of qualifying income.  

Practical impact: If your business is a pass-through, you will continue to enjoy this deduction beyond 2025, and at a slightly higher rate, which can significantly lower your tax bill. This change levels the playing field with C-corporations (which already benefit from a flat 21% corporate tax rate). Many of you were planning for the QBI deduction to expire – the good news is that it’s here to stay. 

• Corporate Tax Rate: Notably, the Act does not change the 21% corporate tax rate. C-corporations will continue with the same flat rate. This means tax planning for entity choice (C-corp vs. S-corp/LLC) can now factor in that pass-through entities have a 23% income deduction while C-corps remain at 21% (but subject to double taxation on dividends). With pass-through benefits extended, many of you may find pass-through status more attractive than it would have been if the deduction had lapsed.  

• Estate and Gift Tax Exemption: The Act provides “death tax” relief for family business owners by extending and increasing the federal estate/gift tax exclusion. Starting in 2026, the estate and gift tax exemption will rise to $15 million for individuals and $30 million for married couples (up from the current ~$13 million per person). This higher exemption is made permanent.  

Practical impact: This substantially expands the amount of business assets or family wealth you can pass to heirs without incurring federal estate tax. We recommend reviewing your estate plans to take advantage of this expanded exemption, especially if you are near the old limits. 

Enhanced Deductions and Expensing for Business Investments 

• 100% Bonus Depreciation is Back: The Act reinstates full bonus depreciation (100% immediate expense) of qualified business property purchases. Specifically, businesses can deduct 100% of the cost of new or used eligible assets (equipment, machinery, computers, certain vehicles, etc.) placed in service between January 20, 2025, and December 31, 2029. (Under prior law, bonus depreciation was dropping to 40% in 2025 and phasing out completely by 2027). Now, if you invest in qualifying assets, you get a full write-off in the first year, which can greatly reduce your taxable income. Example: If your company buys $500,000 of equipment in late 2025, you can expense the entire amount on your 2025 tax return, rather than depreciating over several years. 

Planning tip: Since these kicks in for property placed after Jan 19, 2025, consider timing major asset acquisitions accordingly to maximize deductions. Keep in mind this 100% bonus is temporary – it is scheduled to last five years and then end in 2030, so it may be wise to use it while available. 

• Higher Section 179 Expensing Limits: For smaller-scale capital investments, Section 179 expensing limits are significantly raised. Starting in 2025, the maximum amount of equipment and other qualifying property that can be immediately expensed under §179 doubles to $2.5 million. 

Practical impact: More of your routine business asset purchases can be deducted in full rather than capitalized. Section 179 expensing is especially useful for small and mid-size businesses purchasing trucks, machines, office furniture, or software. Now you can immediately deduct up to $2.5M of such investments each year, which is a substantial increase in cash-flow benefit. It’s also permanent (no sunset date), whereas 100% bonus depreciation will eventually expire – but for the next few years we effectively have both options available. 

• Research & Development (R&D) Expenses: In welcome news for innovative businesses, the Act reverses the recent requirement to capitalize R&D costs. Beginning with the 2025 tax year, companies can once again fully deduct domestic research and experimental expenditures in the year incurred (through 2029).  

Practical impact: If your business invests in product development, software creation, or other R&D, you will be able to write off those costs immediately on your federal taxes from 2025 onward. This reduces your taxable income in the year of investment and encourages innovation.  

New Credits and Incentives 

• Expanded Credit for Employee Child Care: To help businesses support working parents, the Act enhances the Employer-Provided Child Care Tax Credit (IRC §45F). Previously, employers could get a credit equal to 25% of qualified child care expenses (e.g. operating an on-site daycare or contracting slots at a daycare center) plus 10% of eligible referral fees, up to a maximum credit of $150,000 per year. Now, starting in 2025, the credit jumps to 40% of qualified child care expenditures, capped at $500,000 annually. Moreover, small businesses (defined roughly as those with gross receipts under ~$31 million for 2025) can claim an even larger credit – 50% of expenses, up to $600,000 credit per year. This is a substantial increase in the incentive to provide child care benefits.  

Practical impact: If you’ve ever considered offering child care facilities or subsidies for your employees, the tax break is now much more generous. For example, a qualifying small company that spends $200,000 on child care could get a $100,000 credit (50%) under the new law, whereas previously the credit would have been $50,000. This can help attract and retain employees in a tight labor market. We can help you evaluate if setting up a child care assistance program makes sense given the enhanced credit. 

