The 2025 Tax Law Changes: How They Help SMBs

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1. Feature: The 2025 Tax Law Changes: How They Help SMBs (5 min)

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Some of the social media coverage on the 2025 tax changes is solid, some is misleading, and much of it overlooks the impact on small businesses and their owners, employees, and families.

This article offers a clear and useful roundup of changes that, we believe, matter most to SMBs.

Background

President Trump signed wide-ranging tax legislation, Public Law 119-21, on July 4, 2025.

The law includes net tax cuts of 4.5 trillion dollars and spending cuts of 1.2 trillion dollars, for a total cost of 3.3 trillion dollars over the 10-year budget window when compared to current law.

The law incorporates priorities from 11 congressional committees and reaches across virtually every sector of the economy. It affects nearly every type of taxpayer, including individuals, corporations, pass-through entities, and nonprofit organizations.

The following provisions are the most relevant to small and mid-sized businesses.

Bonus Depreciation

The law permanently extends and modifies Section 168 bonus depreciation. Businesses may now deduct 100 percent of the cost of qualifying property in the first year. This applies to property acquired and placed in service after January 19, 2025.

The law also makes permanent the use of the percentage-of-completion method to allocate bonus depreciation to long-term contracts.

Section 179 Expensing

The maximum deduction under Section 179 increases to 2.5 million dollars. The phaseout threshold begins at 4 million dollars. Previously, these limits were 1 million and 2.5 million dollars, respectively.

This change applies to qualifying property placed in service after December 31, 2024. Eligible property includes tangible personal property, off-the-shelf computer software, and certain real property used in the active conduct of a trade or business.

Immediate Expensing for Production Property

To encourage domestic manufacturing and production, the law allows businesses to expense 100 percent of the adjusted basis of qualified production property. This includes a 39-year factory and manufacturing property.

To qualify, the property must be used in a qualified production activity, originally used by the taxpayer, and placed in service in the United States. Construction must begin after January 19, 2025, and before January 1, 2029. The property must be placed in service before January 1, 2031. Eligible production activities include manufacturing, production, refining, and certain agricultural or chemical processes.

Qualified Small Business Stock (QSBS)

The law makes three significant changes to Section 1202.

First, partial gain exclusions are now available after shorter holding periods. Stock held for three years qualifies for a 50 percent exclusion. Stock held for four years qualifies for a 75 percent exclusion. Stock held for five years or more continues to qualify for a 100 percent exclusion.

Second, the exclusion cap on eligible gain increases from 10 million to 15 million dollars. Starting in 2027, this amount will be indexed for inflation.

Third, the asset limit for qualifying as a small business increases from 50 million to 75 million dollars. This threshold will also be indexed for inflation beginning in 2027.

Read our recent article: Don’t Think For a Minute That C Corporations Are Dead.

Trump Investment Accounts for Children

The law establishes Trump investment accounts for children. These accounts can receive up to $5,000 in annual contributions. Children born between 2025 and 2028 will also receive a $1,000 federal contribution.

Read our previous article: Hiring Your Child (or Grandchildren) for Your LLC: A Tax-Smart, Legacy-Building Strategy.

Tax Breaks on Overtime and Tips

For tax years 2025 through 2028, overtime compensation is deductible up to $12,500 for individuals and $25,000 for joint filers. The deduction phases out for taxpayers earning more than $150,000, or $300,000 for joint filers.

Tips received during the same period are also exempt from federal income tax, up to a limit of $25,000. This deduction also phases out at the same income thresholds.

Bank Incentives for Rural and Agricultural Real Estate Loans

Banks now have a strong incentive to lend on agricultural and rural real estate. The law excludes 25 percent of interest income a bank receives from qualifying loans from gross income.

This incentive applies to loans made after the date of enactment by FDIC-insured banks and certain affiliated financial institutions.

1099 Reporting Relief

The law raises the information reporting threshold under Sections 6041(a) and 6041A(a) from $600 to $2,000 per year. This applies to payments made after December 31, 2025. The threshold will be adjusted for inflation beginning in 2027.

The law does not change the threshold for direct sales reporting under Section 6041A(b).

Employer-Provided Benefits

Health Savings Accounts (HSAs)

The telehealth exemption, originally enacted during the COVID-19 pandemic, has been reinstated retroactively and made permanent. This allows individuals to receive telehealth services without affecting their eligibility to contribute to an HSA.

The law also permits HSA contributions for individuals enrolled in direct primary care service arrangements. To qualify, monthly fees must not exceed $150 for individuals or $300 for families. These fees are now treated as reimbursable medical expenses for HSA purposes. This provision takes effect for months beginning after December 31, 2025.

Educational Assistance

The expansion of Section 127 to include tax-free student loan assistance is now permanent. Additionally, the $5,250 annual limit on employer-provided educational assistance will be indexed for inflation beginning in 2027.

Dependent Care FSAs

For tax years beginning after December 31, 2025, the contribution limit for dependent care flexible spending accounts increases to $7,500. The limit for married individuals filing separately is $3,750.

Bicycle Commuter Benefit

The ability to offer tax-free reimbursement for bicycle commuting expenses has been permanently eliminated.

Executive Compensation Limits

The law broadens the application of the one-million dollar compensation deduction limit for public companies. The limit now applies to specified covered employees across all members of a controlled group.

When identifying the five highest-paid employees, the entire controlled group must be considered. The three existing criteria for determining covered employees remain in effect but are still based solely on the public company’s workforce.

Employer-Provided Meals

The Tax Cuts and Jobs Act previously prohibited deductions for meals provided on the employer’s premises and for operating an employer-run eating facility. That prohibition remains in place, with two narrow exceptions.

Deductions are now allowed if the meal or service involves adequate consideration in a bona fide transaction, or if the food is provided on a commercial vessel, an oil or gas platform, or a fish processing facility.

Final Word

This legislation provides meaningful tax relief and planning opportunities for SMBs. Many provisions are permanent. Others, like the overtime and tip exemptions, expire in 2028.

Either way, business owners can begin using these changes to reduce costs, improve hiring, and support their teams and families.

Have an interesting business question and need a free bit of advice? Send your question to [email protected]. No confidential info, please!