Bonus Depreciation

The One Big Beautiful Bill Act (OBBB) brings significant changes to bonus depreciation rules, aiming to incentivize business investment. Here’s a summary of the key adjustments:

• Permanently restores 100% first-year bonus depreciation expensing of qualified assets acquired and placed in service beginning January 20, 2025.  Prior to this bill, bonus depreciation was set to phase out with a first-year 40% expensing in 2025 and 20% first-year expensing in 2026. Some states do not conform to the federal guidance on bonus depreciation.

• New Bonus Depreciation for Manufacturing QPP (Section 168(n)):
  Expands the scope of qualified production property assets to include manufacturing buildings.   This QPP will be eligible for 100% bonus depreciation until 2029, (special property until 2030) a significant benefit for domestic manufacturers and supply-chain operators.
• This restoration will be helpful for those taxpayers who were contemplating a cost segregation study.

Section 179 Expensing Cap Increased

Small businesses can expense up to $2.5 million in qualifying property (up from $1.22M), with the phase-out starting threshold also rising to $4 million (up from $3.15M).

Section 199A: Qualified Business Income Deduction

• Makes the QBI deduction a permanent provision at 20%.
• Expands the limitation phase-in window for certain taxpayers from $50,000 for single filers ($100,000 for married filing jointly) to $75,000 for single filers ($150,000 for married filing jointly). 
• Creates a minimum deduction of $400 for taxpayers who materially participate and have $1,000 or more in qualified business income.

Limited Business Interest Expense

There is a permanent provision to restore the TCJA’s EBITDA type calculation of the business interest deduction limit for tax years beginning in 2025. 

Previously starting in 2022, taxpayers were to use an EBIT type calculation to determine the allowable interest expense deduction which increased the number of taxpayers that were limited in their business expense deductions.

Innovation, Research and Development

• Permanent provision that allows for the immediate expensing of domestic research costs.  Foreign R&D expenditures must still be capitalized under IRC Section 174.  Under previous law, all R&D expenditures were required to be capitalized and amortized over 5 or 15 years, domestic and foreign expenses, respectively.
• Eligible small businesses (annual average gross receipts ≤ $31 M over the past three years) may elect to retroactively apply full expensing to tax years beginning in 2022, allowing them to amend prior returns and recover previously amortized costs.  
  
  • The retroactive election must be made within one year from the enactment, which means that amended returns for 2022–2023 must be filed by July 2026.
  • If a 2024 tax return has not yet been filed, then the originally filed tax return can include these changes for R&D expensing for 2024, but the catch-up will wait until the 2025 tax return for the 2022 and 2023 costs to be expensed (If not amending the prior year tax returns).
  • If the 2024 tax return has already been filed, an amended tax return can be filed before July 2026 to recoup the previously amortized 2024 R&D costs.
• For those businesses not wanting to amend previously filed tax returns or not eligible under the gross receipts limit, the OBBB provides an ability to accelerate the remaining unamortized amounts of the previously capitalized research costs incurred in 2022 through 2024 as a single deduction on the 2025 tax return or spread out the remaining costs evenly on the 2025 and 2026 tax returns.  This acceleration will most likely be done through an automatic adjustment on Form 3115, guidance pending.

Qualified Small Business Stock (QSBS) Provision of Section 1202

Expands the Section 1202 benefit in three ways:

1. Provides a tiered gain exclusion for QSBS, allowing a:
   
   • 50% exclusion for shares held more than three years, 
   • 75% exclusion for shares held more than four years, and a 
   • 100% exclusion for shares held more than five years. 
2. Increases the corporate-level gross assets ceiling from $50 million to $75 million. 
3. Increases the per-issuer lifetime exclusion dollar cap from $10 million to $15 million.

Charitable Contributions

• Starting in 2026, the act creates a 1% floor on corporate charitable deductions, allowing deductions only for contributions exceeding 1% of taxable income. It also adds a 0.5% floor for individual itemizers. The disallowed portion may be carried forward. 
• Individuals who do not itemize their deductions, can claim an above the line cash charitable deduction of up to $1,000 (or $2,000 for married couples filing jointly). 

