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Also see: 2025 Year-End Tax Planning for Individuals.
2025 Year-End Tax Planning for Businesses
(Parker Tax Publishing November 2025)
The second installment of Parker's annual two-part series on year-end tax planning reviews the changes affecting businesses for 2025 as well as some strategies clients can utilize to minimize their business's 2025 tax bill.
Practice Aid: For a comprehensive year-end letter for businesses, see Client Letter (Businesses).For a comprehensive year-end planning letter for individuals, see Client Letter (Individuals). Both letters are entirely new and emphasize the new and expanded tax breaks enacted by the One Big Beautiful Bill Act.
The following discussion is divided into two parts: a discussion of key changes made by the One Big Beautiful Bill Act (OBBBA) that have implications for year-end tax planning, and a discussion of other year-end considerations.
Section 179 Expensing Limit Doubled
Section 179 expensing got a big boost from the OBBBA, which more than doubles the dollar limit on the deduction from $1.22 million in 2024 to $2.5 million in 2025. The threshold at which the deduction is reduced on a dollar-for-dollar basis (i.e. phased out) by any amount by which the cost of Section 179 property placed in service during the year exceeds the threshold amount increased from $3.05 million in 2024 to $4 million in 2025.
If a client is looking for business-related property to purchase in order to reap the maximum benefit of the Code Sec. 179 expense deduction and/or the bonus depreciation deduction, a vehicle purchase could result in a substantial tax savings. By purchasing a sport utility vehicle weighing more than 6,000 pounds, a client can obtain a bigger deduction than if a smaller vehicle is purchased. Because vehicles that weigh 6,000 pounds or less are considered listed property, deductions are limited to $12,200 for cars, trucks and vans acquired and placed in service in 2025 ($20,200 total with bonus depreciation). However, if the vehicle weighs more than 6,000 pounds, up to $31,300 of the cost of the vehicle can be immediately expensed.
100 Percent Bonus Depreciation Restored and Made Permanent
Under rules enacted by the Tax Cuts and Jobs Act (TCJA), bonus depreciation was scheduled to be repealed for property placed in service after 2026 (2027 for longer production period property and aircraft), culminating a multi-year phaseout of the deduction. Under these rules, the bonus depreciation percentage was 40 percent for property placed in service in 2025 (60 percent for longer production period property and aircraft).
The OBBBA permanently increases the bonus depreciation percentage to 100 percent for all qualified property acquired after January 19, 2025, as well as for specified plants planted or grafted after that date. The new law made only one change to the definition of qualified property: it added qualified sound recording productions to the list of eligible property.
The bonus depreciation rules apply unless a taxpayer elects out of those rules. An election out may be advisable where a business has a loss for the year and will get no benefit from the loss. Most businesses no longer have the option to carryback a net operating loss (NOL) and NOLs arising in tax years ending after 2020 can only be carried forward. Exceptions apply to certain farming losses and NOLs of insurance companies other than a life insurance company. Also, the NOL deduction for tax years beginning after December 31, 2020, is limited to 80 percent of the excess (if any) of taxable income (determined without regard to certain deductions) over the total NOL deduction from NOLs arising in tax years beginning before January 1, 2018.
By not taking bonus depreciation in the current year, a business can defer depreciation deductions into future years when it expects to have taxable income that can be offset by the depreciation deductions. Of course, where the business is operated through a flow-through entity, additional considerations must be given to the tax situation of the owner of the flow-through entity and whether the owner can benefit from the flow-through of the bonus depreciation deductions.
Planning Opportunity. The OBBBA provides a transitional rule that allows businesses to elect to apply a 40 percent bonus depreciation percentage (60 percent for longer production period property and aircraft) in the first tax year ending after January 19, 2025. Although it's usually advantageous to apply the maximum bonus depreciation percentage allowed, there are situations where choosing a lower percentage can make sense (for example, to avoid creating a net operating loss).
Full Expensing of Domestic Software Development and R&E Expenditures
Reversing TCJA rules that had been in effect since 2022, the OBBBA restores full expensing for domestic software development and research or experimental expenditures ("R&E expenditures"). It leaves in place the rules requiring that foreign software development and R&E expenditures be capitalized and amortized over 15 years.
The OBBBA also provides a rule that allows small businesses with annual gross receipts of $31 million or less to apply the new expensing rules retroactively to tax years beginning after December 31, 2021 by filing amended returns (or, under certain conditions, an original return). In addition, any business (small or large) can write off unamortized domestic software development and R&E expenditures that were capitalized under TCJA ratably over a one- or a two-year period beginning with the business's first tax year beginning after December 31, 2024.
