One Big Beautiful Bill Business Breakdown: 10 Must-Know Provisions for Business Owners
With the One Big Beautiful Bill Act (OBBBA) signed into law, your team at Harmony has been hard at work reviewing the tax implications of the new legislation and identifying the most relevant elements of it for our many successful business clients. Prior to its passage, there was a lot of uncertainty about what provisions would be included in the new bill, what the final limits would be, and when they would be applicable.
Now that we know much of the bill is retroactively applied, there are a lot of tax planning opportunities available for businesses and we want to make sure you’re aware of some of the most important provisions.
1. QBI Deduction
The QBI deduction, also known as the Section 199A deduction, allows eligible taxpayers to deduct 20% of their qualified business income from their taxable income, materially lowering tax rates on small business owners. The OBBBA makes permanent and expands the 20% qualified business income (QBI) deduction for owners of pass-through entities (such as partnerships, LLCs, and S Corporations) and sole proprietorships. It also raises the income limitations for certain small businesses without many employees to claim the deduction.
What it means for you: The QBI was scheduled to expire at the end of 2025, raising taxes on small business owners by 20%, so small business owners can rejoice - one of the most important provisions of the TCJA for small business owners is now extended and business owners will be able to move forward with tax rate certainty. We will continue to take the QBI deduction for Harmony clients eligible to use it, and expand its usage under the new limits wherever applicable.
2. 1099 Threshold Increase
The threshold for issuing 1099s is raised to $2,000 from $600 and will be indexed to inflation moving forward.
What it means for you: Taxpayers have had a requirement to issue 1099s to recipients of $600 or more in payments per year for decades, so increasing the threshold to $2,000 and indexing it to inflation is a welcome relief to increasingly onerous annual 1099 reporting requirements. We remind all Harmony clients that a form W-9 should still be collected from any vendor or service provider (generally unincorporated service providers, like individual tradesmen, musicians, etc.) prior to issuance of any payments to them.
3. Tax Free Tips and Tax Free Overtime
The OBBBA allows tipped employees to earn $25,000 of tax free tips each year and up to $12,500 of tax free overtime, subject to income limitations and filing requirements (married taxpayers must file joint returns) from 2025 through 2028. See more information in our writeup about individual provisions here.
What it means for you: While this new tax free income provision isn’t directly applicable to businesses, business owners should be aware of the new provisions for recordkeeping, HR, payroll processing, and compensation structure purposes. Employers with tipped employees and employees who earn a considerable amount of overtime should be aware of the pay boost these employees will get under this law and take this into consideration when determining compensation structures and considering employment arrangements, as astute employers will recognize the benefits that can accrue to their employees when syncing compensation to legal parameters.
Practical Examples:
Tax Free Tips
Two competing restaurants each have a part time server that works 1,000 hours.
Restaurant A pays the server $10 per hour tipped minimum wage and the employee earns $25 per hour in tips, resulting in $35,000 of total income. Only $10,000 of this is taxable.
Restaurant B pays the server $35 per hour and there are no tips allowed, resulting in $30,000 of total income. All $35,000 of this is taxable.
Ceteris paribus, Restaurant A is offering the server considerably more net pay than Restaurant B and Restaurant A will be able to attract better servers than Restaurant B, unless Restaurant B raises its wages and lowers its profits.
Tax Free Overtime
Two companies each have a full time admin employee that works 45 hours per week.
Company A pays salary and the employee earns $50,000 in total income. All $50,000 is taxable.
Company B pays $20 per hour regular, $30 per hour overtime, and the employee earns $50,000 in total income. About $42,000 of this is taxable and $8,000 is tax free.
Ceteris paribus, the companies are offering the same gross pay, but Company B will be more attractive because the employee can save thousands in taxes.
4. Employer Payments of Student Loans
Tax free employer payments of student loans are permanently extended, with a $5,250 limit per year that will be indexed to inflation.
What it means for you: Employers can pay up to $5,250 towards student loans for employees each year, tax free, as a compensation and retention benefit. The permanent extension of this program encourages more employers to consider adding this sort of benefit to their compensation packages for staff.
5. Employer Provided Childcare Credit
The OBBBA provides a massive expansion of the Section 45F credit for employer provided child care expenses. The key changes include:
Raising the maximum credit from $150,000 to $500,000 per year ($600,000 for small businesses with less than $31M of annual gross receipts).
Increasing the percentage of expenses covered from 25% to 40% (50% for small businesses).
Indexing the limits to inflation.
Expanding eligibility to use third-party intermediaries to coordinate child care services with qualified providers.
What it means for you: Under the old law, employers had to operate their own childcare facilities to get the credit (which wasn’t particularly useful in cost offsets), so employer provided childcare benefits have been common only with large on-site employer facilities. With the broader definition of eligible childcare expenses and the significant increase in value of the credits, a much broader set of employers will qualify for the credits and start to implement childcare benefits. We would expect that new regional networks of childcare providers will come into existence to begin to provide employer partnerships for childcare services and this may become a key part of compensation and retention packages in the future.
