CONTRIBUTORS
Bill Cass, CFP®, CPWA®
Director of Wealth Planning,
Franklin Templeton
While many business owners will benefit from the individual taxpayer provisions of the new law—such as the extension of current tax rates, brackets and estate tax thresholds—there are a number of additional changes which specifically target businesses. These include a permanent extension of a popular deduction as well as a relaxation of expensing rules for tax purposes.
Here’s a more detailed look at how businesses are impacted by the One Big Beautiful Bill Act:
Deduction for qualified business income (QBI) made permanent
The QBI deduction allows certain pass-through business owners (sole proprietors, partnerships, S-Corps, LLCs) to generally deduct 20% of net business income from their individual tax return. The provision was scheduled to expire in 2025 but was extended permanently. The deduction is subject to income phase-outs, which may eventually eliminate the tax benefit (in the case of service-related businesses) or alter its calculation (non-service businesses).
Beginning in 2026, these phase-out levels are slightly relaxed. Here’s how they apply for 2025:
Source: IRS 2025 figures. Service business refers to any trade or business activity involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services or brokerage services. Or, any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees, or investing, trading or dealing in securities, partnership interest or commodities. The alternative calculation for non-service businesses is based on a certain percentage of wages paid by the business and/or the unadjusted cost basis of qualified property.
Restores 100% bonus depreciation
The Tax Cuts and Jobs Act of 2017 introduced a provision allowing businesses to fully expense the purchase of certain qualified property related to the business. This is referred to as bonus depreciation since the business avoids capitalizing the cost of the property over many years based on a depreciation schedule. Immediate expensing of capital expenditures is designed to promote business expansion by providing a valuable tax benefit. Under previous law, the 100% expensing treatment was phased out gradually in 2023 for most capital purchases. For 2025, businesses were generally limited to expensing 40% of the cost of acquiring qualified property in that tax year. The new law restores 100% expensing on qualified property acquired on or after January 19, 2025, on a permanent basis.
Examples of qualified property include office equipment, computers (and software), machinery, other tangible property used in the business, and internal renovations or improvements of a building. Since the definition of “qualified property” for purposes of applying 100% bonus depreciation is property with a cost recovery period of 20 years or less for tax purposes, buildings and land do not qualify.
Increased Section 179 deduction
Section 179 allows small businesses to deduct the full cost of acquiring property in that tax year instead of spreading the cost over multiple years. Beginning in tax year 2025, the maximum deduction increases from $1.25 million to $2.5 million, and the phase-out threshold is also increases from $2.5 million to $4 million. Examples of eligible expenses include tangible property such as machinery, office equipment, computers, vehicles and improvements to buildings. The Section 179 deduction is commonly prioritized versus bonus depreciation because it can be elected on a per-item basis, allowing for more tax planning flexibility. It can be especially helpful when the business owner expects lower future income or has made multiple expenditures for new equipment or technology. Businesses can apply 100% bonus depreciation and Section 179 in concert together. The IRS requires that Section 179 is applied first, followed by bonus depreciation. Business owners should consult with a tax professional on how to combine both tax benefits that will be optimal for the particular circumstances.
Here are some other changes that may affect business owners:
- Businesses can fully deduct the cost of building new domestic manufacturing, production or refining facilities in the same tax year on construction that started after January 19, 2025, through the end of 2028. This allows companies to avoid amortizing the cost over many years for tax purposes.
- Businesses can fully deduct the cost of qualified domestic research and experimental investments in the same year beginning in 2025.
- Enhancements to the tax treatment of Qualified Small Business Stock (QSBS), which is a capital gains exclusion available to certain businesses structured as C-Corps considered “active businesses.” This provision allows a significant exclusion from capital gains tax on the sale of stock meeting certain requirements. For QSBS acquired after July 4, 2025, the cap on excluding capital gains is increased from $10 million to $15 million.1 While stock still must be held at least five years to benefit from the full exclusion, a new partial exclusion from capital gains is allowed (50% exclusion allowed for stock held three years, 75% exclusion for stock held four years). Specific types of businesses are prohibited from applying QSBS treatment, including professional services, finance, hospitality, farming and reputation-based services.
Planning considerations for business owners
- Manage income to maximize the QBI deduction. For example, service-related businesses close to the phase-out thresholds may want to consider avoiding or reducing income to avoid losing the deduction because of the phase-out. While a deductible retirement plan contribution could reduce the amount of QBI, it may allow avoidance of the income phase-out.
- Since the expense provisions (100% bonus depreciation and expanded Section 179 deduction, for example) apply for this tax year, business owners should consult with their tax professional on a strategy that makes sense for their particular situation right now.
- Seek expert advice when considering the best entity choice for your business—LLC, S-Corp, or C-Corp for example. Many business owners default to choosing a pass-through structure such as an LLC which is typically treated as a partnership for tax purposes. A startup business with significant growth prospects may be better served to be structured as a C-Corp to potentially take advantage of the tax benefits of the QSBS treatment upon sale of the stock in the future. Consultation with a legal and tax expert is critical.
Endnote
- Under IRC Section 1202, the maximum amount of the capital gains exclusion is the greater of $15 million (for stock issued after 7/4/25), $10 million (for stock issued on or before 7/4/25) or ten times the original cost basis of the stock when it was acquired.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
Any information, statement or opinion set forth herein is general in nature, is not directed to or based on the financial situation or needs of any particular investor, and does not constitute, and should not be construed as investment advice, forecast of future events, a guarantee of future results, or a recommendation with respect to any particular security or investment strategy or type of retirement account. Investors seeking financial advice regarding the appropriateness of investing in any securities or investment strategies should consult their financial professional.
Franklin Templeton, its affiliated companies, and its employees are not in the business of providing tax or legal advice to taxpayers. These materials and any tax-related statements are not intended or written to be used, and cannot be used or relied upon by any such taxpayer for the purpose of avoiding tax penalties or complying with any applicable tax laws or regulations. Tax-related statements, if any, may have been written in connection with the “promotion or marketing” of the transaction(s) or matter(s) addressed by these materials, to the extent allowed by applicable law. Any such taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor.