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The One Big Beautiful Bill Act (OBBBA): Key Tax Changes for Individuals and Businesses
- Kim Bernstein
- Aug 13
- 14 min read
Updated: Aug 15
On July 4, 2025, the One Big Beautiful Bill Act, better known as the OBBBA, was signed into law as Public Law No. 119-21. This sweeping omnibus legislation changes major sections of the federal tax code for both individuals and businesses.
While it covers a lot of ground, we’re going to focus on the provisions that matter most to taxpayers and business owners.
A Quick Overview of the OBBBA
Bill Number: H.R. 1, 119th U.S. Congress
Timeline: Introduced May 2025, passed in June, signed into law July 4, 2025
Scope: Tax bracket changes, new deductions, permanent expensing rules, and expanded employer benefits
Why It Matters: These changes can mean significant tax savings if you plan ahead and track eligible expenses
Key Tax Changes for Individuals
Permanent Lower Tax Brackets
The individual income tax brackets from the 2017 Tax Cuts and Jobs Act are now permanent. They’ll continue to be indexed for inflation each year, ensuring tax bracket creep is minimized.
Bigger Standard Deductions
For tax year 2025:
Single: $15,750
Head of Household: $23,625
Married Filing Jointly: $31,500
These will be indexed for inflation each year going forward.
Why it matters: More taxpayers will find the standard deduction exceeds their itemized deductions, which can simplify filing and reduce recordkeeping for smaller expenses.
New Targeted Deductions (2025–2028)
OBBBA adds several time-limited deductions designed to benefit specific groups of taxpayers: (Click expand for additional details)
Senior Bonus Deduction
From 2025 through 2028, taxpayers age 65 or older may be eligible for an additional $6,000 deduction on top of their standard deduction (or itemized deductions).
Eligibility Rules
Age Requirement: You must be 65 or older on the last day of the tax year. For example, if you turn 65 on January 1, 2026, you cannot claim the deduction for 2025, you’d qualify starting with your 2026 return but if you turn 65 on December 31, 2025 you can claim the deduction for 2025.
Filing Status: Available to all filing statuses, but the amount is per taxpayer, not per return. If both spouses are 65+, the deduction can double to $12,000.
Income Limitations: The deduction phases out above certain adjusted gross income (AGI) thresholds (exact phase-out numbers are still pending final IRS guidance, but are expected to align with other senior-targeted benefits).
Residency Requirement: Only U.S. citizens and resident aliens can claim it; nonresident aliens do not qualify.
Interaction With Other Deductions
The Senior Bonus Deduction is in addition to the existing extra standard deduction for seniors/blind taxpayers. These are separate provisions and can be combined if eligible.
This deduction is available whether you itemize or take the standard deduction, it’s considered an “above-the-line” deduction in OBBBA.
Common Misunderstandings to Avoid
Turning 65 mid-year does not give you a prorated deduction, it’s all or nothing based on your age at year-end.
Partial-year residents must meet all standard residency tests for the full year to claim it.
High-income seniors may see the deduction reduced or eliminated under the AGI phase-out rules, claiming it incorrectly could trigger IRS correspondence.
It does not apply automatically, you must actively claim it on your tax return.
Why Documentation Still Matters
While age can be verified easily, phase-out calculations will require accurate reporting of AGI. Seniors with fluctuating income (capital gains, RMDs, Roth conversions) should plan strategically to stay under phase-out limits in the years they wish to claim it.
Tip Income Deduction (“No Tax on Tips”)
The OBBBA introduces a new above-the-line tax deduction, popularly referred to as “No Tax on Tips” but it's not an outright exemption. Here's how it works and where it often gets misunderstood:
How It Works
Deduction Amount: You can deduct up to $25,000 of qualified tip income per year, limited by income for self-employed filers.
Income Phase-Out: Begins at $150,000 (single) and $300,000 (joint).
Occupational Limit: Only workers in roles that “customarily and regularly received tips” before December 31, 2024 qualify. The IRS must publish the eligible list by October 2, 2025.
Reporting Requirements: Tips must be reported on a W‑2, 1099, or via Form 4137. Unreported cash tips don’t count.
Temporary Provision: Applies only for 2025–2028
Still Taxed Elsewhere: Payroll and state/local taxes still apply, this only affects federal income tax.
Limited Reach: Roughly 2.6% of returns will benefit. Not everyone in tipped occupations will see a deduction
Common Misperceptions to Avoid
It’s not a full universal exemption, only a deduction from taxable income.
It doesn’t relieve payroll or state tax obligations.
It only applies to qualifying jobs, not all tip recipients.
