In today’s volatile economic environment, business owners face uncertainty on many fronts. As they seek to make decisions regarding expansion, contraction, or even changing lines of service or product offerings, many discover that a prudent plan from a few weeks ago has turned into an ill-advised one today. Fortunately, there has been one island of predictability in the vast sea of volatility – federal tax policy.
The One Big Beautiful Bill Act, a law enacted in the Summer of 2025, has preserved and extended some important tax provisions that were scheduled to expire at the end of this year. Businesses in all industries and of all sizes will be able to identify specific clauses that will help them to navigate the storm. In this article, we will discuss some key components of OBBBA, what steps businesses can take to benefit from these components, and some challenges for which they should prepare.
Bonus Depreciation
The Tax Cuts and Jobs Act made 100% bonus depreciation available to businesses for a short period of time but gradually phased down the percentages. The provision allowed for just 40% bonus depreciation in 2025, 20% in 2026, and zero in 2027 and future years. The OBBBA made 100% bonus depreciation permanent for fixed assets acquired and placed in service after January 20, 2025. This means that businesses can deduct the full cost of most fixed asset purchases (other than commercial or residential real property) in the year of purchase. Businesses can utilize the 100% bonus depreciation regardless of size, or profitability level. It even applies to SUVs and trucks with a gross vehicle weight of at least 6,000 lbs.
The OBBBA also increases the annual Section 179 expensing limit from $1 million to $2.5 million, with a phaseout threshold of $4 million (increased from $2.5 million). The changes to Section 179 are effective for property placed in service after December 31, 2024, with both the deduction and the phaseout threshold indexed for inflation in future years. For taxpayers eligible to use Section 179 expensing, the yearly expensing election can be used in addition to bonus depreciation to claim deductions for property not eligible for bonus depreciation or to deduct only a portion of the property’s cost.
In many cases, taxpayers have the flexibility to determine how much depreciation to claim in the year assets are placed in service. By claiming the default 100% bonus depreciation, electing out for certain categories of assets (or all assets), or making other available elections to slow down depreciation, taxpayers can manage taxable income in ways that benefit many other calculations.
Pass-Through Deduction
The OBBBA makes permanent the 20% deduction for qualified business income under Section 199A and favorably adjusts the phaseout of the deduction for taxpayers who do not meet the wage expense and capital investment requirements or who participate in a “specified service trade or business.”
The permanence of this provision provides welcome certainty for companies engaged in qualifying activities. The deduction is not available for a range of specified service businesses. There may be opportunities to segregate activities and to increase or allow deductions. The safe harbor for rental activities to qualify as a Section 199A trade or business under Rev. Proc. 2019-38 remains in effect.
New Employer Reporting Requirements On Tips And Overtime
Employers will be required to report qualified tips and qualified overtime compensation to both employees and the IRS beginning in 2025 to facilitate new individual deductions under the OBBBA. The deductions are effective from 2025 through 2028.
Businesses will have to make a number of important determinations to properly report tips, including:
- Identifying employees in occupations that customarily and regularly received tips before December 31, 2024
- Determining whether the tips are earned in a disqualified specified service trade or business
- Verifying that the tips are voluntary
For overtime reporting, employers will report only the additional compensation premium due to the higher overtime rate (the “half” in “time-and-a-half”). This includes only federal Fair Labor Standards Act (FLSA) required overtime premiums (not state/local or contractual overtime). Employees cannot use the same compensation as the basis for a deduction on their Form 1040 for both qualified tips and qualified overtime.
The IRS announced that it will not revise the 2025 Form W-2 or update 2025 withholding tables for qualified tips or qualified overtime, and it has not yet made clear the form and manner of reporting. Despite the current lack of clarity, employers will still be required to report qualified tips and qualified overtime to employees in 2025. Companies should update payroll and recordkeeping for the new reporting, which requires tracking data points that previously have never been separately identified. There will be transition relief in 2025 whereby the employer can approximate a separate accounting of amounts designated as qualified tips and qualified overtime using any reasonable method specified by the IRS. Qualified tips and qualified overtime remain subject to federal withholding and benefit plan compensation rules.
States Loom Large
Many states have decided not to adopt all the recent tax changes that benefit businesses and their owners. One of the most notable examples is bonus depreciation – states have chosen to limit the percentage of assets subject to bonus depreciation or even forbid it entirely. Such businesses must take their depreciation expense over a longer period, resulting in a lower deduction in the year of purchase and greater deductions in subsequent years. Virginia is one of the states that has not adopted bonus depreciation at this time.
States have also become more aggressive in going after businesses with “nexus,” or presence in their respective state. Businesses need not have a physical building location in order to create nexus, and the subsequent tax liability to the state. Business owners should be proactive in addressing these challenges to reduce the likelihood of costly and time-consuming audits and penalties.
Conclusion
Taxes have continued to change at both the Federal and state levels. It was welcome relief to see so many beneficial tax rules continue for the near future. We encourage you to reach out to your KWC advisor with questions about how the OBBBA may affect your tax situation.
Note: Some content borrowed with permission from BDO USA. Our firm is an independent member of the BDO Alliance USA, a nationwide association of independently owned local and regional accounting, consulting, and service firms.