Individual State And Local Tax Deduction Limitation (SALT Cap)

• The SALT limitation is increased to $40,000 ($20,000 for married separately filers) and indexed for inflation through tax year 2029, after which the limitation would revert to $10,000 ($5,000 for married filing separately taxpayers). The limitation is phased down for taxpayers with modified adjusted gross income over $500,000, ($250,000 for married filing separately taxpayers) but not to be reduced below a $10,000 deduction.  AMT rules could come into play again for some taxpayers.
• Pass-through entity tax (PTET) elections: No new limitations are placed on pass-through entity taxes.

Limitation on Tax Benefit of Itemized Deductions

• Adds a new overall limit on itemized deductions that caps the value of each dollar of itemized deductions at $0.35, in most cases, and applies only to taxpayers in the highest individual income tax bracket so that the deduction that would be taken if the taxpayer’s top marginal rate was 35% rather than 37%.
• This new limitation is effective for taxable years beginning after December 31, 2025.

Personal Exemptions

Includes a temporary increase to a $6,000 deduction for qualified individuals the age of 65 and over, up from $1,600 through December 31, 2028.  There will be phaseouts for modified adjusted gross income exceeding $75,000 ($150,000 married filing jointly).  No change has been made directly to the taxation of social security income as previously discussed in Congress.

Cash Tips

• Up to $25,000 in cash tips  or charged tips from certain businesses can now be allowed as an above the line deduction deducted from federal income tax for tax years 2025 through 2028 per tax return (phases out at MAGI over $150K individual / $300K married filing jointly). Tips remain subject to Social Security (FICA), Medicare, state and local taxes, and reporting rules. 
• Worker status does not matter but the type of work does. Both W-2 employees and 1099 contractors receiving tips are included.

Overtime Pay

Up to $12,500 (single) or $25,000 (married filing jointly) in qualitfued overtime compensation will be allowed as an above-the-line deduction from federal income tax (2025 through 2028), phasing out like the tips provision.  Overtime wages are still fully subject to Social Security, Medicare, and state/local taxes. 

Car Loan Interest

• There is a new deduction for up to $10,000 per year for qualified interest paid on loans used to purchase new U.S. assembled personal-use vehicles beginning on January 1, 2025 through 2028.
• The tax deduction for auto loans phases out when MAGI exceeds $100,000 for an individual and between $200,000 if you file jointly.
• The gross vehicle weight rating must be under 14,000 pounds to qualify.

Child Tax Credit

Permanently increases the Child Tax Credit to $2,200 per qualifying child under the age of 17, with up to $1,800 of the amount refundable through the Additional Child Tax Credit. The phaseout thresholds increase to $500K for married filing jointly taxpayers, $250K for single and married filing separately, and $375K for head of household taxpayers.

Phaseout of Certain Credits

Repealed the federal clean vehicle (EV) credit and several other green energy tax incentives, effective for vehicles placed in service and projects starting after September 30, 2025. The bill shifts focus away from green tax credits as part of its broader tax reform package and accelerates the phaseout for primarily wind, solar, tax incentives. 

Individual Trust Accounts (Trump Accounts)

Creates a new type of tax-favored account designed to benefit children under age 18 for education, small business investments and first home purchases. The annual contribution limitation to the accounts would be $5,000. This provision also includes a one-time government funded $1,000 deposit for qualifying children born between Dec. 31, 2024, and Jan. 1, 2029, and enables employers to make tax-free contributions to these accounts annually.

Estate Planning

Increases the estate, gift, and generation-skipping tax exemption amounts to $15 million in 2026, adjusted for inflation, and makes them permanent.  The 2025 lifetime exemption will be $13.99 million per person and the gift tax exemption will be $19,000 per donee.

• Please be advised that not all states follow the federal rules.

What This Means For You

The OBBB changes mean tax planning for 2025 is super important, especially with the third-quarter estimated tax payment deadline coming up fast. Chat with your tax advisor and accountant to get a handle on how this bill might hit your business’s taxes, cash flow, and profits, and what it means for your personal tax picture.