With ongoing economic uncertainty, evolving regulatory requirements, and competitive market pressures, strategic tax planning has become essential for businesses seeking to optimize profitability and cash flow. As we approach year-end, now is the critical time to review your 2025 business tax position and implement strategies to reduce, defer, or accelerate taxes due in both the current and upcoming tax years.
This letter addresses key federal tax planning issues for U.S. businesses as of November 2025. Results may vary based on business structure, state or foreign tax law, and specific circumstances. Before making tax or financial decisions regarding any of the topics below, we recommend consulting with your trusted advisor.
Business Tax Highlights
C Corporation Tax Rate
C corporations are subject to a flat 21% federal income tax rate on taxable income. This rate applies regardless of income level and has remained constant since the Tax Cuts and Jobs Act of 2017.
Pass-Through Entity Taxation
- S Corporations, Partnerships, and LLCs: Taxed at owner level. Entity generally pays no tax; income/losses pass through to owners' tax returns.
- Reasonable Salary Requirement (S Corps): Owners must pay reasonable W-2 wages; excess profits can be distributed as dividends subject to self-employment tax only on wages.
- Self-Employment Tax: Partners and sole proprietors pay 12.4% Social Security tax (up to $176,100 wage base in 2025) and 2.9% Medicare tax on net business income.
Business Income Tax Deductions
Maximize ordinary and necessary business deductions to reduce taxable income:
- Salaries and wages paid to employees.
- Reasonable compensation to owner-employees.
- Rent, utilities, and occupancy costs.
- Depreciation and Section 179 expensing (see Depreciation and Asset Disposition below).
- Business vehicle and travel expenses.
- Advertising and marketing expenses.
- Professional fees (accounting, legal, consulting).
- Interest on business loans.
- Health insurance premiums for employees and self-employed individuals.
Timing of Income and Expenses
Cash-method businesses should consider timing strategies before year-end:
- Delay Income Recognition: Postpone invoicing or delivery of goods/services to January 2026 where feasible.
- Accelerate Deductible Expenses: Pay bills before December 31, 2025 for deductions in current year (subject to economic performance and other rules).
- Accrual-Method Businesses: Have less flexibility; income is recognized when earned and expenses when incurred or properly accrued.
Depreciation and Section 179 Expensing
Businesses can accelerate deductions for qualifying assets:
- Section 179 Deduction: For 2025, businesses may immediately deduct up to $1,160,000 of qualified property placed in service during the year[3]. Excess amounts are carried forward.
- Bonus Depreciation: 80% bonus depreciation allowed for qualified property in 2025 (phasing down over time).
- Cost Segregation Studies: Accelerate depreciation on real property by identifying personal property components.
- Qualified Leasehold Property: Enhanced depreciation available for certain restaurant, retail, and qualified leasehold improvements.
Net Operating Losses (NOLs)
For tax year 2025:
- NOLs are limited to 80% of taxable income in the year of generation.
- NOLs cannot be carried back; they carry forward indefinitely subject to the 80% limitation in each carryforward year.
- Excess business loss limitation applies to non-corporate taxpayers: $313,000 ($626,000 for joint filers) in 2025. Disallowed amounts become NOL carryforwards.
Research and Development (R&D) Tax Credit
Qualifying businesses may claim a nonrefundable tax credit for eligible research expenses:
- The credit generally equals 20% of qualifying R&D expenses exceeding a base amount.
- Qualified expenses include wages, supplies, and contractor costs related to developing new or improved products, processes, or software.
- The credit can offset regular income tax and, in some cases, may be refundable for smaller businesses.
- Businesses should document R&D activities carefully to support credit claims.
Work Opportunity Tax Credit (WOTC)
Employers may claim a credit of up to $2,400 per employee hired from targeted groups, such as veterans, TANF recipients, or ex-felons:
- Credits range from $1,200 to $2,400 depending on employee category and retention period.
- Employer must obtain and maintain IRS Form 8850 certification before the job offer is made.
- Eligible businesses should coordinate with HR to identify and document qualifying hires.
Business Vehicle Deductions and Section 280F Limits
- Standard Mileage Rate (2025):5 cents per mile for business usedd.
- Actual Expense Method: Depreciation, gas, insurance, repairs, and maintenance are deductible; includes Section 179 expensing and bonus depreciation subject to limits.
- Luxury Auto Limits: For vehicles placed in service in 2025, first-year depreciation is limited to $13,200 for sedans (subject to additional limits based on property class).
- Electric Vehicle Credit: Businesses may claim up to $7,500 credit (under Section 30D) for qualified electric vehicles purchased in 2025.
