The recently passed tax legislation brings significant changes that will directly impact how small businesses manage their finances, report income, and plan for the future. Understanding these changes is crucial for maintaining compliance and maximizing tax benefits available to your business.
This post breaks down the most important provisions affecting small businesses, from enhanced deductions and credits to new reporting requirements. Whether you’re a sole proprietor, partnership, or small corporation, these changes will influence your tax strategy and cash flow management in the coming years.
Tax-Free Treatment for Tips and Overtime
Two new provisions provide tax relief for businesses with tipped employees or those paying overtime compensation. Both provisions take effect in January 2025 and sunset after 2028.
Tips Exemption Requirements
Businesses in traditional tipping industries can now provide tax-free tip income to employees, subject to several conditions:
- Employers must report tip income with transitional relief allowing approximations in 2025
- The business must operate in a traditional tipping industry, not a specified service trade or business
- Annual limit of $25,000 per employee with 10% phaseout above $300,000 of income
Navigate Tax Changes with Confidence
Overtime Exemption Benefits
Overtime pay becomes exempt from taxation up to $25,000 for married filing jointly taxpayers. The overtime must be paid in excess of regular rates to qualify, with a 10% phaseout when adjusted gross income exceeds $300,000.
These provisions can help businesses attract and retain employees while providing meaningful tax benefits to workers.
Expanded Depreciation and Expensing Options
The tax bill provides significant benefits for businesses investing in equipment and property through enhanced depreciation rules.
Bonus Depreciation Becomes Permanent
Section 70301 permanently extends bonus depreciation, returning to 100% depreciation for eligible property placed into service in 2025 and later. This change provides immediate tax relief for businesses making equipment purchases.
Property placed into service in earlier years (2023-2024) continues to follow the lower percentage bonus depreciation rules.
Research and Development Expensing
Domestic research and development expenses can now be expensed immediately rather than amortized over five years. Any unamortized costs from prior years can be deducted in 2025 through an election. This change provides substantial cash flow benefits for businesses investing in innovation.
Small businesses with average receipts under $31 million over the last three years can elect to apply this treatment retroactively to 2022. The election must be made within specific timeframes and requires filing amended returns for affected years.
Qualified Production Property Deduction
Section 70307 provides a 100% deduction for the cost of new qualified production property used in manufacturing activities. This provision targets businesses engaged in production activities located in the United States.
The property must meet specific requirements:
- Construction begins after January 19, 2025, and before January 1, 2029
- Placed in service prior to January 1, 2031
- Used for manufacturing, production, or refining activities
- Located in the United States and built by the taxpayer
Increased 1099 Reporting Threshold
The threshold for issuing 1099 forms increases from $600 to $2,000, with continued inflation adjustments. This change reduces administrative burden for businesses while maintaining appropriate reporting requirements.
Enhanced Child Care Credits and Benefits
Several provisions enhance child care benefits for both businesses and employees, effective starting in 2026.
Employer Child Care Credit Improvements
The employer-provided child care credit increases from 25% to 40% of qualified expenditures, with small businesses receiving 50% credit rates. Maximum credit limits increase from $150,000 to $500,000 ($600,000 for small businesses).
Dependent Care Assistance Program Changes
Employer-provided dependent care assistance increases from $5,000 to $7,500 maximum annual benefit, providing additional value for employee benefits packages.
Child and Dependent Care Tax Credit Enhancements
The child and dependent care tax credit increases to 50% of expenditures from 35%, with income thresholds that don’t decrease below 35% compared to 20% previously. Credit percentage reductions now begin at $150,000 of income for married filing jointly taxpayers, compared to $15,000 previously.
Qualified Business Income Deduction Gets a Boost
The deduction was extended past 2025 and made permanent at the same 20% rate with similar eligibility requirements in terms of industry, income and wages/property.
Smaller businesses will benefit significantly from changes to the Qualified Business Income (QBI) deduction. Starting in 2026, the legislation establishes a new minimum deduction of $400, provided your active business income exceeds $1,000.
This modification ensures that even smaller businesses can access meaningful deductions, potentially reducing their overall tax burden. Business owners should begin planning now to understand how this change will affect their 2026 tax strategy and cash flow projections.
Trump Accounts: New Retirement Savings Option
The legislation introduces “Trump Accounts” under Section 70204, creating a new retirement savings vehicle similar to traditional IRAs. These accounts target families with children and include specific provisions for business owners.
Account Structure and Rules
Trump Accounts follow traditional IRA rules with key modifications:
- Available for individuals who haven’t reached age 18 by the close of 2025
- No distributions permitted before the beneficiary turns 18
- Contributions are not deductible
- Investment limited to mutual funds or exchange funds
- Annual contribution limit of $5,000 until beneficiary reaches 18, adjusted for inflation
Employers can contribute up to $2,500 to employee Trump Accounts without including the contribution in the employee’s gross income. This provides businesses with another tool for employee benefits while offering tax advantages.
Children born between 2025 and 2028 will receive $1,000 in government funding, making these accounts particularly attractive for business owners planning family benefits.
Advanced Manufacturing Investment Credit
The CHIPS credit increases to 35% of the cost of advanced manufacturing facilities for semiconductors and semiconductor equipment, providing substantial incentives for businesses in this sector.
Car Loan Interest Deduction for Personal Vehicles
A new deduction allows taxpayers to deduct interest on car loans for personal vehicles, effective from 2025 through 2028. While this primarily benefits individuals, business owners purchasing personal vehicles can take advantage of this provision.
The deduction requires specific conditions:
- Debt must be incurred after January 1, 2025, and secured by a vehicle for personal use
- Vehicle identification number must be included on the tax return
- Maximum deduction of $10,000 with 20% phaseout when income exceeds $200,000 for married filing jointly
- Vehicle must be new, passenger-type, with final assembly in the United States
Taxpayers will receive a 1099-style form from the lender showing the amount of personal passenger vehicle interest paid if it exceeds $600 for the year.
New Limitations on Itemized Deductions
The tax bill introduces new restrictions on itemized deductions that will affect business owners who itemize on their personal returns. The limitation begins at a rate of 2/37 of income above the 37% tax bracket threshold.
Small business owners who typically itemize deductions should work with their tax professionals to understand how these limitations might affect their overall tax strategy. This change could influence decisions about timing of deductions.
State and Local Tax Deduction Modifications
The State and Local Tax (SALT) deduction receives significant modifications under the new legislation. The deduction limit increases from $10,000 to $40,000, providing substantial relief for business owners in high-tax states.
However, this benefit includes a phasedown mechanism. Once income exceeds $500,000, the deduction phases out at a rate of 30%, completely eliminating the benefit at $600,000 of income. Business owners should plan around these phaseouts to maximize their deductions.
Enhanced Child Tax Credit Provides Additional Relief
The new tax bill increases the child tax credit from $2,000 to $2,200 per qualifying child. While this change primarily benefits individual taxpayers, small business owners will receive the benefit on their personal tax returns.
The enhanced credit maintains the same eligibility requirements as the previous version, ensuring consistent application across tax years.
Preparing Your Business for These Changes
These tax law modifications require careful planning and implementation. Business owners should work with qualified tax professionals to understand how these changes affect their specific situations and develop strategies to maximize benefits while maintaining compliance.
The temporary nature of many provisions means businesses should plan for both implementation and eventual expiration of these benefits. Understanding sunset dates and phase-out provisions will help maintain consistent tax planning strategies.