Businesses will continue to have the option of capitalizing domestic software development and R&E expenditures and amortizing them over a period of at least 60 months.
Credit for Qualified Research Expenses. A business that engages in certain types of research may qualify for an income tax credit based on its qualified research expenses. The credit is calculated as the amount of qualified research expenditures above a base amount that is meant to represent the amount of research expenditures in the absence of the credit. Because some small businesses may not have a large enough income tax liability to take advantage of their research credit, the law allows that small business (i.e., a business with less than $5 million in gross receipts and that is under five years old) to apply up to $500,000 of the research credit toward its social security payroll tax liability.
Special Depreciation Allowance for Qualified Production Property
The OBBBA designates a new category of property referred to as "qualified production property" and allows businesses an additional first-year depreciation deduction equal to 100 percent of the adjusted basis of such property.
Qualified production property is essentially nonresidential real property in the United States (or any possession) used for manufacturing and placed in service after July 4, 2025 and before January 1, 2031. In this context, "manufacturing" means producing or refining a product in a way that results in a substantial transformation of the property comprising the product.
Qualified production property does not include the portion of any nonresidential real property used for offices, administrative services, lodging, parking, sales activities, software development or engineering activities, or other functions unrelated to manufacturing, production or refining of tangible personal property.
Special Acquisition Rule. The OBBBA provides a special rule that allows a taxpayer to claim the qualified production property deduction for nonresidential real property that is acquired (rather than constructed) by the taxpayer. To qualify, the property must not have been used - (1) for a qualified production activity (without regard to a "substantial transformation rule") at any time from January 1, 2021 through May 12, 2025; or (2) for any purpose by the taxpayer or a related party at any time prior to its acquisition by the taxpayer.
Expensing of Qualified Productions: Expanded and Expiring
For productions commencing in tax years ending after July 4, 2025, the OBBBA expands the special expensing rules for qualified film, television and live theatrical productions under Code Sec. 181 to include aggregate qualified sound recording production costs of up to $150,000 per tax year. The OBBBA also expands the definition of qualified property eligible for bonus depreciation to include qualified sound recording productions. A qualified sound recording production is placed in service at the time of initial release or broadcast.
The Code Sec. 181 expensing option applies only to qualified productions that commence before January 1, 2026. Qualified productions started on or after that date are not eligible for Code Sec. 181 expensing, but they are eligible for 100 percent bonus depreciation in the year the production is placed in service.
One Percent Floor on Charitable Contributions Made by Corporations
The OBBBA keeps in place the longstanding 10-percent limit on the deduction for corporate charitable contributions and adds a "1 percent floor." For tax years beginning after December 31, 2025, a corporate taxpayer may claim a deduction for charitable contributions only to the extent that total contributions exceed one percent of a corporation's taxable income.
Planning Opportunity. Some corporations may benefit from making contributions slated for 2026 in 2025 to avoid having their 2026 deduction being reduced by the new 1-percent floor.
Treatment of Capital Gains from Sale of Farmland Property
For sales or exchanges in tax years beginning after July 4, 2025, the OBBBA enacted new Code Sec. 1062, which allows taxes on capital gains from the sale or exchange of qualified farmland property to a qualified farmer to be paid in four equal annual installments, beginning on the unextended due date of the tax return for the tax year in which the sale or exchange occurred.
"Qualified farmland property" generally means real property located in the United States which has been used by the taxpayer as a farm for farming purposes or leased by the taxpayer to a qualified farmer for farming purposes during substantially all of the 10-year period ending on the date of the sale or exchange. "Qualified farmer" means any individual who is actively engaged in farming (within the meaning of subsections 4 (b) and (c) of section 1001 of the Food Security Act of 1986).
Retirement Plans and Employee Benefits
A business may reap substantial tax benefits, as well as non-tax benefits, by offering a retirement plan and/or other fringe benefits to employees. Businesses that offer such benefits have a better chance of attracting and retaining talented workers which, in turn, reduces the costs of searching for and training new employees. Contributions made to retirement plans on behalf of employees are deductible and the business may be eligible for a tax credit for setting up a qualified plan.
In addition, business owners and spouses can take advantage of the retirement plan themselves. Where a spouse is not currently on the payroll of a business, consideration should be given to adding the spouse as an employee and paying a salary up to the maximum amount that can be deferred into a retirement plan.
