July 17th, 2025

Important Tax Provisions of the Tax Cuts and Jobs Act of 2017 Made Permanent: Part One Business Tax Provisions

This is the first of two posts on the One Big Beautiful Bill Act that was just passed by the Congress and signed into law by President Trump on July 4, 2025. The first post identifies some of the more important provisions that affect owners of privately owned business. The second post, which follows shortly, will focus on the international tax law provisions of the OBBB. A more in-depth summary of the OBBB will be appearing shortly in Corporate Taxation (WG&L) and RIA Checkpoint, Jerald David August, Editor-in-Chief, Columnist on Cross-Border Developments

On July 4, President Trump signed into law the budget reconciliation bill, Pub. L. No. 119-21, which further extended or otherwise made permanent favorable tax provisions enacted as part of The Tax Cuts and Jobs Act of 2017 (“TCJA 2017”), Pub. L. No. 119-57. (https://www.congresss.gov/bill/119th-congress/house-bill/1/text as amended by the Amendment to Rules Committee Print 119-3). Many of the favorable provisions of TCJA 2017 had already been phased-down or were otherwise due to expire at the end of this year. For individual taxpayers, the “OBBB” permanently reduces individual income tax rates, increases the standard deduction as well as a more generous child tax credit and increases the lifetime transfer tax exemption for individuals for estate and gift tax (and also for generation skipping transfer tax purposes).

Most of the provisions in TCJA 2017 affecting individuals were scheduled to expire in 2025. This includes the items referred to in the preceding paragraph as well as other particularly important provisions relating to the deductibility of state and local income, sales and property taxes, the immediate expensing of certain depreciable property, expensing of certain research and development costs and reduced rates of tax on certain levels of qualified business income. This post focuses on the business tax reforms which in large part extends the rate reduction and other benefits provided in TCJA 2017 as well as immediate expensing of certain cost recovery property and domestic research & development expenditures.

Individual Tax Rate Changes

TCJA 2017 set individual graduated marginal tax rates starting at 10% (for taxable income not over $11,925) and increasing up to 37% for taxable income over $626,350 for married joint filers, or $500,000 for single and head of household filers in 2018, indexed for inflation. The rates prior to the TCJA 2017 ranged from 10% to 39.6%. Absent the TCJA changes, the top rate of 39.6% would have applied to taxable income over $480,050 for married joint filers, $453,350 for head of household filers, or $426,700 for single filers in 2018, also indexed for inflation. Without the OBBB, the top marginal income tax rate on individuals would return to 39.6% and with lower bracket amounts.

Other individual tax changes or modifications pertaining to itemized deductions, new savings accounts, changes effecting Section 501(c)(3) organizations, the increased transfer tax exemption, etc. are not covered in this post.

Corporate Income Tax Rate Remains Flat 21%

Under TCJA 2017, the U.S. corporate tax rate was dramatically reduced from the prior maximum rate of 35% to a flat 21%. The 21% flat corporate income tax rate announced in TCJA 2017 was in marked contrast to the maximum non-corporate income tax rate of 37%, which was reduced by 6.6% from 39.6%. As mentioned, expectation is that the Trump II Administration will recommend the corporate tax rate be reduced to a flat rate of 15% or at least 17%. The TCJA 2017 did not contain a phase-out of the corporate tax rate and there is no provision in the OBBB. The bracket rate differences between high income individuals as well as trusts and estates and their beneficiaries, on income realized directly or through ownership in pass thru entities or shareholders in an S corporation is quickly rising to 37% (plus potential net investment income tax of 3.8%) and stands in marked contrast to the 21% corporate income tax rate. Owners of privately owned companies, organized as a partnership or S corporation for federal and state income tax purposes, need to give consideration to whether the benefits under Subchapter C, including the 21% flat income tax rate and access to the Section 1202 exclusion derived from gains from the sale of qualified small business stock issued by a C corporation, outweigh the benefits realized as owners in a pass through entity. Conversions of entity tax regime involve multiple factors, but the 21% flat corporate income tax rate (continued from TCJA 2017) makes it important to consider the tax rate savings generated under Subchapter C which additional funds can be used to expand business operations, capital expenditures or for other business purposes including funding reserves for contingent liabilities.

State and Local Tax (SALT) Deduction Limit

Prior to 2017, individuals were allowed an itemized deduction for SALT and foreign taxes even though they were not incurred in a taxpayer’s trade or business. Foreign tax credits on foreign income taxes are allowable against foreign source income subject to applicable limitation. Under TCJA 2017, state and local income and property taxes, as well as foreign property taxes, are deductible as an itemized deduction but subject to a limitation of $10,000. The $10,000 aggregate limitation rule does not apply to: (i) foreign income, war profits and excess profits taxes; (ii) state and local, and foreign real property taxes; and state and local personal property taxes that are paid or accrued in the conduction of a trade or business. The SALT Cap was schedule to expire at the end of 2025 in which case the pre-TCJA 2017 law would be apply.

