By Jim Schmersahl and Alan Dierker
The One Big Beautiful Bill Act (OBBB) is a significant tax law change by Congress, which made several major changes under the Tax Cuts and Jobs Act (TJCA) of 2017 permanent, and created new tax benefits while enhancing others. For the business owner, understanding and effectively using its provisions to your benefit can produce significant tax savings.
Understanding the Tax Cuts and Jobs Act (TJCA) and OBBB
The 2017 TJCA was the most significant change to tax law in recent years, which enacted across-the-board tax cuts for individuals and corporations and made several notable changes to the individual and corporate tax structures. The so-called “Trump tax cuts” in the OBBB simply maintained the lower temporary tax rates for individuals but made permanent the corporate tax rate of 21%. Other changes include retaining and expanding the Qualified Business Income Deduction (QBID), new bonus depreciation and 179 Equipment Expensing Limits, and changing the deductibility of R&D expenses retroactive to 2022, among other changes.
Qualified Business Income 20% Deduction for Pass through Entity Owners
This 20% deduction was actually going to sunset and be repealed as of December 31, 2025, but was made permanent as well as enhanced. A new minimum deduction of $400 was added for taxpayers with at least $1,000 of Qualified Business Income. Additionally, phase-out amounts were increased to $150,000 and $75,000 respectively for Married Filing Joint and Single taxpayers that own Specified Service Trades or Businesses (SSTBs), an engineering firm filing as an S-Corporation or LLC for example.
Bonus and 179 Expensing – Immediate Write-Offs
Prior to the passage of the OBBB, Congress was allowing taxpayers to write off (depreciate) 40% of large asset purchases in the first year, which is now retroactively increased to 100% for property acquired and placed in service on or after January 19, 2025.
Additionally, Congress increased the amount a taxpayer may expense under IRC section 179 to $2,500,000 and increased the phase-out threshold amount to $4,000,000 of purchased equipment, significantly increasing the amount small businesses can deduct in an asset’s first year in service, but still retaining the option to depreciate assets over their class lives.
R&D Credits
Prior law required domestic Research & Development (R&D) expenses to be capitalized and amortized over five years. Under the OBBB the law change allows an immediate deduction for domestic R&D expenses retroactively back to 2022 via filing amended tax returns. It also allows taxpayers an option to accelerate any remaining Section 174 (R&D) deductions. This is a substantial change for companies with a large amount of R&D expenses.
Pass the SALT
One interesting change in the new OBBB is the change to the limitation for State and Local Taxes, increasing from a hard cap of $10,000 for most taxpayers to $40,000. Although most states passed some version of a Passthrough Entity Tax as a workaround for the original limitation, it may no longer be necessary to utilize this in the future.
Excluding Income from the Sale of Section 1202 Qualified Small Business Stock
The OBBB made significant changes to the treatment of Section 1202 stock in that it increases the eligibility limit on the corporation’s aggregate gross assets at the time of issuance from a $50 million limit to a $75 million limit. Also, OBBB modifies the Qualified Small Business Stock exclusion to provide a tiered exclusion based on the holding period of the stock by the taxpayer.
Conclusion
The recent passage of the OBBB produced many changes to various business tax laws and created meaningful planning opportunities for businesses and their owners. Understanding which changes affect your unique situation allows you, as business owner, to make sound planning decisions and achieve long-term reductions of your tax liability. Seek tax advice from a qualified professional before making any big decisions.
Jim Schmersahl, CPA, is a Partner at Schmersahl Treloar & Co. He can be reached at 314.966.2727. Alan Dierker is a Tax Manager at Schmersahl Treloar. She can be reached at 314.966.2727.