To help employees with medical expenses, a business might consider setting up a high deductible health plan paired with a health savings account (HSA). The benefits to the business include savings on health insurance premiums that would otherwise be paid to traditional health insurance companies and having employee wage contributions to the plan not being counted as wages and thus neither the employer nor the employee is subject to FICA taxes on the payroll contributions. As for employees, they can reap a tax deduction for funds contributed to the HSA and the funds can grow tax free and be used in retirement.
Another employee benefit a business might consider is the establishment of a flexible spending arrangement (FSA). An FSA allows employees to be reimbursed for medical expenses or dependent care expenses and is usually funded through voluntary salary reduction agreements with the employer. The employer has the option of making or not making contributions to the FSA. Contributions made by the business are excludible from the employee's gross income and thus no employment or federal income taxes apply to the contributions. Reimbursements to the employee are tax free if used for qualified medical or dependent care expenses, and the FSA can be used to pay qualified expenses even if the employer or employee haven't yet placed the funds in the account.
Employers can also offer de minimis financial incentives, not paid for with plan assets (for example, low-dollar gift cards), to boost employee participation in retirement plans. In Notice 2024-2, the IRS advised that such an incentive qualifies as de minimis only if it does not exceed $250 in value.
In addition, the following tax credits may be available for employers that offer benefits such as paid leave, retirement benefits, and health insurance.
Qualified Business Income Deduction
For an individual operating as a sole proprietorship, a partner in a partnership, a member in an LLC taxed as a partnership, or as a shareholder in an S corporation, the qualified business income (QBI) deduction under Code Sec. 199A can significantly reduce taxable income. The QBI deduction allows eligible taxpayers to deduct up to 20 percent of their QBI, plus 20 percent of qualified real estate investment trust dividends and qualified publicly traded partnership income. A W-2 wage limitation amount may apply to limit the amount of the deduction. The W-2 wage limitation amount must be calculated for taxpayers with a taxable income that exceeds a statutorily-defined amount (i.e., the threshold amount). For any tax year beginning in 2025, the threshold amount is $394,600 for married filing joint returns, $197,300 for married filing separately, and $197,300 for all other returns.
Since the QBI deduction reduces taxable income, and is not used in computing adjusted gross income, it does not affect limitations based on adjusted gross income such as the medical expense deduction or the calculation of social security income that is includible in income. The QBI deduction does not apply to a "specified service trade or business," which is defined as any trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, including investing and investment management, trading, or dealing in securities, partnership interests, or commodities, and any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees. Engineering and architecture services are specifically excluded from the definition of a specified service trade or business.
In addition to making the QBI deduction permanent, the OBBBA made two changes that apply after December 31, 2025. First, the OBBBA increases the size of the fixed range of taxable income over which the wage and investment limitation and the SSTB limitation are phased in. For joint filers, the range is increased from $100,000 to $150,000. For all others, the range is increased from $50,000 to $75,000. Second, the OBBBA introduces a new, inflation-adjusted, minimum deduction of $400 for taxpayers who have at least $1,000 of QBI from one or more active trades or businesses in which the taxpayer materially participates.
Rental Real Estate Considerations
For clients with real estate businesses that generated losses, it's important to determine whether such losses from the activity are deductible. Generally, passive activity losses are only deductible against passive activity income. However, a deduction of up to $25,000 ($12,500 if married filing separately) may be allowed against nonpassive income to the extent an individual actively participates in the rental real estate activities. However, the deduction is subject to a phaseout for individuals with modified adjusted gross income above $100,000 (or $50,000 if married filing separately).
Rental real estate enterprises operated by individuals and owners of passthrough entities may also qualify for the QBI deduction if certain criteria are met. For example, in order to qualify for the deduction, a taxpayer's rental activity must be considerable, regular, and continuous in scope. In determining whether a rental real estate activity meets this criteria, relevant factors include, but are not limited to, the following:
- the type of rented property (commercial real property versus residential property);
- the number of properties rented;
- the taxpayer's or taxpayer's agent's day-to-day involvement;
- the types and significance of any ancillary services provided under the lease; and
- the terms of the lease (for example, a net lease versus a traditional lease and a short-term lease versus a long-term lease).
A rental real estate activity will be treated as a business eligible for the QBI deduction if certain safe harbor requirements are satisfied, such as:
- separate books and records are maintained to reflect the income and expenses for each rental real estate enterprise;
- for rental real estate enterprises that have been in existence less than four years, 250 or more hours of rental services are performed per year with respect to the rental real estate enterprise (with slightly less stringent requirements for rental real estate enterprises that have been in existence for at least four years);
- contemporaneous records have been maintained, including time reports, logs, or similar documents, regarding the following: (i) hours of all services performed; (ii) description of all services performed; (iii) dates on which such services were performed; and (iv) who performed the services; and
- certain compliance requirements are met.
