What the 2025 Tax Law Changed for Business Owners

The 20% deduction for qualified business income from pass-throughs was scheduled to disappear after 2025. The 2025 law made it permanent and kept the 20% rate. Two technical changes start in 2026.

First, the phase-in range above the threshold grows from $50,000 to $75,000 for single filers and from $100,000 to $150,000 for joint filers. In 2026 the deduction begins phasing at $201,750 single and $403,500 joint and finishes at $276,750 and $553,500. That range governs both the wage and property limits for non-service businesses and the full phaseout for specified service businesses.

Second, a minimum deduction of $400 applies to owners with at least $1,000 of QBI from active businesses they materially participate in. It mainly helps small side businesses whose computed deduction would otherwise be tiny. Both the $400 and $1,000 amounts are indexed after 2026.

What did not change: W-2 wages you pay yourself from an S corp are not QBI, and reasonable compensation still matters. A higher salary lowers QBI but raises the wage base for the limit, so the balance is a planning question. Our QBI guide has the full mechanics.

Bonus depreciation is 100% again, permanently, for property acquired after January 19, 2025. Before the law it was on track for 20% in 2026 and zero in 2027. Section 179 also doubled: $2,560,000 of expensing in 2026, phasing out once purchases pass $4,090,000. Bonus has no income limit and can create a loss; Section 179 cannot exceed business taxable income, which is why many owners use both. Heavy vehicles are covered on our vehicles over 6,000 pounds page.

Manufacturers and producers get a new option: 100% first-year depreciation for qualified production property, the portion of a new nonresidential building used for manufacturing, production or refining, if construction begins after January 19, 2025 and before 2029 and it is placed in service before 2031.

Domestic research and experimental costs can be deducted immediately again under new Section 174A, for tax years beginning after 2024, instead of amortized over five years. Businesses that met the small business gross receipts test can apply it back to 2022 through 2024 by amended return, and other businesses can deduct their remaining unamortized balance over one or two years. The research credit itself is covered on our R&D credit page.

The business interest limit again adds back depreciation and amortization when computing adjusted taxable income, for tax years beginning after 2024, which raises the cap for capital-heavy and leveraged businesses.

The tips and overtime deductions are claimed by employees on their own returns, but employers carry the reporting. Starting with 2026 W-2s, qualified overtime and tips (with the worker's occupation) are reported separately so employees can claim the deductions. Payroll systems and job descriptions for tipped and non-exempt hourly staff need to be ready before year-end. Our tips and overtime pages cover the employee side.

For contractors, the Form 1099-NEC and 1099-MISC threshold rises from $600 to $2,000 for payments made after December 31, 2025. The forms you file in early 2026 for 2025 payments still use $600. Payment platforms went back to issuing Form 1099-K only above $20,000 and 200 transactions.

Several employee benefits grew in 2026: the dependent care assistance exclusion rises from $5,000 to $7,500, the employer-provided childcare credit rises to as much as $500,000 ($600,000 for eligible small businesses), and employers can contribute up to $2,500 a year tax-free to an employee's or an employee's child's Trump account.

The individual SALT cap rose to $40,400 for 2026, with the 30% phasedown above $505,000 of MAGI. The final law did not restrict pass-through entity tax elections, which earlier drafts would have limited for service businesses. A PTET election still moves state income tax to the entity, outside the individual cap, and because it reduces the income on your K-1 it also lowers your MAGI for the phasedown. See our PTET guide for the state elections.

The excess business loss limit is now permanent. In 2026, net business losses above $256,000 single or $512,000 joint cannot offset wages or investment income that year and carry forward instead. With 100% bonus depreciation back, a big equipment year can run into that cap.

For C corporation stock issued after July 4, 2025, the QSBS exclusion now phases in: 50% of the gain after three years, 75% after four, and 100% after five. The per-company cap rose from $10,000,000 to $15,000,000, and companies can have up to $75,000,000 of gross assets at issuance. Our QSBS guide covers the rest of the test.

The estate and gift exemption is $15,000,000 per person from 2026 and indexed afterward, rather than falling to roughly half. Succession plans built around a 2026 deadline can be revisited without that pressure.

Bonus depreciation, Section 174A expensing and the EBITDA-based interest limit continue unchanged in 2027. The Section 179 limits, QBI thresholds, the $400 minimum, the excess business loss limit, the $2,000 1099 threshold and the employer childcare credit are all inflation-indexed. IRS publishes these in late 2026.

The employee deductions for tips and overtime run through 2028, so the W-2 reporting continues through then. The individual SALT cap rises 1% a year through 2029 and returns to $10,000 in 2030; PTET has no expiration.