• Health and Medical Benefits – Enhanced HSAs: The Act also encourages better health benefits. One notable change is the expansion of Health Savings Accounts (HSAs). The contribution limits for HSAs will roughly double. This effectively allows many individuals to contribute twice as much to an HSA each year as they did before. Additionally, the Act makes it easier for employees to participate in HSAs by removing some barriers: for example, being in a direct primary care arrangement or using an on-site workplace clinic will no longer disqualify an employee from HSA eligibility. Individuals over 65 who are on Medicare Part A can even still contribute to an HSA under the new rules.  

   

  Practical impact: For business owners and employees with high-deductible health plans, HSAs just became a more powerful tool. You and your staff can set aside more pre-tax money for healthcare. This can enhance your employee benefit offerings at relatively low cost. We anticipate the IRS will issue guidance and adjust plan limits to implement these HSA changes; we’ll keep you informed as these provisions take effect (many HSA changes are likely for tax year 2025 and beyond). 

• Clean Energy Tax Credit Changes: If your business was planning to invest in electric vehicles, solar panels, or other clean energy projects utilizing federal tax credits, be aware that OBBBA scales back some green energy incentives. For instance, the Clean Vehicle credit for electric cars will be eliminated after 2025 in most cases, and certain renewable electricity production credits from last year’s Inflation Reduction Act will end by 2028.  

Practical impact: This doesn’t directly raise taxes, but it means the window to claim some popular clean energy credits is closing sooner. If you were considering, say, purchasing EVs for your company fleet or installing solar panels on your building with federal credits, you might want to act before those credits sunset. 

Compliance and Other Tax Changes Affecting Businesses 

• Higher Reporting Threshold for 1099s: The Act brings a bit of relief on tax reporting paperwork. Form 1099-MISC/NEC reporting thresholds will increase – you will only be required to issue a 1099 for services, rents, etc. if you paid a contractor $2,000 or more in a year (up from the longstanding $600 threshold).  

Practical impact: Fewer small-dollar transactions will trigger IRS reporting, which means less administrative burden for your business in issuing and managing 1099 forms. This is positive for anyone who makes occasional payments to freelancers or vendors. (You should still maintain good records of all payments, of course, but you won’t have to send as many forms for small amounts.) This change is effective starting with the 2025 tax year payments. We’ll update our clients on the new thresholds each year since they will adjust with inflation. 

• Employee Retention Credit (ERC) Claims: In response to concerns about fraud and a backlog of claims, the Act ends the processing of new ERC claims effective retroactively to January 31, 2024. In addition, the IRS now has a longer statute of limitations (6 years) to audit and claw back improper ERC refunds.  

Practical impact: If you were eligible for the pandemic-related ERC in 2020–2021 and have already filed for it, there is no change to the credit itself – but be aware the IRS may scrutinize claims for up to six years.  

• State and Local Tax (SALT) Deduction Cap: The Act modifies the SALT deduction limit, which is of interest to many business owners who pay significant state taxes. The federal cap on individual deductions for state and local taxes (including state income and property taxes) will increase to $40,000 (from $10,000) for a joint filer, or $20,000 for married filing separately. This higher cap, however, comes with a catch – it phases out for higher-income taxpayers: once adjusted gross income exceeds $500,000 (joint) or $250,000 (separate), the benefit of the higher cap gradually disappears (but it won’t phase out below the original $10k level).  

Practical impact: If you reside or operate in a high-tax state, you may be able to deduct more of your state income and local property taxes on your federal return than before – potentially reducing your taxable income. For example, under the new cap a qualifying couple could deduct up to $40k of state taxes paid, which is a significant increase. However, if your household income is above $500k, you’ll likely still be capped around $10k-$20k deduction after the phase-out. We will calculate the optimal deduction for you when we prepare your returns. 