People often assume they can claim it, but IRS guidance and occupation lists are still pending.
Other Notables
SALT Cap Increase: Raised from $10,000 to $40,000 through 2029, reverting in 2030.
Qualified Small Business Stock (QSBS) Gains: Increased exclusion cap to $15M; exclusion percentage now ranges from 50% to 100% depending on holding period.
Credit Changes: Some lesser-used credits (like certain clean energy credits) have been reduced or eliminated, so check eligibility before assuming you’ll qualify.
Overtime Deduction
From 2025 through 2028, eligible employees can deduct $12,500 (single) or $25,000 (married filing jointly) of qualifying overtime premium pay from their taxable income.
What This Deduction Actually Covers
This is not a blanket “no tax on overtime” provision. Regular wages, including the “1x” portion of your overtime rate, are still taxed normally. The deduction applies only to the extra “0.5x” overtime premium you earn when working beyond 40 hours in a week (as defined under federal wage law).
Example:
Normal hourly rate = $20/hour
Overtime rate = $30/hour (1.5x)
Of that $30, $20 is taxed like normal pay, and only the $10 overtime premium is eligible for the deduction.
Who Qualifies?
Non-exempt employees under the Fair Labor Standards Act (FLSA) who receive time-and-a-half (or higher) for hours worked over 40 in a week.
Employees whose pay stubs and W-2s clearly separate base pay and overtime premium pay.
Certain industries with special overtime rules (e.g., healthcare, transportation) if they meet IRS criteria.
Limitations & Compliance Requirements
Exempt (salaried) employees do not qualify, even if they work extra hours.
Shift differentials or flat-rate premiums that aren’t true overtime under FLSA do not count.
Self-employed individuals and independent contractors cannot claim this deduction for their own work hours.
Annual Caps: You can only deduct overtime premiums up to $12,500 (single) or $25,000 (joint). Anything above still gets taxed normally.
Documentation Tips
Save all pay stubs, these will be your proof that the deduction is applied only to the 0.5x portion of your overtime rate.
Make sure your employer’s payroll system properly categorizes overtime premium pay separately from base pay.
If you work for multiple employers, track overtime per employer, not across combined jobs.
Examples
Example 1 – Single Employee, Moderate Overtime
Base pay: $25/hour
Worked 45 hours one week (5 overtime hours)
Overtime rate: $37.50/hour (1.5x)
Overtime premium portion: $12.50/hour × 5 hours = $62.50 eligible for deduction that week.
Over a year, if this pattern continued for 50 weeks, that’s $3,125 in deductible overtime premiums.
Example 2 – Married Filing Jointly, High Overtime
Base pay: $22/hour
Spouse works similar pay rate, both in non-exempt roles with consistent overtime
Both work 10 overtime hours per week at $33/hour (overtime premium = $11/hour)
Overtime premium per week, per person = $110
Combined annual overtime premiums = $110 × 2 people × 50 weeks = $11,000 deductible
Still well under the $25,000 joint cap, so the full amount qualifies.
Example 3 – Misunderstanding the Rule
Employee earns $25/hour and works 5 overtime hours at $37.50/hour.
Some may think the full $187.50 is tax-free, it’s not.
Only the $62.50 overtime premium portion qualifies for the deduction; the $125 base pay portion is taxed like regular wages.
Category | Single Filer | Married Filing Jointly | What’s Taxed Normally | What’s Deductible |
Annual Deduction Cap | Up to $12,500 of overtime premiums | Up to $25,000 of overtime premiums | Regular base pay (the “1x” part of overtime rate) | The overtime premium (the “0.5x” part of overtime rate) |
Example Hourly Rate | $20/hour base pay | $20/hour base pay (each spouse) | $20/hour for all hours worked | $10/hour (premium portion) for OT hours worked |
Overtime Rate (1.5x) | $30/hour | $30/hour | $20/hour portion taxed normally | $10/hour portion deductible |
Weekly Example (5 OT hrs) | $50 deductible per week | $100 deductible per week combined | $100 taxed normally per week | $50 (single) or $100 (joint) deducted from taxable income |
Annual Example (50 weeks) | $2,500 total deduction | $5,000 total deduction combined | $5,000 taxed normally per year | $2,500 (single) or $5,000 (joint) deducted |
Auto Loan Interest Deduction
From 2025 through 2028, OBBBA allows taxpayers to deduct up to $10,000 of interest paid on a qualifying auto loan, but the rules are much narrower than they sound.
What Qualifies
Vehicle Type: Must be a new passenger vehicle, light truck, or van.
