As the year draws to a close, it's time to focus on strategies that can reduce your business's 2025 tax bill. The recently passed One Big Beautiful Bill Act (OBBBA) has changed the game, creating new opportunities for savings and modifying some classic tax-reduction measures.
Getting a head start on your year-end tax planning is always a smart move. Understanding how these legislative changes affect your business can help you make informed decisions before the December 31 deadline. Let's explore some of the most beneficial strategies you can implement.
Investing in capital assets before the end of the year is a proven strategy for cutting taxes, and the OBBBA makes it even more powerful for 2025.
Bonus Depreciation
Under previous law, the 100% first-year bonus depreciation was being phased out, dropping to 40% in 2025. The OBBBA reverses this, restoring 100% bonus depreciation for qualified new and used assets acquired and placed in service after January 19, 2025. This permanent change allows for a full deduction of the cost in the year of purchase, providing a significant immediate tax benefit.
Section 179 Expensing
The new law also increases the Section 179 expensing limit to $2.5 million for small and midsize businesses, with the phaseout threshold rising to $4 million. While most assets eligible for bonus depreciation also qualify for Sec. 179, this election can be more flexible. You can apply it on an asset-by-asset basis, which is useful for certain types of property not eligible for bonus depreciation, such as roofs and HVAC systems for nonresidential buildings.
Many states introduced Pass-Through Entity Tax (PTET) deductions to help business owners navigate the $10,000 cap on state and local tax (SALT) deductions. The OBBBA temporarily raises this SALT cap to $40,000 for 2025, which might make the PTET seem less critical.
However, the higher cap is subject to income phaseouts, meaning the $10,000 limit still applies once modified adjusted gross income (MAGI) reaches $600,000. In these cases, or for owners who take the standard deduction, the PTET can still be a valuable tool. It allows the business to deduct state taxes at the entity level, which can lower an owner's federal income and potentially reduce self-employment tax liability.
The QBI deduction allows eligible owners of pass-through entities to deduct up to 20% of their qualified business income. While the OBBBA expands the income limits for this deduction starting in 2026, there are still steps you can take for your 2025 return.
If your income is approaching the threshold where the deduction is limited, consider strategies like accelerating expenses into 2025 or deferring income to 2026. You could also increase W-2 wages or purchase qualified property before year-end to maximize your potential QBI deduction. Careful planning is key to navigating these limitations effectively.
The OBBBA has also introduced favorable changes for businesses with research and experimental (R&E) expenses. For 2025, it allows companies to capitalize domestic R&E costs and amortize them over five years.
More importantly, it offers retroactive benefits. Small businesses (with average annual gross receipts of $31 million or less) can now claim the R&E deduction going back to 2022. Businesses of any size that incurred these expenses from 2022 to 2024 can also choose to accelerate the remaining deductions over one or two years. Reviewing your past R&E spending could unlock significant tax savings on your upcoming return.
While these OBBBA-related strategies are significant, don't forget about other valuable year-end tactics, like deferring income, accelerating expenses, or maximizing retirement plan contributions. The end of the year will be here before you know it.
Now is the time to act. By partnering with a trusted advisor, you can confidently navigate these changes and build a tax strategy that fits your unique business goals. We're here to help you identify the best opportunities to trim your 2025 tax liability.