• SALT Cap Workaround Limitation: As you may know, over 30 states have enacted pass-through entity taxes (PTET) as a workaround to allow business owners to bypass the federal SALT cap. These regimes let S-corporations or partnerships pay state tax at the entity level (fully deductible for federal tax) and give owners a credit, thus avoiding the personal $10k cap. The new federal law places a restriction on this workaround for certain businesses. It disallows the SALT workaround for pass-through businesses that are in specified service trades or businesses (SSTBs) (such as law, accounting, consulting, medicine, etc.), while still allowing the workaround for other businesses that are eligible for the QBI deduction. In practice, if your business is an SSTB and you elect a state pass-through entity tax, you might not be able to deduct those state taxes in full federally going forward – effectively, the benefit of making that election could be negated for high-earning professionals. This change adds complexity, and states will need to adapt their rules as well.  

Practical impact: Business owners using or considering a PTET election should consult with us on whether it remains advantageous. The value of the workaround may diminish for certain service businesses, and the decision may vary by state. Each state’s rules differ, and with this federal change, we need to re-evaluate the cost/benefit of paying tax at the entity level for 2025 and beyond. We will be closely watching how states respond to these federal limitations. 

Effective Dates and Next Steps 

Many of the Act’s provisions have different start dates. Here’s a quick reference timeline of major changes so you know what to expect: 

• 2024: Largely business as usual under current law. The Employee Retention Credit program was essentially shut down as of early 2024, so avoid any new filings for that. 

• January 1, 2025: Higher Section 179 limits apply to property placed in service in 2025. The SALT deduction cap rises to $40k (phase-out >$500k income) for tax year 2025. Expanded HSA rules (contribution limits, qualified expenses) are expected to be in effect by 2025. The 1099 reporting threshold increase to $2,000 kicks in for payments made in 2025 (forms issued in January 2026). If you have an on-site clinic or direct primary care for employees, 2025 is the year those become HSA-friendly.  

Action: For any changes effective in 2025, we’ll incorporate them in the tax planning we do in late 2024 and in your estimated tax calculations for 2025. 

• Tax Year 2025 Filings (done in 2026): You’ll first see many changes on the returns you file in early 2026 for the 2025 tax year. This includes the new SALT deduction limit on Schedule A, the higher child care credit if you provided that benefit, and new 1099 reporting thresholds (which will simplify your 2025 filing process). We expect the IRS to update forms and issue instructions well before then. We will guide you through those updates during the 2025 year-end closing and 2026 tax filing season. 

• January 1, 2026: Individual tax provisions that were sunsetting are now extended, so in 2026 the tax rates and brackets remain similar to 2025. However, note that the QBI deduction increase to 23% technically applies to tax years beginning after 2025 – meaning your first time using the 23% (instead of 20%) will be on your 2026 return, unless Congress accelerates it. Likewise, the expanded estate tax exemption takes effect in 2026. If you plan on making large gifts or other estate planning moves, 2026 and onward offers even more headroom. 

• 2025–2029 Window: Many of the business perks are available during this period: 

• Full expensing (bonus depreciation) for assets is in effect 2025–2029. 

• Immediate R&D deduction is allowed 2025–2029. 

• Eased interest deductions (EBITDA basis) apply for 2025–2029. 

• These provisions are set to sunset after 2029, meaning without further extension, in 2030 we’d revert to no bonus depreciation and stricter interest rules (and R&D capitalization would resume). While 2029 seems far off, it’s good to know these are not permanent – consider front-loading investments or financing plans to utilize the tax-friendly rules by 2029. We will revisit this as the dates draw nearer or if laws change again. 

• 2030 and Beyond: Unless extended again, 100% bonus depreciation ends in 2030 (back to normal depreciation), and R&D capitalization returns in 2030. The QBI 23% deduction and individual rate cuts remain in place permanently, as do the higher estate exemption and permanent SALT cap, until or unless a future Congress changes them. Essentially, the Act locks in many taxpayer-favorable rules long-term, except a few (bonus, R&D, interest) which are on a timer. This gives a planning horizon of at least five years of certainty for most provisions. 

Conclusion

Overall, the One Big Beautiful Bill Act provides significant tax relief and planning opportunities for business owners. With a higher small business income deduction, extended expensing provisions, and various incentive credits, the Act is designed to stimulate business investment and reward companies that invest in their workforce and communities.  

Even though OBBB is not law yet and while we expect some changes, this is the framework for Tax Planning in 2025.  

If you have any questions about how these specific changes affect your business or personal tax situation, please do not hesitate to reach out. We are here to help you navigate this new landscape and make the most of the opportunities it presents.