U.S. businesses find themselves navigating a tax landscape marked by rapid change and increasing complexity. The wave of legislative, economic, and technological developments over the past year has created novel challenges. All businesses are facing external challenges, and the most agile companies are often the most successful. Businesses should focus on converting new developments into opportunities to thrive.

Tariff policy often seems to have changed by the hour, and the situation continues to evolve. Mitigation tools and planning responses can help companies thrive despite the challenges.

Sweeping new legislation will also have major implications for businesses. The most significant provisions include options for implementation, and planning decisions on one provision can affect others. Modeling will help identify beneficial strategies. A bevy of less heralded changes can also affect tax planning.

With the multitude of challenges present today, the tax function must operate efficiently to identify tax risk and planning opportunities. Automation and other tools can help companies deploy the necessary resources to integrate tax considerations into critical business decisions.

 

Deferring income

Businesses using the cash method of accounting can defer income into 2026 by delaying end-of-year invoices so that payment is not received until 2026. Businesses using the accrual method can defer income by postponing the delivery of goods or services until January 2026.

Companies that want to reduce their 2025 tax liability should consider traditional tax accounting method changes, tax elections, and other actions for 2025 to defer recognizing income to a later taxable year and accelerate tax deductions to an earlier taxable year. Depending on their facts and circumstances, some businesses may instead want to accelerate taxable income into 2025 if, for example, they believe tax rates will increase in the near future, or they want to optimize usage of net operating losses.

 

Purchasing fixed assets

 Bonus Depreciation. The OBBBA permanently restores 100% bonus depreciation for most investments in business property acquired and placed in service by January 19, 2025. Property is considered acquired no later than the date the taxpayer enters into a binding written contract for its acquisition. Eligible property includes tangible property with a class life of 20 years or less under the modified accelerated cost recovery system, computer software, qualified improvement property, and other property listed in Section 168(k).

 Property acquired on or before January 19, 2025, and placed in service after that date remains subject to the bonus depreciation phasedown rules under the TCJA – 40% for property placed in service in calendar year 2025. Used property remains eligible for 100% bonus depreciation if it meets certain additional requirements.

The OBBBA continues to allow taxpayers to elect out of bonus depreciation by property class. However, the OBBBA also gives taxpayers the ability to elect 40% bonus depreciation instead of 100% bonus depreciation for the first tax year ending after January 19, 2025.

• Qualified Production Property. The OBBBA adds Section 168(n) to the Internal Revenue Code, which introduces special 100% expensing for a new separate class of building property known as “qualified production property” (QPP), effective with construction of property within the U.S. that is used by the taxpayer as an integral part of a qualified production activity beginning after January 19, 2025, and before January 1, 2029. Taxpayers can elect to deduct amounts invested in QPP in the year the property is placed in service. Unlike bonus depreciation, which applies unless the taxpayer elects out, taxpayers must elect QPP expensing for each tax year it is claimed. QPP does not include any portion of building property used for offices, administrative services, lodging, parking, sales activities, research activities, software engineering activities, or other functions unrelated to a qualified production activity.
• Section 179 Expensing. Businesses should take advantage of Section 179 expensing this year whenever possible. For 2025, the OBBBA increased the annual Section 179 expensing limit to $2.5 million with a phaseout threshold of $4 million. Keep in mind that the Section 179 deduction cannot exceed net taxable business income. Also, the yearly expensing election can be used in addition to bonus depreciation to claim deductions for property not eligible for bonus depreciation or to deduct only a portion of the property’s cost.

