Small Business Taxes & ManagementTM--Copyright 2025, A/N Group, Inc.
Introduction
President Trump has signed the One Big Beautiful Bill Act (OBBBA) (it is also known by other official names). The bill contains a slew of provisions, most of them beneficial to both individuals and businesses, but you've got to read the fine print. Many of the 2017 provisions have been made permanent, most with minor changes. Some provisions have phaseouts, some expire in a few years. In addition, you've got to watch the definitions in the new law. And if you're looking for it, the "no tax on social security" is not in the Act. States have their own rules. Some begin with federal adjusted gross income (AGI) and add or subtract income or deductions. Some have a different way of computing income. Some automatically adopt the federal changes and for some, the federal changes must be adopted by the legislature. Finally, if you use tax software to do your own return or for planning, be sure the software has been updated for the changes.
We'll review the provisions of most interest over the next several issues.
Individual Provisions
Basics of Tax Cuts and Jobs Act Made Permanent This one's simple. Many of the basic rules of the 2017 tax act are now permanent including the following:
Personal Exemption This was eliminated in the 2017 Act, but it's now permanent. However, seniors age 65 and older will get a $6,000 deduction for tax years beginning after 2024 and before 2029. This is in lieu of repealing the tax on social security. But that deduction phases out for taxpayers with MAGI (modified adjusted gross income) of $75,000 for individuals; $150,000 for those filing a joint return.
Standard Deduction The increased standard deduction is permanent and for 2025 it will be $15,750 for individuals; $23,625 for head of households; and $31,500 for married, filing joint and will be indexed for inflation in subsequent years.
SALT For taxpayers in high tax states the $10,000 cap on state and local taxes was a heavy hit. But not only New Yorkers and Californians are now feeling the impact. Real estate taxes in many states are now $6,000 and above and could be much higher depending on the value of the home. It doesn't take much in income taxes (or sales taxes) to break the $10,000 cap. The new law temporarily increases the limit to $40,000 and indexes it for inflation by 1% annually. Beginning in 2030 the cap drops back to $10,000. For higher income taxpayers, those with MAGI over $500,000 the extra deduction is phased out by 30% of the excess. The deduction will never drop below $10,000. You still have the option of deducting sales tax instead of income tax.
What about the PTET (pass-through entity tax) allowed by most states? The concept is that a pass-through entity could deduct the tax on it's return, thereby securing a federal deduction at the entity level. There was a move to eliminate the PTET in the House version, but that failed to make it through the Senate. The final version does not restrict use of the PTET deduction.
Comment
Should you abandon the PTET election? That depends on your tax situation. If you're well under the $40,000 cap it might save some extra work and expense if you use an outside firm to file the paperwork. Because state tax rates and your personal state income and real estate taxes will drive the decision. Use your tax advisor, or tax software if you do your own return, to guide you. And don't forget to take into the phaseout if you're income is high.
Child Tax Credit There are two portions to the child tax credit--a nonrefundable amount and a refundable amount. A refundable credit is one where the taxable is entitled to the amount, even if he owes no taxes. The new law increases the nonrefundable amount to $2,200 per qualifying child beginning this year and now indexes the credit for inflation. The refundable amount is $1,400 and now permanent and indexed for inflation. The $500 credit for a dependent other than a child with a permanent phaseout of $200,000 ($400,000 for married filing joint).
Casualty Losses. The new law continues to limit the itemized deduction for personal casualty loses. The Act makes this provision restricting the loss to federally declared disaster losses permanent. However the new law expands the deduction to include certain state-declared disasters. The definition includes any hurricane, tornado, storm, high water, wind-driven water, tidal wave, tsunami, earthquake, volcaniceruption, landslide, mudslide, snowstorm, or drought or, regardless of cause, any fire, flood, or explosion, in any part of the State, which in the determination of the Governor of such State and the Secretary causes damage of sufficient severity and magnitude to warrant the application of this provision.