Assembly Location: The vehicle must be assembled in the United States and meet IRS verification requirements. VIN-based validation will be required.
Loan Type: Deduction applies only to interest on a secured loan used exclusively to purchase the vehicle. Lease payments and unsecured personal loans do not qualify.
Purchase Date: Must be purchased between January 1, 2025 and December 31, 2028. Refinanced loans do not restart eligibility.
Ownership: You must be listed as the owner on the title, co-signers without ownership rights cannot claim the deduction.
What Doesn’t Qualify
Used vehicles, even if they’re nearly new.
Vehicles assembled outside the U.S. (even if the brand is American-owned).
Cash purchases (no loan means no interest to deduct).
Loan interest already deducted elsewhere (e.g., for business use under Schedule C) no double dipping.
Vehicles purchased primarily for business where the interest is fully deducted as a business expense, the personal-use deduction is only for personal-use interest.
Coordination With Business Use
If you use the car for both business and personal purposes:
Business-use interest is deducted on Schedule C (or E/F for rentals/farming).
Personal-use portion may qualify for the Auto Loan Interest Deduction, but you can’t claim the same dollar of interest in both places.
You’ll need to allocate interest based on mileage logs or other reasonable tracking.
Documentation Requirements
Loan Statements: Keep annual interest summaries from your lender showing total interest paid.
Proof of U.S. Assembly: VIN documentation or manufacturer’s certificate.
Purchase Agreement: Showing date of purchase and that it was new at the time of sale.
Examples
Example 1 – Fully Personal Vehicle
Purchased new, U.S.-assembled car in 2025 for $40,000.
Loan balance: $35,000 at 6% interest = $2,100 interest paid in 2025.
Deduction: Full $2,100 (well under $10,000 cap).
Example 2 – Mixed Business & Personal Use
Purchased U.S.-assembled truck for $60,000.
Loan balance: $50,000 at 7% interest = $3,500 interest paid in 2025.
60% business use → $2,100 deducted on Schedule C.
Remaining $1,400 eligible for Auto Loan Interest Deduction.
Example 3 – Not Eligible
Bought a nearly-new, one-year-old sedan assembled in Mexico.
Even though interest paid was $1,800 in 2025, vehicle fails the U.S. assembly requirement → $0 deduction allowed.
Common Misunderstandings to Avoid
Thinking any auto loan interest qualifies — it must meet all requirements.
Assuming the deduction is permanent — it sunsets after 2028.
Believing the $10,000 is “free money” — it’s a cap, not a guaranteed amount.
Forgetting that refinancing a 2023 or 2024 vehicle in 2025 does not make it eligible.
Business & Employer Impacts
The OBBBA isn’t just about individual tax relief, it locks in and expands several major tax benefits for business owners, along with incentives that make it easier to invest in growth and support employees. These provisions can directly impact cash flow, equipment purchases, research budgets, and payroll strategies. Below, we break down each major change, who qualifies, how to claim it, and common pitfalls to avoid so you can put the new rules to work for your business. (Click expand for additional details)
Permanent QBI Deduction
The Qualified Business Income (QBI) deduction, one of the most valuable provisions from the 2017 Tax Cuts and Jobs Act, is now permanent under the OBBBA.
What It Is
The QBI deduction allows eligible business owners to deduct up to 20% of their qualified business income from pass-through entities (S-Corps, partnerships, sole proprietorships, certain LLCs) from their taxable income.
OBBBA removes the scheduled 2026 expiration date and locks in the benefit indefinitely, with an increased phase-in threshold to make it easier for more businesses to qualify.
Who Qualifies
Owners of pass-through entities: sole proprietors, partnerships, S-corporations, and some trusts/estates.
Businesses with taxable income under the new higher phase-out limits (exact figures will adjust annually for inflation).
Specified Service Trades or Businesses (SSTBs) such as law, accounting, consulting, financial services, still qualify under the new phase-out thresholds, but lose eligibility above the upper limit.
Who Does Not Qualify
C-Corporations they pay corporate tax instead and don’t get QBI benefits.
High-income SSTBs over the upper income limit.
Businesses without domestic qualified business income (foreign-sourced income doesn’t count).
Documentation Requirements
Maintain accurate year-end financial statements separating QBI-eligible income from non-eligible income.
For S-Corps, ensure reasonable compensation to owners is properly documented, W-2 wages are excluded from QBI.
Partnerships must issue accurate K-1s detailing each partner’s share of QBI.