 

Depreciation limitations on luxury, passenger automobiles, and heavy vehicles

As a reminder, tax reform changed depreciation limits for luxury passenger vehicles placed in service after December 31, 2017. If the taxpayer does not claim bonus depreciation, the maximum allowable depreciation deduction for 2025 is $12,200 for the first year. Deductions are based on a percentage of business use. A business owner whose business use of the vehicle is 100 percent can take a larger deduction than one whose business use of a car is only 50 percent. For passenger autos eligible for the additional bonus first-year depreciation, the maximum first-year depreciation allowance remains at $8,000. It applies to new and used (“new to you”) vehicles acquired and placed in service after September 27, 2017, and remains in effect for tax years through December 31, 2025. When combined with the increased depreciation allowance above, the deduction amounts to as much as $20,200 in 2025. Heavy vehicles, including pickup trucks, vans, and SUVs whose gross vehicle weight rating (GVWR) is more than 6,000 pounds, are treated as transportation equipment instead of passenger vehicles. As such, heavy vehicles (new or used) placed into service between January 1 – 19, 2025 qualify for a 40 percent first-year bonus depreciation deduction. Due to the OBBBA, those placed in service after January 19, 2025 qualify for a 100 percent first-year bonus depreciation deduction.

 

Repair regulations

 Where possible, end-of-year repairs and expenses should be deducted immediately, rather than capitalized and depreciated. Small businesses lacking applicable financial statements (AFS) can take advantage of de minimis safe harbor by electing to deduct smaller purchases ($2,500 or less per purchase or invoice). Businesses with audited financial statements can deduct $5,000. Small businesses with gross receipts of $10 million or less can also take advantage of safe harbor for repairs, maintenance, and improvements to eligible buildings.

 

Deductibility of R&D expenses

The OBBBA creates new Section 174A, which reinstates the full deductibility of domestic research costs in the year paid or incurred, effective for tax years beginning after December 31, 2024. Software development remains statutorily included in the definition of research costs for Section 174A. Taxpayer have the option of electing to capitalize and amortize Section 174A amounts beginning with the month in which the taxpayer first realizes benefits from the expenses, with a 60-month minimum amortization period. This legislation also modifies Section 280C(c), requiring taxpayers to reduce their Section 174A deduction by the amount of their research credit or alternatively elect to reduce the amount of their credit. Most taxpayers will need to file at least one method change with their first tax year beginning after December 31, 2024, to comply with Section 174A.

The OBBBA includes a transition rule that allows taxpayers to elect to claim any unamortized domestic R&D costs incurred in calendar years beginning after December 31, 2021, and before January 1, 2025, in either the first tax year beginning after 2024 or ratably over their first two years beginning after 2024. Note that this election to accelerate the unamortized costs is considered a separate change in method of accounting from the general change to comply with Section 174A.

Eligible small businesses can elect to file amended returns to claim full deductions of domestic R&D costs for tax years before 2025, or to file an accounting method change with tax returns beginning before January 1, 2025, to deduct the costs. This election is not available to small businesses that are tax shelters, such as pass-through entities that allocate more than 35% of their losses to limited partners or limited entrepreneurs.

 

Dividend planning

Reduce accumulated corporate profits and earnings by issuing corporate dividends to shareholders.

 

Tracking basis for digital assets

 Private companies with digital asset investments may no longer use the universal method for determining the tax basis of digital assets held in virtual wallets and accounts as of January 1, 2025. Taxpayers must now use a “wallet-by-wallet” approach to digital asset identification for each transaction. Under this approach, taxpayers must adequately identify, among other information, the particular units sold, the price of such units, and the basis of such units for each transaction no later than the date and time of the transaction (specific identification). Taxpayers that are unable to adequately identify the specific digital asset prior to or at the time of sale are required to use the first-in, first-out (FIFO) rule for determining basis.

 

Write-off bad debts and worthless stock

Businesses should evaluate whether losses may be claimed on their 2025 returns related to worthless assets such as receivables, property, 80% owned subsidiaries or other investments.

• Business bad debts can be wholly or partially written off for tax purposes. A partial write-off requires a conforming reduction of the debt on the books of the taxpayer; a complete write-off requires a demonstration that the debt is wholly uncollectible as of the end of the year.
• Losses related to worthless, damaged or abandoned property can sometimes generate ordinary losses for specific assets.
• Businesses should consider claiming losses for investments in insolvent subsidiaries that are at least 80% owned and for certain investments in insolvent entities taxed as partnerships.

 

Limit on the interest expense deduction

 The OBBBA permanently restores the exclusion of amortization, depreciation, and depletion from the calculation of adjusted taxable income (ATI) for purposes of Section 163(j), which generally limits interest deductions to 30% of ATI. The change is effective for tax years beginning after 2024.

