2025 Year-End Tax Planning for Businesses
Reference Guide
The 2025 tax landscape has been fundamentally reshaped by the OBBBA
The One Big Beautiful Bill Act (OBBBA) is a landmark piece of legislation that made many provisions from the Tax Cuts and Jobs Act (TCJA) permanent, introduced new deductions and credits, and altered the trajectory of others.
As the year comes to a close, businesses must evaluate these changes to implement effective tax-saving strategies and ensure compliance.
Key Legislative Changes for Businesses
The OBBBA has introduced significant updates affecting depreciation, key deductions, and various tax credits. Businesses should review these provisions to understand their impact and identify planning opportunities.
Depreciation and Expensing
100% Bonus Depreciation
The OBBBA has permanently restored 100% bonus depreciation for most qualified business property that is both acquired and placed in service after January 19, 2025. Property acquired before this date but placed in service in 2025 remains subject to the previous 40% phase-down rule. The legislation also provides an option for businesses to elect a 40% bonus depreciation rate instead of the full 100% for the first tax year ending after January 19, 2025.
Section 179 Expensing
The annual expensing limit under Section 179 has been increased to $2.5 million, with the investment phaseout threshold rising to $4 million, effective for property placed in service after December 31, 2024.
Qualified Production Property (QPP)
A new provision, Section 168(n), allows businesses to elect 100% expensing for investments in “qualified production property.” This new asset class includes certain nonresidential real property, such as manufacturing facilities, where construction begins after January 19, 2025, but before January 1, 2029.
Core Business Deductions
Business Interest Limitation (Section 163(j))
The OBBBA permanently restores the more favorable calculation of adjusted taxable income (ATI) by once again excluding depreciation, amortization, and depletion. This change, effective for tax years beginning after 2024, will allow many capital-intensive businesses to deduct a greater amount of their business interest expense.
Research and Experimental (R&E) Expenditures
For tax years beginning after December 31, 2024, businesses can once again immediately deduct domestic R&E expenditures. This change, enacted under the new Section 174A, reverses the five-year amortization requirement established by the TCJA. However, foreign-based R&E costs must still be amortized over 15 years. A transition rule allows for the accelerated deduction of unamortized domestic R&E costs from 2022-2024.
Qualified Business Income (QBI) Deduction (Section 199A)
The 20% deduction for qualified business income from pass-through entities and sole proprietorships has been made permanent, providing long-term certainty for eligible businesses.
Business Credits and Incentives
- Work Opportunity Tax Credit (WOTC): The OBBBA did not extend the WOTC. Businesses that hire individuals from targeted groups have until December 31, 2025, to complete all requirements to claim this credit before it expires.
- New Markets Tax Credit (NMTC): This program, which supports investments in low-income communities, has been made permanent with a $5 billion annual allocation authority.
- Qualified Small Business Stock (QSBS): The benefits of QSBS under Section 1202 have been enhanced. For stock issued after July 4, 2025, the gain exclusion limit is increased to $15 million (from $10 million), and the aggregate gross assets test for a qualifying corporation is raised to $75 million (from $50 million).
- Opportunity Zones (QOZ): The QOZ program has been made permanent, though the rules have been modified. New zones will be designated in rolling 10-year periods, and investments made after 2026 will be subject to new gain recognition and basis step-up rules.
Clean Energy Credits
The OBBBA has significantly reshaped the energy credit landscape. The credit for commercial clean vehicles is repealed for vehicles acquired after September 30, 2025. Additionally, the phaseouts for the investment tax credit (Section 48E) and production tax credit (Section 45Y) have been accelerated. Businesses should act quickly to place qualifying property in service before year-end to claim any remaining available credits.
Other Key Developments and Year-End Strategies
Beyond the OBBBA, several other regulatory changes and ongoing issues require attention from businesses as they plan for year-end.
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Digital Assets
Beginning January 1, 2025, new regulations require taxpayers to use a “wallet-by-wallet” approach to identify the basis of digital assets sold. Those unable to use specific identification must use the first-in, first-out (FIFO) method. Brokers will begin issuing Form 1099-DA for these transactions in early 2026. Businesses dealing with digital assets must implement robust recordkeeping systems to ensure compliance.