In reaction to the SALT Cap, some states allowed taxes in excess of the SALT Cap to reduce, for example, a partner's or S shareholder's distributive or pro-rata share of business income or elect to incur an entity level state income tax on pass-through entities having income sourced or otherwise resident in the particular state. Where a state enacted a pass-through entity tax (“PTET”), such so-called “work-around” the SALT Cap allowed the state income tax to be fully deductible for federal income tax purposes as a reduction in computing net taxable income from business operations. The partner in a partnership or shareholder in an S corporation may either claim credit for the amount of the owner's distributive share of the taxes paid by the PTE or allow the owner to exclude their distributed share of the PTET's income. Approximately 35 states have enacted different versions of the work -around of the SALT Cap. In IRS Notice 2020-75, 2020-49 IRB 1453, the IRS announced it would respect PTEPs. Note that the relief in this area is limited to members of pass-through entities and generally does not extend to highly compensated wage earners residing in or realizing service income sourced from “blue states.” The various formulations of the SALT-Cap work-around rules are complex and with it increased fees and costs of compliance.

The TCJA 2017 SALT-Cap was and continues to be a political hot potato. A “noisy” peace was reached between blue state and red state members of Congress in the new tax bill. The Congress expanded the aggregate deduction amount to $40,000 with married individuals filing separately able to deduct $15,000. The deduction is phased for individuals making more than $500,000 per year ($250,000 for married filing separately). The SALT Cap reverts back to $10,000, however for tax years beginning after 2029. That’s not that far away. There is a phase down of the SALT Cap deduction by 30% of a taxpayer’s modified adjusted gross income in excess of $500,000 (married filing jointly) or $250,000 (married filing separately). That means the increase benefit of the $40,000 ceiling quickly is eliminated for incomes over $500,000. Now you have it and then you don’t have any so to speak. The OBBB does not limit or directly address the deduction under the PTEP regimes under a work-around model. That’s good news! the OBBB does not limit the use of the state level workaround tax (PTEP) although prior versions of the bill in the House and Senate put limitations on the workarounds. There may be issues with the SALT Cap and taxation of non-grantor trusts in having have the trust absorb the brunt of state and local tax. Still, there is uncertainty about the application of the phase-down rule for high income individuals allocated “trade or business” expenses for SALT remittances by a PTEP.

Deduction for Qualified Business Income of Pass-Through Entities and Sole Proprietors: Section 199A

For taxable years beginning after December 31, 2017, and before January 1, 2026, an individual taxpayer generally may deduct 20% of qualified business income (“QBI”) with respect to a partnership, S corporation, or sole proprietorship, as well as 20% of aggregate qualified REIT dividends, qualified cooperative dividends, and qualified publicly traded partnership income. This provision, set forth in Section 199A, is a hallmark of the TCJA 2017 tax benefits to privately owned companies conducted through a partnership or S corporation. Section 199A was otherwise due to expire at the end of 2025.

Eligible taxpayers to the 20% deduction of the QBI amount in computing taxable income, will, in general include fiduciaries and beneficiaries of trusts and estates with QBI. Special rules apply to specified agricultural or horticultural cooperatives. A limitation on the amount of the Section 199A deduction is the greater of 50% of W-2 wages, or 25% of W-2 wages plus 2.5% multiplied by the value of depreciable property. Specified service businesses generally may not claim the deduction (these are health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, and services consisting of investment and investment management, and trading of securities, partnership interests, or commodities). The specified service business definition does not include architecture or engineering firms. Still architectural and engineering firms do not qualify under the Section 1202 exclusion discussed in the next section.

Congress makes the QBI deduction under Section 199A permanent but at the current level of 20% and not the increased 23% rate as had been proposed earlier. The law expands the deduction limit phase-ins for single and joint filers, including for specified service trades or businesses and the overall wage and investment limitations.

OBBB’s Expansion of Section 1202 Exclusion For Gains From Qualified Small Business Stock.

Under Section 1202(a) enacted in 1993, 50% of a non-corporate taxpayer’s gain from the sale or exchange of “qualified small business stock” (QSBS) issued by an eligible corporation after August 10, 1993, is excluded from the taxpayer’s gross income provided the QSBS has been held for more than 5-years. The remaining portion of the gain is usually capital gain. The Section 1202(a) exclusion was enacted to provide tax relief for investors with respect to risk capital in specialized small business companies or start-ups that otherwise would have difficulty in attracting equity financing. See House Rep. No. 111, 103d Cong., 1st Sess. 600 (1993). For shares of stock acquired prior to September 28, 2010, a prescribed percentage of the exclusion was treated as a tax preference item for alternative minimum tax purposes. Section 57(a)(7). Where recognized gains from QSBS with respect to a particular corporation exceeded a ceiling amount, the excess amount was fully taxable. For each tax year, the ceiling is the greater of: (i) $10M reduced by the taxpayer’s previously included “eligible gain” from prior years; or (ii) 10 times the original basis of the stock of the corporation sold during the taxable year. The capital gain exclusion applies to 100% of gain for QSBS acquired after September 27, 2010. For stock acquired prior to that date, the exclusion was 75% or 50% of the gain depending on the acquisition date. This provision is of substantial importance to owners and investors of start-ups as well as mid-stream or mid-life qualified businesses in planning for a future liquidity event that is five to seven years on the horizon.