 

Maximize tax benefits of NOLs

Net operating losses (NOLs) are valuable assets that can reduce taxes owed during profitable years, thus generating a positive cash flow impact for taxpayers. Businesses should make sure they maximize the tax benefits of their NOLs.

For tax years beginning after 2020, NOL carryovers from tax years beginning after 2017 are limited to 80% of the excess of the corporation’s taxable income over the corporation’s NOL carryovers from tax years beginning before 2018 (which are not subject to this 80% limitation but may be carried forward only 20 years). If the corporation does not have pre-2018 NOL carryovers, but does have post-2017 NOLs, the corporation’s NOL deduction can only negate up to 80% of the 2025 taxable income with the remaining subject to the 21% federal corporate income tax rate. Corporations should monitor their taxable income and submit appropriate quarterly estimated tax payments to avoid underpayment penalties.

 

Claim available tax credits

The OBBBA has made significant revisions to energy credits, imposing new restrictions and phasing out many of the credits early. Despite the changes, there is still considerable runway for many projects, and the tax equity financing and credit transfer markets should both be robust over the next several years. In addition, the OBBBA enhanced existing incentives in ways that offer new opportunities for tax-efficient structuring.

• Businesses that incur expenses related to qualified research and development (R&D) activities are eligible for the federal R&D credit. To improve administration and reduce improper claims, the IRS recently made several changes to Form 6765, clarifying documentation requirements for claiming the credit. The revised Form 6765 will make optional the mandatory reporting of qualified research expenses (QRE’s) by business component for tax year 2025. When this becomes mandatory for tax year 2026, taxpayers will be required to disclose the top 80% of QRE’s, with controlled group members required to attach detailed breakdowns by entity. There are also new questions related to officer wages, acquisitions, and the use of the ASC 730 directive, which provides guidance on the accounting and financial reporting of R&D costs.
• The OBBBA made the qualified opportunity zone (QOZ) program permanent. The current QOZ designations will expire at the end of 2026. New zones will be designated in rolling 10-year designation periods under new criteria that are expected to shrink the number of qualifying zones.

As under the current program, taxpayers can defer capital gains by investing in a qualified opportunity fund (QOF). For investments made after 2026, taxpayers will be required to recognize the deferred gain five years after making the investment but will receive a 10% increase in basis for holding the investment for five years. For QOF’s operating in a new category of rural opportunity zones, this basis increase is 30%. And the threshold for establishing the substantial improvement of qualifying property in a rural opportunity zone will be 50% of basis rather than 100%, effective for any determinations after July 4, 2025.Taxpayers who make investments before the end of 2026 must still recognize the deferred gain at the end of 2026.

The more powerful tax benefit may be the tax-free appreciation on the underlying investment itself. Taxpayers will still receive a full basis step-up to fair market value (FMV) for property held 10 years, but the OBBBA added a rule freezing the basis step-up to the FMV at 30 years after the date of investment.

• The New Markets Tax Credit (NMTC) program supports capital investments in low-income communities by offering tax credit-subsidized loans to eligible businesses for use towards eligible costs (ex. real estate, furniture, fixtures and equipment). These loans often feature interest-only terms, below-market rates, and principal forgiveness after seven years, providing a permanent cash benefit to businesses. Previously set to expire at the end of 2025, the OBBBA made the program permanent.
• Other incentives for employers include the Work Opportunity Tax Credit (set to expire for after December 31, 2025), the Federal Empowerment Zone Credit (set to expire after December 31, 2025), and credits for paid family and medical leave (FMLA) (made permanent).

