Business owners face a complex tax environment, and new rules under the OBBBA provide both expanded opportunities and important considerations as you plan for 2025 and beyond. From enhanced depreciation limits to improved treatment of research costs, these updates can make a real difference in your year-end strategy. Now is the time to understand how these provisions may affect your business.
Depreciation-Based Deductions
A business may benefit from one of two depreciation-related tax breaks, or both, for qualified property placed in service. The OBBBA enhances those tax breaks, beginning in 2025.
- Section 179 deduction: Section 179 allows a business to currently deduct the cost of qualified property up to an annual limit, subject to a phase-out. The TCJA doubled the limit to $1 million in 2018, with indexing . Now the OBBBA permanently increases the Section 179 deduction limit to $2.5 million and the phase-out threshold to $4 million in 2025, with future indexing.
Be aware that the Section 179 deduction cannot exceed the taxable income from all your business activities this year. This rule could limit your deduction for 2025.
- First-year bonus depreciation: The TCJA authorized 100% first-year bonus depreciation subject to a phase-out over a five-year period. The applicable percentage for 2025 was scheduled to be only 40%, but the OBBBA permanently restores the 100% deduction, retroactive to January 20, 2025.
Tip: Regular depreciation deductions may be claimed for any remainder. However, other special rules may apply, such as a separate set of limits on vehicles.
YEAR-END MOVE: Ensure that qualified property is placed in service before the end of the year. Otherwise, your business does not qualify for either tax break on its 2025 return.
Qualified Small Business Stock
Currently, if certain requirements are met, you may exclude from tax 100% of the gain from the sale of “qualified small business stock” (QSBS) if it is held at least five years.
To qualify for the exclusion, the amount of gain taken into account for a QSBS sale in a particular year was limited to $10 million and could not exceed ten times the basis of QSBS sold during the year. Also, the corporation could not have more than $50 million in assets when the stock was issued.
The OBBBA provides the following:
- A partial gain exclusion of 50% is allowed for stock held at least three years and 75% for stock held at least four years.
- The $10 million cap is increased to $15 million.
- The asset threshold for a “small business” is increased from $50 million to $75 million (indexed for inflation after 2026).
Tip: The taxable portion of a QSBS sale may qualify as long-term capital gain eligible for favorable tax treatment.
Work Opportunity Tax Credit
If your business becomes busier than usual during the holiday season, it may add to the existing staff. Consider all the relevant factors, including tax incentives, in your hiring decisions.
YEAR-END MOVE: When appropriate, hire workers eligible for the Work Opportunity Tax Credit (WOTC). The credit is available if a worker falls into a designated “target” group.
Generally, the WOTC is 40% of the first-year wages of up to $6,000 per employee, for a maximum of $2,400. For certain qualified veterans, the credit may be claimed for up to $24,000 of wages, for a $9,600 maximum. There is no limit on the number of credits per business.
Tip: The WOTC has expired and then been revived multiple times in the past but is not expected to be renewed again after 2025.
Employee Compensation
Generally, compensation is taxable to employees and deductible by businesses, but the OBBBA carves out a brand-new tax break for “overtime pay” received from 2025 through 2028. Under the new law, employees can annually deduct part of overtime pay, up to $12,500 for single filers and $25,000 for joint filers. The deduction is only available for the “premium” part of overtime pay based on the “time-and-a-half rate” mandated by the Fair Labor Standards Act (FLSA), and the deduction is phased out based on MAGI. The phase-out begins at $150,000 of MAGI for single filers and $300,000 for joint filers.
Similarly, the OBBBA creates a new deduction for up to $25,000 of tips received by an employee in a services industry from 2025 through 2028, subject to a phase-out above $150,000 of MAGI for single filers and $300,000 for joint filers.
Tip: The IRS announced that there will be no penalties on employers for failure to meet reporting requirements for these new employee deductions for2025. However, employers are encouraged to provide relevant information to help employees with their tax reporting. Beginning in 2026, the W-2 forms will be updated, and mandatory employer reporting requirements will apply.
Research & Experimental Expenses
Previously, the tax law permitted a company to fully deduct domestic R&E expenses in the year in which they were incurred, but the TCJA required costs incurred after 2021 to be capitalized and amortized over 60 months.
Under the OBBBA, taxpayers are allowed to immediately deduct domestic R&E expenditures incurred after December 31, 2024. For qualifying small businesses, this change from the TCJA-mandated capitalization may be applied retroactively to 2022-2024. Foreign R&D must continue to be capitalized and amortized over 15 years.
Tip: A business may also qualify for a research credit. See this article for further discussion of the OBBBA changes to tax treatment of R&E expenses.
YEAR-END MOVE: When warranted, ramp up research and experimental (R&E) activities. The OBBBA restores a faster write-off for qualified expenses.
Business and Employee Meals
Beginning in 2026, meals provided for the convenience of the employer or in on-site employer-operated eating facilities will be nondeductible, with certain limited exceptions. Business purpose meals, such as meals with clients or vendors, will remain 50% deductible. Certain meal expenditures, including meals provided during infrequent recreational or social activities for the benefit of employees (such as a holiday party or company picnic) and meals made available to the general public (such as catering at a trade show) will remain 100% deductible.
YEAR-END MOVE: Consider updating your general ledger to include accounts for the various categories of meal expenditures to minimize the burden of segregating meal expenditures at tax return filing time.
Miscellaneous
- Stock up on routine supplies (especially if you expect prices to rise soon). If you buy the supplies in 2025, they are deductible this year even if they are not used until 2026.
- The OBBBA imposes a 1% “floor” on deductions for charitable donations by C corporations, beginning in 2026. A corporation may increase its donations late in 2025 to avoid the upcoming floor on deductions.
- Owners of pass-through business entities like S corporations and partnerships may adopt SALT “workarounds” to qualify for state tax deductions or credits. The entities make the state tax payments, and then tax benefits are passed through to individuals on their personal tax returns.
- Maximize the qualified business income (QBI) deduction of up to 20% for pass-through entities and self-employed individuals. Note that special rules apply if you are in a “specified service trade or business” (SSTB). The OBBBA extends this tax break and makes it permanent.
- Keep records of collection efforts (e.g., phone calls, emails, and dunning letters) to prove debts are worthless. This may allow you to claim a bad debt deduction.
- Delay bonuses until 2026 if your business is an accrual-basis tax filer. The bonuses generally are deductible by the business on their 2025 return as long as they are paid by March 16, 2026, and are not subject to any contingencies as of year-end. Bonuses received by employees in 2026 are taxable in 2026. Caveat: This technique does not apply to bonuses paid to majority owners of a C corporation or certain owners of a partnership, an S corporation, or a personal service corporation.
We Are Here to Help
Thoughtful planning can help you take full advantage of the opportunities created by the OBBBA and position your business for a strong start to 2026. If you would like support reviewing these changes or creating an action plan that aligns with your goals, our team is here to help. You can also explore our related year-end guides, including 2025 Year-End Tax Planning for Investors and Estate & Gift Planning and 2025 Year-End Tax Planning for Individuals, for additional insights to inform your planning. Visit our Tax Services page or contact us to discuss your year-end strategy.