Thus, to qualify for the QBI deduction, it's essential to determine if the safe harbor conditions are met and, if not, whether such conditions can be met by year end. Alternatively, even if the safe harbor requirements are not met, certain actions may be taken to ensure that a taxpayer's real estate business falls within the "trade or business" guidelines for taking the deduction.
Vehicle-Related Deductions and Substantiation Requirements
Deductions relating to vehicles are generally part of any business tax return. Since the IRS tends to focus on vehicle expenses in an audit and disallow them if they are not properly substantiated, it's important to remind business clients that the following should be part of their business's tax records with respect to each vehicle used in the business:
- the amount of each separate expense with respect to the vehicle (e.g., the cost of purchase or lease, the cost of repairs and maintenance, etc.);
- the amount of mileage for each business or investment use and the total miles for the tax period;
- the date of the expenditure; and
- the business purpose for the expenditure.
The following are considered adequate for substantiating such expenses:
(1) records such as a notebook, diary, log, statement of expense, or trip sheets; and
(2) documentary evidence such as receipts, canceled checks, bills, or similar evidence.
Records are considered adequate to substantiate the element of a vehicle expense only if they are prepared or maintained in such a manner that each recording of an element of the expense is made at or near the time the expense is incurred.
Meal and Entertainment Expenses
The business deduction allowable for food or beverage expenses paid or incurred in 2025 is limited to 50 percent of the amount which would otherwise be allowable as a deduction. Entertainment expenses are generally not deductible.
Increasing Basis in Pass-thru Entities
If a client is a partner in a partnership or a shareholder in an S corporation, and the entity is expecting to pass through a loss for the year, it's important to determine if the partner or shareholder has enough basis to absorb the loss. If not, then actions should be taken before the end of the entity's tax year to increase basis, if possible. Generally, this is done by contributing or loaning money to the entity.
S Corporation Shareholder Salaries and Benefits
For any business operating as an S corporation, it's important to ensure that shareholders involved in running the business are paid an amount that is commensurate with their workload. The IRS scrutinizes S corporations which distribute profits instead of paying compensation subject to employment taxes. Failing to pay arm's length salaries can lead not only to tax deficiencies, but penalties and interest on those deficiencies as well. The key to establishing reasonable compensation is being able to show that the compensation paid for the type of work an owner-employee does for the S corporation is similar to what other corporations would pay for similar work. Practitioners should document in their workpapers the factors that support the salary being paid to a shareholder.
Also, because there are stringent requirements for who may be an S corporation shareholder, it's prudent to check annually as to the residency or citizenship status of S corporation shareholders and S stock beneficiaries (including contingent and residuary beneficiaries).
Energy Efficient Commercial Buildings Deduction
A business that owns or leases a commercial building may qualify for the deduction under Code Sec. 179D for the cost of "energy efficient commercial building property" (EECBP) placed in service during the tax year. EECBP includes property installed as part of the building's interior lighting systems; heating, cooling, ventilation, and hot water (HVAC) systems; or the building envelope that is certified as being installed as part of a plan to reduce the total energy and power costs for these systems. An alternative deduction is available for energy efficient lighting, HVAC, and building envelope costs placed in service in connection with a qualified retrofit plan. The amount of the Code Sec. 179D deduction generally equals the lesser of (1) the cost of the EECBP placed in service during the tax year or (2) the energy savings per square foot, reduced by the aggregate amount of the Code Sec. 179D deductions taken with respect to the building for the previous 3 tax years.
The OBBBA terminated the Code Sec. 179D deduction for property the construction of which begins after June 30, 2026.
Qualified Commercial Clean Vehicles Credit
Under Code Sec. 45W, a credit is available for qualified commercial electric vehicles placed into service before September 30, 2025, and used in a trade or business by the taxpayer. The amount of credit is the lesser of (1) 15 percent of the taxpayer's basis in the vehicle (30 percent in the case of a vehicle not powered by a gasoline or diesel engine) or (2) the "incremental cost" of the vehicle. The credit is limited to $7,500 in the case of a vehicle that weighs less than 14,000 pounds, and up to $40,000 for all other vehicles.
The OBBBA terminated the Code Sec. 45W credit for vehicles acquired after September 30, 2025. In FS-2025-05 (August 21, 2025), the IRS provides that a vehicle is "acquired" for purposes of Code Sec. 45W as of the date a written binding contract is entered into and a payment has been made. A payment includes a nominal downpayment or a vehicle trade-in.
Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.
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