 

Partnerships and S corporations

Partnerships, S corporations and their owners may want to consider the following tax planning opportunities:

• It is important to note that there have been a series of IRS court victories on the issue of limited partner claims of exemption from self-employment tax. Partnerships may want to revisit their tax positions and whether a limited partner should actually be classified as active. For example, does the partner have personal liability for the debts of or claims against the partnership by reason of being a partner? Does the partner have authority to contract on behalf of the partnership? Does the partner participate in the partnership’s trade or business for more than 500 hours during the tax year?
• A new Form 7217 will need to be filed along with partnership returns if there is a distribution to a partner of property other than cash and marketable securities treated as cash.
• Taxpayers with unused passive activity losses attributable to partnership or S corporation interests may want to consider disposing of the interest to utilize the loss in 2025.
• Taxpayers other than corporations may be entitled to a deduction of up to 20% of their qualified business income (QBI). This deduction has been made permanent by the OBBBA. The deduction can be limited based on the taxpayer’s taxable income, whether the taxpayer is engaged in a service-type trade or business, the amount of W-2 wages paid by the business and the unadjusted basis of certain property held by the business. The QBI is complex, and tax planning strategies can directly affect the amount of deduction, i.e., increase or reduce the dollar amount. As such, it is important to speak with a tax professional before year’s end to determine the best way to maximize the deduction.
• Certain tax basis, at-risk and active participation requirements must be met for losses of pass-through entities to be deductible by a partner or S corporation shareholder. In addition, an individual’s excess business losses are subject to overall limitations. There may be steps that pass-through owners can take before the end of 2025 to maximize their loss deductions. The Inflation Reduction Act extends the excess business loss limitation by two years, for tax years beginning after December 31, 2020, and before January 1, 2029.
• Various states have enacted PTE tax elections that seek a workaround to the federal personal income tax limitation on the deduction of state taxes for individual owners of pass-through entities. See State pass-through entity tax elections, below.

 

New considerations for employers

 The OBBBA makes significant changes to compensation and benefit rules and imposes new reporting. The following include some of those changes:

• Employers will be required to report qualified tips and qualified overtime compensation to both employees and the IRS beginning in 2025 to facilitate new individual deductions. These deductions are effective from 2025 through 2028.
• For payments beginning after December 31, 2025, the threshold for providing a 1099-NEC and 1099-MISC increases from $600 to $2,000. Starting in 2027, the $2,000 threshold will be indexed for inflation.
• For tax years beginning after December 31, 2025, the employer tax credit for paid family and medical leave (PFML) becomes permanent and will include amounts paid for state-mandated paid leave and insurance premiums. The credit broadens the eligibility of part-time employees, clarifies the aggregate rules, and provides flexibility for multistate employers who operate in states where PMFL is not required.
• For tax years beginning after December 31, 2025, the tax credit for on-site employer-provided child care increases from $150,000 to $500,000 ($600,000 for small businesses), indexed for inflation, up to 40-50% of expenses (increased from 25%). The definition of qualified expenditures will expand to include costs of third-party arrangements and jointly owned or operated child care facilities.
• Now made permanent, employers can pay or reimburse employees tax-free for student loan debt payments up to $5,250 if the employer has a written education assistance plan that complies with Section 127. Starting in 2026, the amount will be indexed for inflation.

 

Continuing considerations for employers

Employers should consider the following issues when it comes to compensation and benefits:

