How the Big Beautiful Bill Impacts Small Businesses
The One Big Beautiful Bill Act (sometimes called the “BBB Act”) rewrote many federal tax rules impacting small business owners. Signed into law on July 4, 2025, the BBB Act applies retroactively to tax year 2025—meaning many of its changes affect returns you'll file in early 2026. If you own a small business, are self-employed, or run a pass-through entity like an LLC or S corp, here’s what the law means for you—in plain English.
1. A continued deduction for pass‑through businesses
What changed: The bill makes permanent the 20 % deduction for pass‑through income (Section 199A), which was set to expire. The deduction allows business owners who report profits on their personal returns—like LLC members, sole proprietors or S‑corporation shareholders—to deduct up to 20 % of qualified business income (QBI). The phase‑in thresholds for high‑income taxpayers were expanded to $75,000 for single filers and $150,000 for joint filers, giving more breathing room before the deduction is limited.
Before the law: The Qualified Business Income (QBI) deduction—also known as the 20% pass-through deduction—was subject to limitations once your income hit certain levels. For single filers, the phase-in range used to start at $50,000; for joint filers, $100,000.
After the BBB Act: The thresholds are now more generous—$75,000 for single filers and $150,000 for joint filers—meaning more small business owners qualify for the full deduction.
Example: Kim – Single-Filer Photographer
Kim owns a photography business and files taxes as a single filer. In 2026, she earns $65,000 in qualified business income.
Under the old $50,000 threshold, Kim would’ve been partially phased out of the deduction unless she paid herself wages or had depreciable property—things solo businesses often don’t have.
Under the new $75,000 threshold, Kim qualifies for the full 20% deduction.
That means she deducts $13,000 from her taxable income, possibly saving thousands in taxes.
Example: Mike and Anna – Married Caterers
Mike and Anna run a catering business together and file jointly. In 2026, they earn $140,000 in qualified business income.
Under the old law, with a $100,000 phase-in starting point for joint filers, they would’ve lost part of the deduction.
Under the new $150,000 threshold, they keep the full 20% deduction—$28,000 off their taxable income.
2. Full expensing of equipment and research costs
What changed: The BBB Act restores 100 % bonus depreciation for equipment, machinery and certain building improvements and makes immediate expensing of domestic research and development costs permanent.
Before the law: Businesses had to deduct equipment costs over several years. R&D expenses had to be amortized over 5 years, limiting upfront tax benefits.
After the BBB Act: 100% bonus depreciation for equipment is restored. R&D costs can be fully expensed in the year incurred, making large investments more affordable.
Example: Manny owns a small machine shop. In 2026, he buys a $60,000 lathe. Before, he had to spread deductions over several years. Now, he deducts the full $60,000 immediately cutting his taxable income that year by the full amount.
3. Higher state‑tax deduction cap
What changed: The BBB Act temporarily raises the State and Local Tax (SALT) deduction cap to $40,000 for joint filers and $20,000 for single filers, starting in 2025. These higher caps apply through 2029, then phase down gradually before reverting to $10,000 by 2033.
Before the law: The SALT (State and Local Tax) deduction was capped at $10,000 regardless of filing status making it hard for small business owners and homeowners in high-tax states to deduct their full property and income taxes. Even if you paid $30,000 in state taxes, you could only deduct $10,000—and only if you itemized your deductions.
After the BBB Act: The new, higher SALT caps allow more taxpayers to deduct a greater share of their state taxes—if they itemize. This is especially helpful for high-income earners, small business owners, and homeowners with significant state income or property taxes. Note: The higher deduction begins to phase out for joint filers with adjusted gross income (AGI) over $500,000 (or $250,000 for single filers), starting in 2026.
Example: Sam and Nicole own a home in Nebraska and run a law firm. They pay $18,000 in property taxes and $14,000 in state income taxes—for a total of $32,000 in SALT. Before, they could only deduct $10,000. Now, they can deduct the full $32,000—reducing taxable income by $22,000 more than before, if they itemize.
💡 Pro Tip: Use the PTET Election to Get the Deduction Without Itemizing
If your business is an S corporation or partnership, many states now let you pay state income tax at the entity level via a Pass-Through Entity Tax (PTET) election).
Why this matters:
PTET payments are fully deductible on your federal business return—no SALT cap applies.
You still get a state tax credit, so you’re not taxed twice.
You can take the standard deduction on your personal return and still benefit.
PTET Example: Laura earns $300,000 through her S corp in 2026. She owes $20,000 in state income tax. Instead of paying it personally, she has her S corp elect PTET and pay the tax directly. The business deducts the $20,000 on its federal return. Laura’s K‑1 income drops to $280,000, reducing her federal tax bill—without needing to itemize.
