The One Big Beautiful Bill is the latest tax bill aimed at making cash flows better for businesses and encouraging investment in equipment, for example. There are significant changes to help an individual lower their tax burden.
OBBB makes the Qualified Business Income deduction for small businesses permanent, which essentially makes only 80% of your business income taxable. There are exceptions to the 20% deduction for specified service trade or businesses for individuals in the professional services industries.
There is an expansion of the Qualified Business Stock Gain Exclusion. This is the provision allowing 100% exclusion of the gain realized in the sale of C corporation stock. It bodes for closer analysis of whether to be an S corporation or C corporation from a tax perspective. Both offer benefits if utilized properly, but a call to your tax advisor is prudent.
We are now back to being allowed to write off research and development costs in the year the costs are incurred.
OBBB makes 100% bonus depreciation permanent as well as enhances the Section 179 100% write off of purchased equipment. Consult with a certified public accountant to understand the tax and cash flow implications to utilizing these methods. Every business is different, so a good tax strategy that benefits one company may not suit yours.
On the individual level comes a deduction for tip income and overtime pay. The deduction for each is up to $25,000 for a married couple. The tips and overtime pay must be reported as taxable income and subjected to Social Security and Medicare tax before you are allowed a deduction.
The state and local tax deduction has been enhanced. Previously, for Schedule A itemized deductions there was a $10,000 capped deduction for a combination of state income tax, real estate taxes, and excise tax. This was a major takeaway for those who have high state income tax or large real estate taxes. OBBB has increased the deduction for taxes to $40,000.
There will be a deduction for up to $10,000 of interest expense on some auto loans. There are several conditions to taking this deduction, but previously auto loan interest was not deductible.
There also is the introduction of Trump accounts (a retirement plan for kids). It allows for up to $5,000 in post-tax contributions per year. The federal government will make a one-time $1,000 contribution for some. Funds grow tax deferred, but no withdrawals before child turns 18. When child turns 18, the Trump account becomes a traditional IRA. The child need not have earned income in order to create a Trump account, unlike the Roth IRA.
But do be careful, Roths work better in some situations. Again, call your tax professional for advice.
Whether OBBB creates cash flow for businesses and individuals and consequently elicits the type of behavior the government wants, like spending money on new equipment and R&D, only time will tell. But tax law is written to encourage certain behaviors from taxpayers.
Hopefully OBBB will work some magic for the economy.