The OBBB made several changes to Section 1202 with respect to QSBS issued after the date of enactment. The "hold" period of 5-years in Section 1202 was scaled back to 3-years in the OBBB for a lower percentage of applicable exclusion of 50% and 75% for four years and remaining at 100% for 5-year or more "holds". The per-issuer cap was increased from $10M to $15M, and as further adjusted for inflation, again with the 10 times basis rule as well. The aggregate gross asset limitation for the issuing corporation was increased to $75 million adjusted for inflation. The exclusion under Section 1202 may be applied in tandem with a related provision in Section 1045. The exclusion can be availed of as well by family members through inheritance or structured gifts. It only works for qualifying issuances of C corporation stock by a qualified small business corporation.

Bonus Depreciation and Immediate Expensing of Section 179 Property and Qualified Production Facilities

The new act extends, with further modifications, the first year bonus depreciation rules of Section 168 and allows, in general, 100% depreciation in the first year of certain cost recovery property acquired and placed in service after January 19, 2025. The OBBB also makes permanent the percentage of completion method for allocating bonus depreciation to long term contracts.

Taxpayers other than trusts, estates and certain non-corporate lessors may elect under Section 179 to currently expense up to a maximum inflation-adjustment amount of the “cost” of certain cost recovery property that is “purchased” for use in the active conduct of a trade or business and is placed in service in the same year. The maximum amount allowed for immediate expensing under Section 179 is $1 million, as adjusted for inflation, and such maximum amount is reduced dollar-for-dollar for qualifying property in excess of $2.5 million which is placed in service during the tax year and may not be taken to the extent it would otherwise result in a net operating loss. The OBB allows for immediate expensing under Section 179 for qualifying property up to $2.5 million with a phase-out for Section 179 property purchased and placed in service in excess of $4 million after December 31, 2024. Qualifying property includes depreciable personal property, purchased computer software and qualified real property purchased for use in an active trade or business.

New Section 168(n) allows a special allowance for "qualified production property" of a taxpayer who elects to immediately expense the cost of the QPP in lieu of taking depreciation deductions. In general QPP is that portion of nonresidential real property: (i) is elected and otherwise qualifies as QPP; (ii) is used by the taxpayer as an integral part of a qualified production activity; (iii) is placed in service in the United States or a possession of the United States; (iv) the original use of which commences with the taxpayer; (v) the construction begins after January 19, 2025 and before January 1, 2029; (vi) which is designated by the taxpayer in the election made; and (vii) which is placed in service before January 1, 2031. QPP does not include offices, administrative services, lodging, sales activities, research activities, software development or engineering activities or other functions unrelated to manufacturing, production or refining of a “qualified product” unless the ”activities of such taxpayer result in a substantial transformation of the property comprising the product”. How’s that for a cross-motion for summary judgment in a 100% expensing case!

Immediate Expensing In Lieu of Amortization of U.S. Based Research and Experimental Expenditures Under Section 174

Business expenses incurred in the development or creation of an asset having a useful life of more than one year generally must be capitalized and depreciated, if at all, over its useful life. Prior to TCJA 2017, taxpayers, however, could elect to currently deduct the amount of certain reasonable research or experimental expenditures paid or incurred in connection with a trade or business under Sections 174(a) and (e). Alternatively, taxpayers may elect to forgo a current deduction, capitalize their research or experimental expenditures, and recover them ratably over the useful life of the research, but in no case over a period of less than 60 months under Section 174(b) or alternatively, over a period of 10 years per Section 174(g)(2) in order to mitigate the AMT adjustment for research expenditures under Section 56(b)(2) (prior to TCJA 2017). Section 174 research and experimental expenditures deductible under Section 174 are not subject to capitalization rules under Section 263(a) or Section 263A (UNICAP rules). Section 174 deductions are generally reduced by the amount of the taxpayer's research credit under Section 41, although a “reverse” election to expense-in-lieu-of-crediting is available. Research or experimental expenditures generally include all costs incurred in the experimental or laboratory sense incident to developing or improving a product, including software. Other factors are also required to be taken into account but not the ultimate success, failure, sale or other use of the research or property. See Reg. §1.174-2(a)(1).

Qualified Opportunity Zones

The Tax Cuts and Jobs Act provided for the temporary deferral of income required to be included in capital gains that are timely reinvested in a Qualified Opportunity Fund (QO Fund) and the permanent exclusion of certain capital gains derived from the sale or exchange of an investment in a QO Fund per Code Section 1400Zk if the taxpayer held its investment for at least 10 years. A QO Zone is a population census tract in a low-income community that is designated as a QP Zone. The designation of census tracts as opportunity zones is made by a state's governor with the number of tracts capped by statute. The latest round of QO Zones was due to expire in 2028. The OBBB makes permanent the QPZ rules with modifications.

This post is provided by August Tax Law, P.C. for educational and informational purposes only and the reader may not rely on the information provided herein or otherwise consider the information as "legal advice". The reader is encouraged to address any and all issues of interest in this post to his or her tax advisor or tax counsel.

AUGUST TAX LAW, P.C.