• As a reminder, the SECURE Act 2.0 requires 401(k) and 403(b) plans to automatically enroll participants in the respective plans upon becoming eligible (although employees may opt out of coverage).
• For long-term part-time workers, the SECURE Act 2.0 reduces the 3-year eligibility rule to just 2 years, effective for the plan years beginning after December 31, 2024.
• Employers may allow plan participants, but are not required to, designate matching and nonelective contributions as Roth contributions.
• Small employers are eligible for an enhanced version of the plan start-up credit, effective for taxable years beginning after December 31, 2022. The start-up credit for adopting a workplace retirement plan increases from 50% to 100% administrative costs for small employers with up to 50 employees. The credit remains 50% for employers with 51-100 employees. Employers with a defined contribution plan may also receive an additional credit based on the amount of employer contributions of up to $1,000 per employee. This additional credit phases out over five years for employers with 51-100 employees.
• SIMPLE and Simplified employee Pensions (SEPs) can accept Roth contributions effective for taxable years beginning after December 31, 2022. In addition, employers can offer employees the ability to treat employee and employer SEP contributions as Roth contributions (in whole or in part).
• Employers have until the extended due date of their 2025 federal income tax return to retroactively establish a qualified retirement plan and to fund the new or an existing plan for 2025. However, employers cannot retroactively eliminate existing retirement plans (such as simplified employee pensions (SEPs) or SIMPLE plans) to make room for a retroactively adopted plan (such as an employee stock ownership plan (ESOP) or cash balance plan).
• Contributions made to a qualified retirement plan by the extended due date of the 2025 federal income tax return may be deductible for 2025; contributions made after this date are deductible for 2026.
• Employers should ensure that common fringe benefits are properly included in employees’ and, if applicable, 2% S corporation shareholders’ taxable wages. Partners and LLC members (including owners of capital interests and profits interests) should not be issued W-2s.
• Generally, for calendar year accrual basis taxpayers, accrued bonuses must be fixed and determinable by year end and paid within 2.5 months of year end (by March 16, 2026) for the bonus to be deductible in 2025. However, the bonus compensation must be paid before the end of 2025 if it is paid by a Personal Service Corporation to an employee-owner, by an S corporation to any employee-shareholder, or by a C corporation to a direct or indirect majority owner.
• Businesses should assess the tax impacts of their mobile workforce. Potential impacts include the establishment of a corporate tax presence in the state or foreign country where the employee works; dual tax residency for the employee; additional taxable compensation for remote workers’ travel to a work location that is determined to be personal commuting expense; and payroll tax, benefits, and transfer pricing issues.

 

IRS drastically expands electronic filing requirements

Almost all federal tax and information returns filed on or after January 1, 2024, must be submitted to the IRS electronically instead of on paper.

Under the new rules, filers of 10 or more returns of any type for a calendar year generally will need to be filed electronically with the IRS. Previously, electronic filing was required if the taxpayer filed more than 250 returns of the same type for a calendar year.

Practically all filers with the IRS of 10 or more information returns — when counting any type, such as Forms W-2, Forms 1099, Affordable Care Act Forms 1094 and 1095 and Form 3921 (for incentive stock options) and other disclosure documents — are impacted by this change for tax years 2023 and going forward. Even workplace retirement plans may need to file Form 1099-Rs (for benefit payments) and other forms electronically with the IRS starting in 2024, for the 2023 plan or calendar year and going forward.

In addition to the information returns that are the primary focus of this article, the new rules cover a broad variety of returns, including partnership returns, corporate income tax returns, unrelated business income tax returns, withholding tax returns for U.S.-source income of foreign persons, registration statements, disclosure statements, notifications, actuarial reports and certain excise tax returns.

 

IRS instructed to phase out paper checks

An executive order signed on March 25, 2025, instructs the IRS to discontinue issuing paper checks for tax refunds. After September 30, 2025, a taxpayer who is expecting a tax refund from the IRS will generally receive the refund via direct deposit to a U.S. bank account. The biggest effect will be the problems it may pose for global mobility programs and their cross-border employees.

 

State and local taxes

Businesses should monitor the tax laws and policies in the states in which they do business to understand their tax obligations, identify ways to minimize their state tax liabilities, and eliminate any state tax exposure. The following are some of the state-specific areas taxpayers should consider when planning for their tax liabilities in 2025 and 2026:

Nexus rules

• Has the business reviewed the nexus rules in every state in which it has property, employees or sales to determine whether it has a tax obligation? State nexus rules are complex and vary by state. Even minimal or temporary physical presence within a state can create nexus, e.g., temporary visits by employees for business purposes; presence of independent contractors making sales or performing services, especially warranty repair services; presence of mobile or moveable property; or presence of inventory at a third-party warehouse. In addition, many states have adopted a bright-line factor-presence nexus threshold for income tax purposes (e.g., $500,000 in sales). Also keep in mind that foreign entities that claim federal treaty protection are likely not protected from state income taxes, and those foreign entities that have nexus with a state may still be liable for state taxes.

