Many American taxpayers were bracing for significant tax increases due to lower tax rates and favorable provisions expiring Jan. 1, 2026.
This was changed by the passage of the One Big Beautiful Bill Act (OBBBA) in July 2025, which included both permanent and temporary changes to tax laws — some effective in 2025 and some in 2026.
Bracket fix
Two of the biggest moves in OBBBA were to permanently lower tax brackets and to continue one of the most favorable provisions in the tax code — the Qualified Business Income (QBI) deduction.
Prior to OBBBA, qualified business owners would have gone frompaying a lower tax rate on 80% of their net income in 2025 to paying tax on 100% of their net income at higher rates in 2026. The new laws essentially fixed what could have been a nearly 25% tax increase on business income for 2026.
Eligibility for the now-permanent Section 199A deduction is determined by what a business is not — Specified Service Trade of Business. Sorry service providers, if tax breaks were what you were looking for, you should have gone into business making widgets or cheeseburgers.
Engineers and architects must have had better lobbyists, as these service occupations were specifically excluded from the tax-negative Service Business status. The mechanics and classifications of the deduction did not change with the passage of OBBBA.
Full expensing
The act also addressed the scheduled phaseout of bonus depreciation for certain business property, which had fallen from 100% in 2023, 60% in 2024, and was scheduled to be reduced to 40% in 2025.
Now, property with a useful life of less than 20 years that was placed in service after Jan. 19, 2025, can be fully deducted for federal income tax purposes.
The Committee on Ways and Means stated, “Restoring 100% expensing for qualified property and specified plants will result in capital investment, modernization, productivity and economic growth.”
This provision also encourages business real estate investors to consider conducting cost segregation studies when opening new facilities, which breaks down their costs into the underlying components to maximize the amount of bonus depreciation.
It is notable that while 100% bonus depreciation can frontload federal tax deductions, many states, including Wisconsin, do not allow for the accelerated write-offs.
To further incentivize investment in U.S. production, OBBBA created a 100% depreciation election for certain nonresidential structures constructed between Jan. 19, 2025, and placed in service before Jan. 1, 2029, provided that the property is integral to a “qualified production activity.”
Qualified production activities include manufacturing, refining, agricultural and chemical production.
For much of the last decade, businesses investing in Qualified Research & Development enjoyed one of the few provisions in the tax code that effectively allowed for “double-dipping.”
Qualified R&D expenses were both deductible and eligible for an income tax credit. This changed in 2022 when the tax code required R&D costs to be capitalized and amortized over five to 15 years.
As a result, businesses with significant R&D activity such as manufacturing and biotechnology experienced a marked increase in taxable income.
OBBBA restores immediate deductibility of domestic R&D expenses incurred after Dec. 31, 2024. It also providessmall businesses with the option to elect retroactive relief back to 2022 through amended returns, or to deduct previously capitalized domestic R&D costs under a transition election beginning in 2025.
SALT flavoring
In 2018, residents of high property and income tax states such as Wisconsin were stung by the introduction of a $10,000 limitation on the deductibility of State and Local Taxes, or SALT.
Wisconsin was one of the first states to enact a workaround for business owners by allowing flow through entities to elect to pay the owners’ state income taxes at the business level, creating a deduction for those payments against income taxed by the IRS. The new law preserves the pass-through entity tax workaround rather than limiting or eliminating it.
Separately, OBBBA softened the SALT limit forindividual taxpayers earning less than $500,000. They now can deduct up to $40,000 of state and local taxes beginning in 2025.
Reporting tips
Many restaurant owners have long enjoyed the benefit of the FICA tip credit for employer-paid payroll taxes related to employee cash tips. Under OBBBA, that benefit has been extended beyond restaurants into the beauty service industry.
Speaking of tips, OBBBA created a deduction from federal income tax for up to $25,000 of qualified tip income, subject to income limits. Because tips have long been reported separately on an employee’s W-2, eligible workers can readily claim the deduction on their personal tax returns, starting in 2025.
The qualified tips deduction applies to occupations that customarily received tips prior to Dec. 31, 2024 — including food service, hospitality and guest services, personal appearance services and delivery businesses.
This new tax benefit for individuals does not impact on the FICA tip credit that eligible business owners can claim.
Overtime rules
A similar OBBBA provision allows individuals to claim a deduction for qualified overtime beginning in 2025. One distinction in calculating qualified overtime is that only the premium portion of overtime pay counts toward the annual maximum of $12,500 per taxpayer.
If an employee earns a regular hourly wage of $30 per hour and $45 per hour for overtime pay, only the $15 premium qualifies for the OBBBA deduction.
Overtime pay has never been separately reported onemployees’ W-2s, and the IRS has indicated it won’t adjust its forms for 2025. As a result, business owners may face an additional reporting burden to communicate qualified overtime pay to employees seeking to claim this deduction.
Head scratchers
The new law also included several unfavorable tax law changes, most notably prohibiting the payment of Employee Retention Tax Credits for the third and fourth quarters of 2021 if claims were filed after Jan. 31, 2024.
One particularly head-scratching change was the elimination of the deduction for employer-provided meals furnished to employees after Jan. 1, 2026.
Like most things in the tax code, it’s complicated. So before celebrating (or panicking), check in with your tax adviser to see how OBBBA applies to you.
Cindy Meicher is the managing partner of Meicher CPAs, a locally owned public accounting firm serving business and individual clients.
