(This column originally appeared in the Inquirer)
The GOP’s “Big Beautiful Bill” is working its way through Congress, and small business owners should be paying attention.
A number of provisions included in the bill will impact our taxes beginning this year. With the right amount of planning, a business owner can lower what is for many one of their biggest expenses of the year: the amount paid to the federal government.
The bill has passed the House and is being debated in the Senate. Most of this debate revolves around deficit reduction and individual tax matters — such as the deduction of state and local taxes — that have little impact on businesses. My expectation is that most of the business tax provisions will survive this debate and become law by early July, which is the deadline imposed by President Donald Trump.
Here are three of the most significant provisions for small businesses.
First-year capital equipment deductions
The bill restores small business owners’ ability to deduct 100% of “bonus depreciation,” which is the cost of “short-lived” assets — equipment, machinery, business vehicles, hardware, software and other items — in the first year, beginning Jan. 19, 2025.
Under existing rules, only 40% of the cost of these purchases would be deductible in 2025 and 20% in 2026. Once finalized, business owners can feel confident that the acquisitions they make this year and through 2029 can be fully deductible as long as they’re placed into service.
And being placed into service is important. Business owners can finance their purchases and still take the full bonus depreciation in the first year as long as the asset is being used, regardless of the payment terms of the loan.
My expectation is that — even with relatively higher interest rates — many business owners who have been holding back on investing in capital equipment, technology and vehicles may now find it tax-advantageous to do so.
Increase in the ‘pass through’ deduction
Since the enactment of the 2017 Tax Cuts and Jobs Act, many “pass-through” businesses (generally partnerships, limited liability companies and S-corporations) have enjoyed taking a 20% deduction on their companies’ net income before that income is “passed through” to their individual return and then taxed at individual rates.
That provision, the 199A Qualified Business Income Deduction, was set to expire this year. But the House bill makes it permanent and increases the deduction to 23%. In addition, the income and dividend thresholds that allowed business owners to take advantage of this deduction are increased and are now indexed for inflation so the deduction will be higher for some.
This change not only benefits existing pass-through businesses but also may encourage other filers (such as C-corporations) to consider a potential change in their business organization structure to take advantage.
Research and development deduction
In 2022, existing tax law stopped allowing businesses to deduct the full amount of their research and development costs in the first year. Instead, they could deduct 20% in the first year and then amortize the rest over the remaining four years.
Many of my clients perform research and development work for new products and have enjoyed deducting the costs of R&D-related materials, supplies, wages, and outside services right away. Forcing these companies to spread out these deductions over five years has increased their taxable income in the first year these expenses were incurred and discouraged some from spending.
The House bill would allow these costs to be fully deductible in their first year and that would extend through 2029. This change could encourage more businesses to invest in research and development activities.
Other provisions in this bill impact small business owners — like allowing the expensing of “qualified structures” in manufacturing, extraction, and agriculture, reinstating the limitation of certain interest deductions, bumping up the estate tax exemption, and increasing the requirements for deducting charitable expenses.
That is why it’s important for business owners to be talking to their accountants now and making their plans. Not doing so could be costly.