Itemized Deductions The restriction on the deduction of miscellaneous itemized deductions is now permanent.
The tax benefit on itemized deductions that are otherwise deductible will be reduced by 2/37 of the lesser of (1) itemized deductions or (2) taxable income of the taxpayer for the taxable year (determined without regard to this section and increased by such amount of itemized deductions) as exceeds the dollar amount at which the 37 percent rate bracket begins with respect to the taxpayer. The limitation is not applicable to the amount of the deduction for qualified business income.
No Tax on Tips This is a temporary deduction of up to $25,000. The exclusion applies to tax years beginning in 2025 and ends with tax years beginning in 2029. There are a number of restrictions here.
First, the deduction from adjusted gross income is limited by a taxpayer's modified adjusted gross income (MAGI). MAGI here includes tip income. The deduction phases out for taxpayers with MAGI of $150,000 ($300,000 for a married couple filing joint). The deduction is reduced by $100 for each $1,000 in excess of the above thresholds. The deduction is allowed to both itemizers and nonitemizers.
Second, the deduction applies only to individuals in occupations that customarily and regularly received tips on or before December 31, 2024 in the course of a trade or business. The IRS is directed to issue a Published List of Occupations Traditionally Receiving Tips within 90 days of passage of the Act. The definition here is a lot less restrictive than originally suggested.
Third, the qualified tips must be included on a statement furnished to the taxpayer such as a W-2 or 1099 or reported to the employer on Form 4137.
There's a lot of room for abuse here and the IRS will have to issue regulations explaining a number of points and closing loopholes.
No Tax on Overtime qualified overtime compensation of up to $12,500 for an individual or $25,000 for a married couple filing joint received will be deductible from gross income. The deduction is phased out for taxpayers with MAGI exceeds $150,000 ($300,000 for those filing married, joint. The phaseout regime is $100 per $1,000 over the threshold. Qualified overtime compensation means overtime compensation paid to an individual required under section 7 of the Fair Labor Standards Act of 1938 that is in excess of the regular rate (as used in such section) at which such individual is employed. If you're married you have to file a joint return to secure the deduction. This provision also has a limited life. It applies to tax years beginning after December 31, 2024 and is not applicable for tax years beginning after December 31, 2028. To qualify for a deduction the amount of overtime must be reported separately on a W-2 (or 1099 if the worker is not an employee. There are a number of questions concerning this provision that will have to be answered by IRS regulations.
Note:
The rules requiring reporting of overtime and tips could be more complicated than many small businesses want to deal with unless they use a well established payroll service.
Car Loan Interest We've said you have to read the fine print. This new benefit is the poster child. For taxable years 2025 through 2028 you can deduct as an itemized deduction interest on a qualified passenger vehicle loan up to $10,000. The deduction applies to interest expense incurred in 2025 through 2028. Here are the most important points:
Despite the list above, a significant proportion of the vehicles sold in the U.S. will qualify and the savings could be significant.
Comment--
Keep in mind that deduction for auto interest and the higher cap on state and local taxes as well as any other itemized deductions won't help you unless you clear the top of the standard deduction. That could be fairly easy if you're single and have an auto loan. Likely not so easy if you're married filing joint and don't have mortgage interest and/or significant medical expenses. Best approach? Give your tax preparer all your information. Most preparers will automatically enter the information in the software and let the program calculate the best method--itemize or standard deduction.
Bicycle Commuting Reimbursements They're permanently excluded from qualified transportation fringe and other commuting benefits.
Mortgage Interest The inclusion of mortgage insurance premiums as a deduction for mortgage interest is now permanent.
-----This is the first of a several part explanation of the Act.
--Last Update 07/11/25
Copyright 2025 by A/N Group, Inc. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. The information is not necessarily a complete summary of all materials on the subject. Copyright is not claimed on material from U.S. Government sources.--ISSN 1089-1536
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