2025 Tax Law Updates
Recent federal tax legislation includes a range of changes that affect individual taxpayers, small-business owners, and in many cases both. Because many of our clients earn income from multiple sources—such as wages, self-employment, investments, or pass-through businesses—this letter summarizes the key provisions most relevant to you and explains how they apply in practice.
Some provisions affect your personal tax return, while others affect the operation and taxation of your business. Where helpful, we note that distinction so you can better understand how these changes fit into your overall tax planning.
Individual Tax Provisions
Overtime Pay Deduction
The legislation introduces a new deduction for individuals who receive required overtime pay. This deduction applies at the individual level and may reduce taxable income for qualifying employees. It does not change employer payroll rules, withholding requirements, or business deductions, but it may affect your personal tax liability if you earn overtime wages.
Tip Income Deduction
Individuals who earn tipped income may deduct up to $25,000 of tip income, subject to income-based phaseouts. While this provision can provide meaningful tax relief for employees, employers must continue to report tips as wages, pay employer FICA taxes on those tips, and may still claim the employer FICA tip credit if eligible. This distinction is important for individuals who are both business owners and tipped workers.
Social Security Income Taxation
The legislation introduces a temporary exemption for a portion of Social Security income for taxpayers age 65 or older. Eligible individuals may exclude up to $6,000 of Social Security benefits from taxable income, while joint filers may exclude up to $12,000, provided both spouses are eligible. This exemption applies for tax years 2025 through 2028 and is subject to income-based limitations. This provision may reduce taxable income for many retirees and should be considered when evaluating retirement income strategies, withholding, and estimated payments.
Health Care Premium Tax Credit Changes
Recent legislative action and related guidance affect the Affordable Care Act (ACA) Premium Tax Credit, which helps offset the cost of health insurance purchased through the marketplace. Enhanced premium tax credits are now subject to updated income thresholds and extension rules, and future congressional action may further impact eligibility. Because these credits are closely tied to household income, they are particularly relevant for self-employed individuals, early retirees, and business owners with variable or seasonal income.
Increased State and Local Tax (SALT) Deduction Limit
The legislation temporarily increases the cap on the itemized deduction for state and local taxes above the prior $10,000 limit. This change is especially significant for individuals in higher-tax states and for pass-through business owners whose state income taxes are paid personally. The increase is scheduled to apply for a limited number of years, making timing and planning considerations—such as income recognition and estimated payments—especially important.
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Small-Business Tax Changes – 100% Bonus Depreciation Made Permanent (Placed-in-Service Rule for 2025)
The law permanently restores 100% bonus depreciation, allowing businesses to immediately deduct the full cost of qualifying equipment, vehicles, and certain improvements. For 2025, property must be placed in service after January 19, 2025, to qualify for the full 100% deduction. Assets placed in service earlier in the year may be subject to reduced bonus depreciation under prior phaseout rules. Going forward, this provision provides long-term certainty for capital investment planning and can significantly improve cash flow for small businesses, but the placed-in-service date is critical when timing purchases.
Expanded Section 179 Expensing
Section 179 expensing limits have been increased, allowing businesses to expense more qualifying property in the year it is placed in service. Section 179 continues to be one of the most flexible and widely used investment incentives for small business owners.
Immediate Deduction and Retroactive Relief for Research & Experimental (R&D) Costs
The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, restores immediate expensing for domestic research and experimental (R&D) costs and provides meaningful retroactive relief. Small businesses with average annual gross receipts of $31 million or less may amend prior tax returns for 2022 through 2024 to fully deduct U.S.-based R&D expenses that were previously required to be amortized. The election must be made on an amended return filed by the later of the normal statute of limitations or July 6, 2026, and requires specific documentation of research activities and related expenses.
In addition, all taxpayers—not just small businesses—may choose how to recover previously capitalized R&D costs from 2022–2024 by either deducting the remaining balance entirely in 2025 or spreading it over 2025 and 2026. These options are treated as accounting method changes, with simplified procedures available for 2025. Special coordination rules apply when R&D credits are claimed, and partnerships subject to centralized audit rules must use a different amendment process. This provision creates significant refund and cash-flow opportunities for businesses that incur qualifying research expenses.
Permanent 20% Qualified Business Income Deduction (§199A)
The 20% qualified business income deduction for pass-through entities has been made permanent. This remains one of the most valuable provisions for LLCs, S corporations, partnerships, and sole proprietors, including many professional service firms and contractors.
Termination of Green Energy Tax Credits
Several green energy and energy efficiency tax credits have been eliminated, including the clean vehicle credit, commercial clean vehicle credit, alternative fuel property credit, residential clean energy credit, and home efficiency credits. To qualify under the prior rules, projects generally must have been completed and placed in service by December 31, 2025. Projects that were started but not completed by that date may no longer be eligible for these credits. These changes may affect contractors, installers, and businesses whose customers previously relied on these incentives, as well as businesses planning energy-related capital improvements.
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What This Means for You
Taken together, these changes may affect both your personal tax return and your business planning decisions. Opportunities for accelerated deductions and pass-through tax benefits remain strong, while changes to credits and deductions may require adjustments to income planning, estimated payments, or investment timing.
We encourage you to contact our office to discuss how these provisions apply to your specific situation and to ensure your tax strategy remains aligned with the new law.
Sincerely,
Flaming & Associates CPAs