Examples
Example 1 – Eligible S-Corp Owner
Net QBI: $120,000
Filing jointly, under phase-out threshold
QBI Deduction: $120,000 × 20% = $24,000 deduction from taxable income
Example 2 – SSTB Within Limit
Small CPA firm with $150,000 taxable income (joint)
Below phase-out → full QBI deduction applies
Deduction: $150,000 × 20% = $30,000 deduction
Example 3 – SSTB Over Limit
Same CPA firm with $450,000 taxable income (joint)
Above phase-out → no QBI deduction allowed for SSTBs
Common Misunderstandings
W-2 wages aren’t QBI, salary paid to the owner is excluded. The deduction applies to profit after wages.
Rental income isn’t always QBI, only qualifies if the activity meets IRS trade/business standards.
Foreign income doesn’t count, only U.S.-sourced qualified business income is eligible.
QBI is not a tax credit, it reduces taxable income, not your tax bill dollar-for-dollar.
Bonus Depreciation Made Permanent
Under OBBBA, the 100% bonus depreciation provision is now permanent for qualifying property placed in service after January 1, 2025.
What It Is
Bonus depreciation lets businesses deduct 100% of the cost of qualifying new or used business assets in the year they are placed in service, rather than depreciating the cost over several years.
OBBBA removes the phase-down schedule that was set to reduce the deduction after 2026, keeping the full 100% rate indefinitely.
Who Qualifies
Businesses purchasing tangible personal property with a useful life of 20 years or less, such as:
Machinery and equipment
Computers and office furniture
Certain qualified improvement property (QIP) to nonresidential buildings
Both new and used assets qualify, provided they are new to the taxpayer.
Who Does Not Qualify
Land, buildings, and assets with a useful life greater than 20 years (except QIP).
Assets acquired from related parties (e.g., buying equipment from a business you already own).
Property used outside the United States.
Documentation Requirements
Keep detailed purchase invoices and receipts showing date acquired and date placed in service.
Maintain asset listings with descriptions, costs, and business use percentage.
For used assets, proof they were not previously owned by you or a related party.
Examples
Example 1 – Small Manufacturer
Buys new CNC machine for $250,000 in 2025
Placed in service in September 2025
Deduction: Full $250,000 in 2025 under bonus depreciation
Example 2 – Used Equipment Purchase
Purchases a 2-year-old delivery truck for $60,000 from an unrelated company
Placed in service immediately
Deduction: Full $60,000 in year of purchase
Example 3 – Non-Qualifying Asset
Buys land for $150,000 in 2025
Land does not qualify, no bonus depreciation allowed
Common Misunderstandings
Bonus depreciation is not the same as Section 179, Section 179 has annual dollar limits and taxable income limits, while bonus depreciation does not.
“Placed in service” means ready and available for use, not just purchased.
If you have mixed-use property, only the business-use percentage of the cost qualifies.
The deduction can create or increase a net operating loss (NOL) which can be a planning tool but requires strategy.
Full Expensing of R&D
OBBBA restores and makes permanent full expensing for domestic research and experimental (R&E) costs, reversing the 2022 requirement that these expenses be amortized over five years.
What It Is
Businesses can now deduct 100% of qualifying domestic R&E expenses in the year they are incurred.
Applies to expenses related to developing new products, processes, software, or improvements to existing products/processes.
The change is retroactive to January 1, 2025, and applies going forward with no sunset.
Who Qualifies
Any taxpayer incurring domestic research and experimental costs in the ordinary course of business.
Both large and small businesses, from tech startups building apps to manufacturers improving production lines.
Who Does Not Qualify
Foreign R&D expenses, these must still be amortized over 15 years.
Routine quality control, market research, or consumer surveys, these are not considered R&E under IRS rules.
Research conducted after commercial production has already started.
Documentation Requirements
Maintain detailed project records showing the purpose, scope, and domestic location of the R&D.
Keep invoices, payroll records, and supply costs tied directly to the R&D effort.
For mixed projects (domestic and foreign work), track costs separately by location.
Examples
Example 1 – Software Startup
Spends $500,000 on salaries for domestic developers and prototype costs for a new mobile app in 2025.
Deduction: Full $500,000 in 2025 under OBBBA.
Example 2 – Manufacturing Process Improvement
Spends $150,000 redesigning a production line to reduce waste.
Deduction: Full $150,000 in the year the work is performed.
Example 3 – Foreign Lab Research
Contracts $200,000 of R&D work to a lab in Canada.
Must amortize over 15 years, no immediate deduction allowed for foreign research.
Common Misunderstandings
Not all product development costs are R&E, marketing and market testing are excluded.
If R&D is performed outside the U.S., it doesn’t qualify for immediate expensing.