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Accounting Method Planning
Businesses can manage their 2025 taxable income by strategically adopting or changing tax accounting methods. Consider opportunities to:
- Defer Income: Properly structure advance payments received for goods or services to defer recognition to a later year.
- Accelerate Deductions: Utilize the “recurring item exception” to deduct certain accrued liabilities (e.g., rebates, warranty costs) that are paid shortly after year-end. Also, consider prepaying certain expenses like insurance or licensing fees under the 12-month rule.
- Plan Capital Investments: With expanded accelerated depreciation provisions in place, planning the timing of capital investments can yield additional tax benefits.
- Dispose of Inventory: Identify and dispose of obsolete or unsalable inventory before year-end to accelerate loss recognition.
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Partnership Tax Considerations
- Self-Employment Tax for Limited Partners: Following recent Tax Court decisions, the IRS is applying a “functional analysis” to determine if a limited partner is active in the partnership’s business and thus subject to self-employment tax, regardless of their state-law designation. Partnerships, particularly management fund entities, should review their partners’ roles and activities.
- New and Revised Reporting: The IRS has eased reporting requirements for Form 8308 (Report of a Sale or Exchange of Certain Partnership Interests) but has introduced a new filing, Form 7217 (Partner’s Report of Property Distributed by a Partnership), for partners receiving non-cash property distributions in tax years beginning in 2024.
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Compensation and Benefits
- New Reporting for Tips and Overtime: To facilitate new individual-level deductions created by OBBBA, employers must begin reporting qualified tip and overtime income to employees in 2025. The IRS has provided transition relief from penalties for 2025 as employers update their payroll systems.
- Information Reporting Thresholds: The reporting threshold for Forms 1099-NEC and 1099-MISC will increase from $600 to $2,000 for payments made after December 31, 2025 (i.e., for the 2026 tax year).
- State Paid Family and Medical Leave (PFML): The IRS has issued new guidance (Rev. Rul. 2025-4) clarifying the federal tax treatment of contributions and benefits for state-mandated PFML programs, effective January 1, 2025. Most benefits will be taxable to employees, and employers must update their payroll systems to ensure correct withholding and reporting for 2026 and beyond.
State and Local Tax (SALT) Conformity
A critical planning point for 2025 is how states will conform to the federal changes under OBBBA. States with “rolling” conformity may automatically adopt the new rules, while “fixed-date” conformity states will need to pass legislation. Key areas of divergence to monitor include state treatment of 100% bonus depreciation, Section 174 R&E expensing, and the Section 163(j) interest limitation. Michigan has already updated state tax law to continue these deductions under pre-OBBBA law. Businesses must analyze the SALT implications of federal tax decisions on a state-by-state basis.
The most important differences for Michigan are that:
- Michigan will still require domestic research and development (R&D) costs to be written off over five years. This means businesses cannot deduct the full amount of U.S.-based R&D spending in the year it occurs; instead, the deduction must be spread out over a longer period.
- C corporations still cannot use bonus depreciation in Michigan. This is not a new rule, but it continues to mean that C corporations must depreciate new equipment or other qualifying assets using regular depreciation methods rather than taking a large upfront deduction.
- Bonus depreciation will now phase out for S corporations, partnerships, and individual business owners. This is a new change for Michigan and will require additional tracking and reporting. Instead of allowing a large, immediate deduction, the state will gradually reduce the amount of bonus depreciation allowed each year.
- Section 179 deduction limits will remain at Michigan’s lower, prior-level thresholds. While federal rules allow a higher amount of equipment and qualifying property to be expensed immediately, Michigan continues to use an older, smaller limit.
- Businesses cannot add back depreciation or amortization when calculating how much interest expense they are allowed to deduct. This restriction may limit the deductible amount of business interest, especially for companies with significant asset purchases or intangible assets.
Tailored Year-End Planning Support
Looking for some assistance in optimizing your business tax position? Have specific questions about the OBBBA? Lean on our team of tax experts to help ensure your organization takes advantage of every tax credit, deduction, and savings opportunity available.
Our team of experts can identify viable opportunities for minimizing, delaying, or expediting tax obligations and we’re well versed in the complexities of federal tax laws and policies, staying updated to help you succeed.
Please contact us at maner@manercpa.com or call 517-323-7500 to set up your year-end review.