6. Paid Family and Medical Leave Credit
Starting in 2026, the Paid Family and Medical Leave Credit is made permanent and expanded to include both wages paid to employees on leave as well as premiums paid for family and medical leave insurance policies. To qualify, there must be a written policy in place that provides at least two weeks of paid family and medical leave per year to qualifying employees with at least 50% wage replacement. The leave must be for purposes that qualify under the FMLA, like birth, adoption, caring for a sick family member, or personal medical conditions.
The credit is for 12.5% of wages paid during PFML if the wage replacement is 50%, and increases by 0.25% for each extra percentage point of income replacement, up to a maximum of 25%.
For example:
50% wage replacement —> 12.5% credit
75% wage replacement —> 18.75% credit
100% wage replacement —> 25% credit
What it means for you: If you offer PFML to employees you may be eligible to claim a credit for the out of pocket expenses you incur to provide that benefit. You can also be eligible for a credit for amounts paid to purchase insurance to provide this for staff. If you have such a policy or are considering one, make sure it is properly documented in writing and track any PFML accurately to ensure you can claim the credit.
7. Bonus Depreciation
The OBBBA reinstates and makes permanent 100% bonus depreciation for qualified property acquired and placed in services after January 19, 2025. The 100% bonus depreciation applies to new and used property with a recovery period of 20 years or less, including qualified improvement property, and taxpayers have the option to elect a 40% bonus depreciation instead of 100% to allow flexibility for businesses that may prefer a more gradual depreciation approach with a boosted amount in the first year.
What it means for you: This allows businesses to immediately deduct the full cost of eligible assets, such as equipment, machinery, and leasehold improvements, in the year they are placed in service. The new law gives long term certainty for tax planning and business investment purposes, and the retroactive nature of the law will benefit businesses who are investing in growth in 2025. Prior to the passage of OBBBA, bonus depreciation was set to be 40% in 2025 and be eliminated in 2026, so restoration of full bonus depreciation is a huge benefit to Harmony clients who are planning to reinvest in their businesses and wanting guidance on the most beneficial timing.
For clients we’d advised to consider waiting to make investments or open new locations until the law was clear, it is now beneficial to ensure you open in 2025 rather than waiting until 2026.
8. Section 179 Expensing
Section 179 Expense limitations are increased to $2,500,000 per year, starting in 2025, with phase-out thresholds beginning at $4,000,000. These amounts are indexed for inflation moving forward.
What it means for you: The substantially increased limits on Section 179 expensing will cover the capital expenditures of most small business owners on a permanent basis, allowing for tax planning opportunities to reduce taxable income through asset investments. Your Harmony tax team will always consider options with Section 179 expensing during the tax preparation process - it is not always optimal to write off everything immediately at the business level, but these decisions should be carefully considered by your tax CPA as part of holistic planning.
9. ERTC Claims
Employee Retention Tax Credit claims that were filed after January 31, 2024 are cut off and will not be funded.
What it means for you: If you filed a claim for an ERTC after January 31, 2024, regardless of what period the claim was filed for, it will not be paid. Taxpayers should account for any late filed claims, make sure they are no longer shown as receivables on the books, and work with their CPAs to ensure deductions that might have been limited due to these claims are restored. Active Harmony clients during the ERTC period would have had claims filed previous to this cutoff period and should not be affected, but clients who joined Harmony after January 2024 may have claims that are now cut off.
10. Clean Energy Credits Cut
Most of the clean energy tax credits that were introduced in the Inflation Reduction Act have been cut, with a variety of different ending dates over the coming 12 months. If you were planning to use any of these credits - which covered energy efficient improvements to homes, purchases of electric vehicles for personal or commercial use, etc. - we recommend that you review the specific new deadlines on these programs and accelerate your purchases and construction timelines to qualify for the credits.
What it means for you: Two big things here. First, If you were planning to use any of these credits - which covered energy efficient improvements to homes, purchases of electric vehicles for personal or commercial use, etc. - we recommend that you review the specific new deadlines on these programs and accelerate your purchases and construction timelines to qualify for the credits.
More importantly, it is unusual for Congress to have done this to pay for the OBBBA and sets a precedent for additional uncertainty in tax policy moving forward. The OBBBA will set policy that will likely last through the entirety of the Trump administration, but we will closely monitor tax legislation in future Congressional sessions to keep clients apprised of any expected rollbacks of OBBBA provisions. Many of the OBBBA provisions are targeted to providing relief to small business owners and lower to middle class taxpayers, so we wouldn’t expect many of those provisions to be attacked in the future, but a future Congress might reduce the QBI deduction, lower depreciation provisions, or otherwise make changes.
As ever, if you’re a Harmony client, don’t hesitate to reach out with any questions or concerns about how the OBBBA affects your business. This is hugely sweeping tax legislation, and Harmony will continue to breakdown its impact with more analysis and more webinars to come. And of course, if you’re not already a valued client, there’s no time like the present!