Some mistakenly think the credit for increasing research activities (the R&D tax credit) is the same as expensing, they are separate benefits and can be claimed together if eligible.
R&D expensing can create or increase a loss, which may be carried forward under NOL rules.
Interest Expense Limitations
OBBBA makes permanent the limit on the business interest expense deduction, generally capped at 30% of adjusted taxable income (using an EBITDA calculation).
What It Is
Businesses can deduct interest on loans used for business purposes, but only up to 30% of adjusted taxable income (ATI).
OBBBA codifies the use of EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) in calculating ATI for this limit, making it more favorable than the stricter EBIT standard that was scheduled to apply after 2021.
Unused interest deductions can be carried forward indefinitely.
Who Qualifies
All for-profit businesses, unless exempt under special rules.
Small business exemption: Businesses with average annual gross receipts of $50 million or less (adjusted annually for inflation) are exempt from the limitation entirely.
Who Does Not Qualify for the Exemption
Businesses over the gross receipts threshold.
Certain “tax shelter” entities, regardless of size.
Aggregated groups of related businesses whose combined receipts exceed the threshold.
Documentation Requirements
Keep complete loan agreements and statements to prove the purpose and terms of debt.
Maintain detailed financial records to calculate ATI accurately.
Track carryforwards for unused interest deductions year to year.
Examples
Example 1 – Small Business Exemption
Gross receipts: $10 million average over the last three years
All interest deductible, the 30% limit does not apply.
Example 2 – Mid-Sized Manufacturer Over the Limit
ATI (EBITDA basis) = $2,000,000
30% limit = $600,000
Actual interest expense = $800,000
Deduction allowed: $600,000 in current year; remaining $200,000 carried forward to future years.
Example 3 – Related Entities Exceeding the Limit
Two related companies each have $30 million in receipts.
Combined = $60 million → over the threshold → limitation applies to both.
Common Misunderstandings
Thinking the limit applies to personal interest, it applies only to business interest.
Forgetting to aggregate related businesses for the gross receipts test.
Miscalculating ATI by using EBIT instead of EBITDA, OBBBA confirms EBITDA is used, which is generally more favorable.
Assuming carryforwards expire, under OBBBA, they can be carried forward indefinitely.
What to Watch Next
IRS Implementation Guidance
Many provisions, especially new deductions, will require additional IRS instructions. Expect updates on documentation requirements and forms.
State-Level Responses
Some states automatically conform to federal tax law, while others do not. This could create mismatches in state vs. federal treatment of deductions.
Tax Planning Opportunities
With several new deductions expiring in 2028, there’s a window to maximize benefits, especially for overtime, tips, and auto loan interest.
Recordkeeping Adjustments
Both individuals and employers may need to adjust payroll, bookkeeping, and expense tracking systems to capture new deduction-eligible data.
Looking Ahead: Employer Benefit Enhancements
In addition to tax provisions for individuals and businesses, OBBBA also expands several employee benefits, including higher childcare FSA limits, extended student loan repayment exclusions, enhanced adoption assistance, and a higher Form 1099 reporting threshold. These changes could have a big impact for employers looking to attract and retain talent.
We’ve covered these updates in detail in our newest KB2 Business Insights post, along with a state-by-state guide to the 1099 threshold so you can stay compliant.
📖 Read Part 2 here to see exactly how to implement these changes in your workplace.
Final Thoughts
The OBBBA represents one of the most sweeping tax updates in recent history. For individuals, it locks in lower tax rates, raises the standard deduction, and introduces new opportunities like the Tip Income Deduction, Overtime Premium Deduction, Senior Bonus Deduction, and Auto Loan Interest Deduction, all of which require clear documentation and an understanding of the fine print to maximize the benefit.
For business owners, the permanence of tools like the QBI deduction, 100% bonus depreciation, and full expensing of domestic R&D can have a lasting impact on tax planning and investment decisions. The updated interest expense limitation rules also give clarity for long-term financing strategies.
Whether you’re a wage earner, a business owner, or both, the key to benefiting from these changes is proactive planning and precise recordkeeping. Many provisions are temporary, expiring after 2028, so the next few years will be critical for taking full advantage. Work with a qualified tax professional now to adjust your strategy before year-end, and revisit it annually to capture every available opportunity.
Ready to make the OBBBA work for you?
KB2 Bookkeeping & Tax can help you navigate these new rules, identify deductions you qualify for, and keep your books tax-season ready all year long.
Call us at (512) 843-2320 or visit www.kb2bookkeeping.com to schedule your consultation today. Let’s make sure you get every dollar you’re entitled to, without the stress.
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