Special Considerations for PTET election: If you’re a business owner in a PTET-participating state, this strategy can be a huge win. Talk to your CPA early in the year to see if you can make the election in your state and to track payments properly. States Without PTET as of now, Delaware, Maine, North Dakota, Pennsylvania, Vermont, and Washington, D.C. do not offer PTET. And in states with no personal income tax (like Texas, Florida, or Wyoming), PTET is generally unnecessary.
4. New 1099 thresholds
What changed: The reporting threshold for Forms 1099‑MISC and 1099‑NEC rises from $600 to $2,000 starting in 2026, with inflation adjustments thereafter. The 1099‑K threshold returns to $20,000 and 200 transactions. This reduces paperwork for small businesses.
Before the law: Businesses had to issue 1099-NEC and 1099-MISC forms for anyone they paid more than $600 annually.
After the BBB Act: The threshold increases to $2,000 (adjusted for inflation). 1099-K thresholds return to $20,000 and 200 transactions.
Example: Rosa pays a part-time video editor $1,500 in 2026. Before, she had to send a 1099-NEC. Now, no form is required—saving time and administrative cost.
5. Special Deductions for Sole Proprietors & Independent Contractors (2025–2028)
What Changed: The One Big Beautiful Bill Act introduced temporary individual tax deductions for certain types of income earned by workers in service and labor-intensive jobs. While these don’t reduce business income directly, they can offer meaningful federal tax savings to small business owners who report income as sole proprietors or independent contractors.
Before the law: There were no special federal deductions for tips, overtime, or personal vehicle loan interest. All of that income was fully taxable.
After the BBB Act (2025–2028): Qualified individuals may now deduct the following on their personal tax returns (even if they take the standard deduction):
Up to $25,000 in tips (in IRS-recognized tipped occupations)
Up to $12,500 in overtime pay (or $25,000 if married filing jointly)
Up to $10,000 in interest on car loans for qualifying, only U.S.-assembled vehicles, if no mileage or depreciation is claimed
These deductions lower your adjusted gross income (AGI), which can also improve eligibility for other tax benefits (like the Child Tax Credit or Saver’s Credit).
Who Qualifies? This deduction is for individuals, not businesses. It applies to self-employed people—including gig workers, tradespeople, and Schedule C filers—who:
Earn tips in recognized service jobs (e.g., stylists, servers, valets, massage therapists)
Work extended or seasonal hours with overtime (e.g., agricultural workers, delivery drivers)
Use a personal vehicle for mixed business/personal use and don’t claim mileage or depreciation on Schedule C
You can’t double dip: If you already take a mileage deduction or depreciate the car, you can’t also deduct loan interest for that vehicle.
Examples:
Jasmine – Salon Owner
Jasmine owns a small hair salon and files Schedule C. She earns $30,000 in service fees and $9,000 in tips. Because hairstyling is a listed tipped occupation and her AGI is below $150,000, she deducts the full $9,000 tip amount on her 2026 tax return—even though she takes the standard deduction.Devon – Delivery Driver
Devon drives for a delivery app as a 1099 contractor. He regularly logs overtime shifts, and his time-and-a-half pay adds up to $6,500 in overtime for the year. He deducts the full amount on his Form 1040—cutting his AGI without needing to itemize or use Schedule C.Leo – Rideshare Side-Hustler
Leo buys a U.S.-assembled car and uses it part-time for rideshare work. He doesn't track mileage or depreciate the vehicle. He pays $1,800 in loan interest and deducts it directly on his return—because he meets all requirements and doesn’t claim vehicle expenses elsewhere.
Not for S Corp or Partnership Owners: This deduction does not apply to business income received via K-1 from an S corp or partnership. It also doesn’t reduce your business’s Schedule C income. It’s strictly for earned income from qualified jobs—not passive ownership or investment income.
6. Employee‑benefit enhancements
The Act introduces or makes permanent several benefits that can help attract workers:
The dependent care flexible spending account limit increases to $7,500, allowing employees to set aside more pre‑tax dollars for childcare.
Employers can repay up to $5,250 of an employee’s student loans tax‑free; this amount is indexed for inflation.
Telehealth coverage is permanently allowed before participants meet their high‑deductible health plan (HDHP) deductible, and direct primary care arrangements are now HSA‑eligible.
Example: A dental practice offers telehealth for routine consultations under its HDHP; employees can access care without jeopardizing HSA eligibility. Previously, if your health plan covered telehealth services at no cost or a reduced copay before your deductible was met, employees could be considered ineligible to contribute to an HSA.
