The 2025 Tax Overhaul: Permanent QBI Relief, Bonus Depreciation, and More for Small Business Owners

Qualified Business Income (QBI) Deduction – Section 199A Enhancements

What Changed:

• The QBI deduction increases from 20% to 23% starting in 2026

• The provision is made permanent (previously set to expire in 2025)

• Limitations on SSTBs and the W-2 wage/property test are phased in more generously

• Qualified BDC interest dividends now count as qualifying income

Impact on Small Business Owners:

• Pass-through businesses—sole proprietors, partnerships, and S corps—will benefit from a larger, more predictable deduction

• SSTBs like law, consulting, and accounting may qualify more easily under expanded income thresholds

• More flexibility in tax planning thanks to the inclusion of BDC interest dividends

Bonus Depreciation – 100% Expensing Restored

What Changed:

• Full 100% bonus depreciation is restored for qualifying property acquired after January 19, 2025 and placed in service before 2030

• Applies to machinery, equipment, and other assets with a recovery period of 20 years or less

• The previously scheduled phase-down under the TCJA is repealed

Impact on Small Business Owners:

• Immediate expensing of capital purchases can significantly lower taxable income

• Encourages reinvestment in tools, vehicles, software, and infrastructure

• Simplifies year-end planning and long-term depreciation strategy

Tip Income Deduction – “No Tax on Tips” Initiative

What Changed:

• Cash tips received in traditionally tipped occupations are tax deductible for the recipient up to $25,000 annually and only below an income cap (~$160,000)

• Applies only if tips are voluntarily given and properly reported (e.g., Form 4137 or W-2)

• Does not apply to SSTBs or high-income earners

• The Section 45B tip credit is expanded to include beauty service industries like salons and spas

Impact on Small Business Owners:

• Tipped employees may see higher take-home pay, improving job satisfaction and retention

• Newly eligible businesses (e.g., salons) can benefit from FICA tax relief

• May encourage more formal tip reporting and reduce compliance risks

Overtime Pay Deduction – “No Tax on Overtime”

What Changed:

• Overtime pay is now tax deductible for employees, up to a defined income threshold

• Applies only to overtime compensation (not base pay), as defined under FLSA

• Excludes “highly compensated employees” as defined under Section 414

Impact on Small Business Owners:

• Employees keep more of their overtime earnings, which could boost morale and retention

• May reduce reliance on part-time hires by making overtime more attractive

• No direct employer savings—but potential indirect workforce benefits

Estate Tax Exemption Enhancement

What Changed:

• The estate and gift tax exemption is increased permanently to $15 million per person / $30 million per couple

• The exemption is indexed to inflation starting in 2026

Impact on Small Business Owners:

• Supports long-term succession planning for family-owned businesses and farms

• Reduces the pressure to liquidate assets at death to cover estate tax

• Offers greater predictability in estate strategy

Standard Deduction Increases

What Changed:

• An additional $1,500 for single filers and $1,000 for married joint filers from 2025–2028

• A new $4,000 senior bonus standard deduction for taxpayers over 65

• Senior bonus phases out starting at $75,000 (single) and $150,000 (married)

Impact on Small Business Owners:

• Sole proprietors who don’t itemize see higher after-tax income

• Filing is simpler, especially for those using the standard deduction

• Senior business owners benefit from additional tax relief

Income Tax Rates and Brackets Made Permanent

What Changed:

• Current TCJA tax rates (10%, 12%, 22%, 24%, 32%, 35%, 37%) are extended permanently

• Bracket thresholds are adjusted for inflation using 2025 as the new base year

• Personal exemption remains repealed

• Standard deduction increases are also made permanent:

  • $13,850 for individuals (plus temporary boost)

  • $27,700 for married couples (plus temporary boost)

Impact on Small Business Owners:

• Pass-through entity income continues to be taxed at lower individual rates

• The 23% QBI deduction + 37% top marginal rate = 28.5% effective rate on qualified income

• Inflation indexing and wider brackets help reduce the marriage penalty

• Greater long-term planning certainty for tax, retirement, and estate strategy

Other Relevant Measures

• Child Tax Credit: Increased to $2,500 through 2028

• SALT Deduction Cap: Raised to $40,000 for households earning under $500,000

• Miscellaneous Deductions: Reinstated or expanded for unreimbursed employee expenses, moving costs, and casualty losses

• Itemized Deduction Limitation: A new 2/37 reduction formula caps deductions for high earners

Final Takeaway

The “One Big Beautiful Bill” delivers a net-positive tax environment for small business owners—especially those using pass-through structures, reinvesting in their businesses, or operating in tipped wage sectors.

If passed, it would offer more stability for long-term tax planning by making several key provisions permanent. For business owners thinking about equipment purchases, employee compensation, or succession strategies, these proposed changes are worth watching closely as they move through Congress.