Payroll Tax Considerations
- FICA Wage Base (2025):2% Social Security tax applies to first $176,100 of wages; 1.45% Medicare tax (no cap) plus 0.9% additional Medicare tax on wages above $200,000 (single) and $250,000 (joint).
- FUTA: Federal unemployment tax of 6% applies to first $7,000 of each employee's wages annually; 5.4% credit available for state unemployment taxes.
- Estimated Quarterly Tax Deposits: Ensure timely deposits to avoid penalties and interest.
- Form 941-X Corrections: Use to correct previously filed payroll tax returns and claim refunds if overpayment occurred.
Qualified Business Income (QBI) Deduction
Pass-through entity owners may deduct up to 20% of QBI, subject to limitations:
- Generally available to self-employed individuals, S corp owners, partnership interests, and LLC members.
- Subject to W-2 wage and qualified property limitations for specified service trades or businesses (SSTBs), such as law, consulting, financial services, and health services.
- QBI deduction phases out for high-income taxpayers; limitation begins at $191,950 (single) and $383,900 (joint) for 2025.
- Certain businesses—such as engineering, construction, and architectural services—may have expanded QBI eligibility compared to prior years under recent guidance.
State and Local Tax (SALT) Planning for Businesses
- Pass-Through Entity Tax (PTET): Several states allow owners to claim a credit for state PTE taxes paid, potentially circumventing the SALT deduction cap.
- Business Property Taxes: Fully deductible as business expenses (not subject to the $10,000 SALT cap for individuals).
- State Income Tax: Business income taxes may be deductible, depending on state structure and entity type.
- Sales Tax Nexus: Evaluate state sales tax obligations; collection requirements vary by state and transaction type.
Charitable Contributions and Employee Giving
- Businesses may deduct charitable contributions to qualified organizations, subject to AGI limitations (generally 10% of taxable income for most businesses).
- Employee charitable giving programs (e.g., payroll deductions matched by employer) are deductible business expenses.
- Donations of inventory and equipment may qualify for enhanced deductions under certain circumstances.
Related-Party Transactions and Transfer Pricing
- Transactions between related parties (e.g., between parent and subsidiary, or between partners) must be at arm's length prices.
- Improper transfer pricing can result in adjustments, penalties, and double taxation.
- Documentation of transfer pricing methodology is critical for businesses engaged in cross-border transactions.
Retirement Plan Contributions for Business Owners
- Solo 401(k): Allows up to $23,500 elective deferral plus employer contribution of up to 25% of compensation (combined limit $69,500 in 2025); $31,000 elective deferral for age 50+ with catch-up.
- SEP IRA: Employer can contribute up to $70,000 or 25% of eligible compensation (whichever is less) for 2025.
- SIMPLE IRA: Available for businesses with fewer than 100 employees; combined employer-employee contribution limit is $16,500 in 2025 ($20,500 for age 50+).
- Contributions are deductible and must be deposited before extended tax filing deadline.
Small Business Stock (Section 1244 and Section 1045)
- Section 1244: Allows ordinary loss treatment (not capital loss) on worthless small business stock, up to $50,000 per year ($100,000 joint).
- Section 1045 Rollover: Allows deferral of capital gains on qualified small business stock held more than six months when proceeds are reinvested within 60 days.
Foreign Income and GILTI
- Global Intangible Low-Taxed Income (GILTI):S. shareholders of foreign corporations may be subject to tax on GILTI at preferential rates, subject to the QBI deduction.
- Foreign Derived Intangible Income (FDII):S. businesses exporting goods/services may deduct up to 37.5% of FDII, effectively taxing FDII at a reduced rate.
- Foreign Tax Credits: Available to offset U.S. tax on foreign-source income, subject to limitations.
Energy Efficient Commercial Building Property Credit
Businesses making qualified energy-efficient improvements to commercial buildings may claim a credit of up to $5 per square foot of improved property (maximum $25 per square foot):
Year-End Action Items
- Review realized gains and losses; consider harvesting losses to offset gains and income.
- Evaluate timing of income recognition and expense payment for cash-basis entities.
- Assess Section 179 expensing and bonus depreciation opportunities; place assets in service before December 31.
- Maximize retirement plan contributions and ensure timely funding.
- Review payroll tax deposits and compliance with quarterly estimated payments.
- Evaluate QBI deduction eligibility and limitations for pass-through entities.
- Consider charitable giving strategies and document all contributions.
- Consult with your tax advisor regarding state tax planning, credits, and compliance requirements.
Contact Information
For tailored advice regarding your year-end business tax planning, please contact our office to arrange a consultation. We are committed to helping you optimize your tax position and position your business for growth in 2026.