One Big Beautiful Bill and the American Small Business Owner
How will this affect you?
Everyone knows by now that Trump has passed his legislation titled One Big Beautiful Bill. The bill is large and has a lot to digest. We have attempted to parse out the most important elements of the bill that will affect our client base.
Voices could be heard expressing disapproval that the Republicans were “adding to the deficit” with this bill. However, by not extending or making permanent many of the existing tax laws, many Americans would have seen their taxes increase. While deficits aren’t great, most of us would rather not send more money to Washington if we don’t have to.
Read along for the big picture elements!
Qualified Business Income Deduction (QBI) has been made permanent
The QBI deduction allows owners of pass through entities and sole proprietors to deduct 20% of the business income from their taxable income. This was a big win for businesses when first implemented during Trump’s first term. The QBI deduction was set to expire at the end of 2025. The expiration of this provision would have caused increases in tax to all that were able to take advantage of the deduction.
Not surprisingly, there are a number of rules regarding the deduction. Some things to think about include:
- How your business entity is structured
- How much you pay yourself as an owner can affect the QBI deduction
- Ensuring you meet the qualifications and avoid getting phased out if possible
It is easy to put this on auto pilot once figured out, but situations change so now is a great time to review this deduction and ensure you are tax efficient.
Bonus Depreciation back to 100%
Bonus depreciation allows for expensing of certain assets in the year of purchase. The law had allowed for bonus depreciation before, but the percentage of the total purchase price that companies were allowed to expense had been declining.
The ability to fully expense assets can create very large tax savings during a year of large asset purchases. The savings are more properly called deferrals because there will be no depreciation deductions in the future for an asset that has been fully expensed. In some cases, 100% bonus depreciation is absolutely not the best way to manage your expenses.
Consider the following:
- You could accelerate needed capital improvements to manage tax liabilities
- You should also consider future year projections to find the best balance between traditional depreciation and bonus
- We can also fully expense assets under Section 179 – the rules regarding the two and very different and the final impact can be as well
State and Local Tax Deduction for Itemizers has increased
For a married filing joint return, you can now deduct $40,000 as an itemized deduction. State and Local Tax includes state income tax paid as well as property taxes on homes and vehicles. The increase in this deduction is not permanent and will expire at the end of 2029. The phase out of this benefit starts once modified adjusted gross income exceeds $500,000 on a joint return.
This can result in significant savings for those under the income threshold that have been stymied be the $10,000 cap.
While it looks straightforward, there are some things to consider. To get around the tax cap, many pass through entities had been paying state taxes on behalf of their owners. Planning will be important for these business owners to ensure the best result. It is also important for those near the phaseout to be aware of the income threshold and plan accordingly.
No tax on tips and other compensation related provisions
During the election, “No tax on tips” became a hot talking point. It is actually here now in the form of exemption from federal income taxes on certain wages. The provision allows for up to a $25,000 exclusion of tips from taxable income. The exclusion does not apply to social security and medicare as those taxes will still apply. The tips must be reported on a W2 to qualify.
Additionally, there is a provision for no tax on overtime pay. This is also capped at $25,000 for married filing joint returns. The deduction only applies to the overtime premium paid. If one is normally paid $20 per hour and receives overtime of $30 per hour, the deduction is only on the $10 premium. The provision expires in 2028. This applies only to those that work hourly or non-professional jobs and those that earn less than $35,568 a year which is the current threshold under the Fair Labor Standards Act. If you own a small business and employ people in this group, you will want to review what is needed to properly account for this as overtime wages will need to be reported on the W2.
Vehicle and Energy Credits
The bill has significantly altered the maze of credits available. Some credits will be phased out and others revised. We recommend reviewing your investment options to determine what credits will be available as it may alter your purchasing decision.
What now?
We have only provided a sample of what we feel are some of the most relevant sections of the bill. This summer and fall is an excellent time to review your situation and plan before the end of the year is here. If you are not sure where to start, we would love to have a discussion with you and plan for next steps.