• Has the business considered the state income tax nexus consequences of its mobile or remote workforce, including the impacts on payroll factor and sales factor sourcing? Most states that provided temporary nexus and/or withholding relief relating to teleworking employees lifted those orders during 2021.
• Does the business qualify for P.L. 86-272 protection with respect to its activities in a state? For businesses selling remotely and that have claimed P.L. 86-272 protection from state income taxes in the past, how is the business responding to changing state interpretations of those protections with respect to businesses engaged in internet-based activities?

 

Taxable income and tax calculation

• Does the state conform to federal tax rules or decouple from them? Not all states follow federal tax rules. For example, many states have their own systems of depreciation and may or may not allow federal bonus depreciation.
• Has the business claimed all state NOL and state tax credit carrybacks and carryforwards? Most states apply their own NOL/credit computation and carryback/forward provisions.
• Is the business claiming all available state and local tax credits? States offer various incentive credits including, e.g., for research activities, expanding or relocating operations, making capital investments or increasing headcount.
• Following the enactment of the OBBBA, many states have expanded or introduced transferable tax credit programs, particularly in clean energy, affordable housing, and infrastructure. These programs allow taxpayers to sell unused credits to third parties, creating liquidity and broader access to state-level incentives. Transfer mechanisms vary by state.

 

Allocation and apportionment

• Is the business correctly sourcing its sales of tangible personal property, services, and intangibles to the proper states? The majority of states impose single-sales factor apportionment formulas and require market-based sourcing for sales of services and licenses/sales of intangibles using disparate market-based sourcing methodologies.
• If the business holds an interest in a partnership, have the consequences with respect to factor flow-through and other potential special partnership apportionment provisions been considered?
• If the business is a manufacturer, retailer, transportation company, financial corporation, or other special industry, have state special apportionment elections or required special apportionment formulas been considered?

 

State pass-through entity elections

Due to the federal itemized deduction limit for state and local taxes on Schedule A ($10,000 prior to 2025 and $40,000 for 2025-2029), more than 30 states have enacted state pass-through entity elections (PTE) so that state and local taxes are deducted on the pass-through entity’s federal tax return. Even though the limit has temporarily increased due to the OBBBA, making these elections will continue to be important and therefore proper planning is still essential.

 

Other state and local taxes

State and local property taxes, sales and use taxes and other indirect state and local taxes can be the largest piece of an organization’s state tax expenditures, even exceeding state and local income and franchise taxes. Just like state income taxes, businesses should understand and plan for their other state and local tax obligations. Some areas of consideration include:

• Has the business reviewed its sales and use tax nexus footprint, the taxability of its products and services, and whether it is charging the appropriate sales and use tax rates? A comprehensive review of the sales and use tax function along with improving or automating processes may help businesses report and pay the appropriate amount of tax to the correct states and localities.
• Remote retailers, marketplace sellers, and marketplace facilitators (i.e., marketplace providers) should be sure they are in compliance with state sales and use tax laws and marketplace facilitator rules.

 

Begin planning for the future

Businesses should consider actions that will put them on the best path forward for 2025 and beyond. Businesses can begin now to:

• Reevaluate choice of entity decisions while considering alternative legal entity structures to minimize total tax liability and enterprise risk.
• Evaluate global value chain and cross-border transactions to optimize transfer pricing and minimize global tax liabilities. Review transfer pricing compliance.
• Review available tax credits and incentives for relevancy to leverage within applicable business lines.
• Consider legal entity rationalization, which can reduce administrative costs and provide other benefits and efficiencies.
• Consider the benefits of an ESOP as an exit or liquidity strategy, which can provide tax benefits for both owners and the company.
• Perform a cost segregation study with respect to investments in buildings or renovation of real property to accelerate taxable deductions, claim qualifying bonus depreciation and identify other discretionary incentives to reduce or defer various taxes.
• Perform a state-by-state analysis to ensure the business is properly charging sales taxes on taxable items, but not exempt or non-taxable items, and to determine whether the business needs to self-remit use taxes on any taxable purchases (including digital products or services).

 

Year-end planning could make a difference in your tax bill

 If you would like more information, please call to schedule a consultation to discuss your specific tax and financial needs and develop a plan that works for your business.