Note: Some benefit changes (dependent care FSA, student loan repayment, telehealth/HSA) are effective for tax years beginning after December 31, 2025 or rolled into early 2026 plan years—so some employers need to update 2026 Open Enrollment plans
7. Estate & Gift Tax Exemption Increased for 2026+
What Changed: The BBB Act increases the unified federal estate and gift tax exemption to $15 million per person (or $30 million for married couples), starting in 2026. This exemption will also be indexed for inflation after that.
Before the law: The exemption was scheduled to revert to around $7 million per person in 2026 (down from the 2025 level of $13.61 million), which would have affected many business owners looking to pass companies to children or heirs.
After the BBB Act: Family business owners now have a much larger exemption window—meaning they can gift or bequeath more assets (including closely held business interests) without triggering federal estate or gift tax.
Example: Harold owns a family manufacturing company valued at $12 million. Under previous law, if he passed away after 2025, much of the business would have exceeded the reduced exemption and possibly triggered estate tax. Now, with the $15 million exemption starting in 2026, Harold’s entire estate—including the business—can pass to his children tax-free, if planned properly. This provides more flexibility for succession planning, especially for high-value businesses with limited liquidity.
8. Interest deduction returns to EBITDA standard
What changed: Businesses that borrow money can deduct interest up to 30 % of their earnings before interest, taxes, depreciation and amortization (EBITDA). Prior law used a stricter EBIT standard (excluding depreciation and amortization).
Before the law: Interest deductions were limited to 30% of EBIT (Earnings before Interest and Taxes). This penalized capital-intensive businesses with large depreciation expenses.
After the BBB Act: The deduction cap is based on EBITDA (adds Depreciation and Amortization back), increasing the allowable interest deduction.
Example: Tasha runs a food distribution business with $600,000 EBITDA and $180,000 interest expense. Under EBIT rules, her deduction might be capped at $120,000. Under EBITDA rules, she deducts the full $180,000.
9. New incentives for selling stock of startups (QSBS)
What changed: For qualified small business stock (QSBS) issued after the BBB Act, gains are partially or fully excluded depending on how long the shares are held: 50 % for stock held three to four years, 75 % for four to five years, and 100 % for five years or more. The per‑issuer cap also rises from $10 million to $15 million, indexed for inflation.
Before the law: Qualified Small Business Stock (QSBS) gains could be excluded only if held for 5 years, and the per-issuer cap was $10 million.
After the BBB Act: QSBS gains can now be partially excluded starting at 3 years:
50% if held 3–4 years
75% if held 4–5 years
100% if held 5+ years
The per-issuer cap increases to $15 million, indexed for inflation.
Example: Jordan invests $100,000 in a health-tech startup. After 5 years, the stock is worth $1.5 million. Previously, only $1.4 million of that gain would be excluded (after cap limits). Now, the full $1.4 million gain qualifies for full exclusion due to the higher cap and tiered schedule.
10. New Excise Tax on Foreign Remittances
What Changed: The BBB Act adds a 1% excise tax on remittances—transfers of cash, money orders, or digital assets—sent outside the U.S., beginning in 2026.
Who it affects: Applies to outbound payments made outside of regulated financial accounts. Exempts U.S. citizens, permanent residents, and transactions made through U.S.-regulated banks, credit unions, and registered fintechs. Affects cash-heavy businesses, crypto users, and companies using unregulated payment methods for overseas payments.
Example: A U.S. business pays a contractor in another country using a non-bank app or cryptocurrency wallet. If $10,000 is sent, a $100 excise tax may apply unless it’s routed through a regulated institution. Businesses should review how they pay overseas vendors to avoid unnecessary tax exposure.
11. Clean Energy Credits Rolled Back
What Changed: The BBB Act scales back or ends many clean energy tax incentives introduced by the Inflation Reduction Act—particularly those involving long-term solar, wind, and manufacturing credits.
Impacted programs include: Early termination of Section 45Y (Clean Electricity Production Credit) and 48E (Clean Investment Credit) after 2027. Elimination of credits for hydrogen, advanced manufacturing, and certain domestic content requirements.
Example: A roofing contractor was planning to offer solar panel installations and claim credits through 2032. With the BBB Act rollbacks, those incentives may now expire in 2027—making some business expansions less viable. If your business is tied to renewable energy, it’s worth reviewing projected ROI and incentive timelines now.
Bottom line
For many small businesses, the BBB Act offers certainty and new incentives. By making the 20 % deduction permanent, restoring full expensing of equipment and R&D, expanding the SALT cap, and raising 1099 thresholds, the law simplifies taxes and encourages investment. At the same time, temporary deductions for tips and overtime provide relief for labor‑intensive service businesses. To take full advantage of these changes, consult your tax professional and update your business plan accordingly.
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