Four Midyear 2025 Tax Planning Tips for Small Business Owners
Which Purchases Are Eligible for Sec. 179 Deductions?
Most types of personal property used for business and off-the-shelf software costs are eligible for Section 179 deductions. These deductions can also be claimed for personal property used predominately to furnish lodging or in connection with the furnishing of lodging. Examples include:
- Furniture,
- Kitchen appliances,
- Lawn mowers, and
- Other equipment used in the living quarters of a lodging facility or in connection with a lodging facility such as a hotel, motel, apartment house, dormitory, or other facility where sleeping accommodations are provided and rented out.
This break can also be claimed for real property expenditures for qualified improvement property (QIP), up to the maximum annual allowance.
QIP refers to any improvement to an interior portion of a nonresidential building that’s placed in service after the date the building is placed in service. However, expenditures for enlargement of the building, any elevator or escalator, or the building’s internal structural framework are excluded.
Sec.179 deductions can also be claimed for qualified expenditures for roofs, HVAC equipment, fire protection and alarm systems, and security systems for nonresidential real property. To qualify, these items must be placed in service after the nonresidential building has been placed in service.
Mid-August isn’t just for barbeques and baseball. It’s also a good time to think about ways to cut your 2025 business tax bill. Here are four tax planning ideas for small business owners to consider with the latest tax law changes under the One Big Beautiful Bill Act (“OBBBA”), enacted July 2025.
1. Establish a Tax-Favored Retirement Plan
If your business doesn’t already have a retirement plan, now might be the time to take the plunge. Current rules allow for significant annual deductible contributions. For example, if you’re self-employed, you can set up a simplified employee pension (SEP) plan for yourself. Then you can contribute up to 20% of your net self-employment income, with a maximum contribution of $70,000 for your 2025 tax year. If you’re employed by your own business, you can contribute up to 25% of your salary, with a maximum contribution of $70,000.
Besides SEPs, other small business retirement plan choices include:
- 401(k) plans,
- Defined benefit pension plans, and
- Savings Incentive Match Plan for Employees (SIMPLE) IRAs.
The optimal choice depends on your circumstances. For instance, a SIMPLE IRA can be a good choice if your business income is modest. If you have plenty of discretionary cash to put away for retirement, non-SEP plans may allow bigger deductible contributions.
Important: When setting up a retirement plan, be aware that if your business has employees, you may have to cover them, too.
In many cases, you can still establish a plan and make a deductible contribution for 2024. The general deadline for setting up a tax-favored retirement plan, such as a SEP or 401(k) plan, is the extended due date for the return for the year you or your business entity want to make the initial deductible contribution.
For instance, if you extended your 2024 personal tax return and operate a sole proprietorship or single-member LLC that’s treated as a sole proprietorship for federal tax purposes, you have until October 15, 2025, to establish a plan and make the initial deductible contribution.
There’s a critical exception, however. To make a SIMPLE IRA contribution for the 2024 tax year, you must have set up the plan by October 1, 2024. So, if the SIMPLE IRA option is appealing, establish the plan and make the initial contribution by October 1, 2025.
2. Leverage Enhanced Depreciation Tax Breaks
Under the 2025 Act (commonly referred to as “the One Big Beautiful Bill”), there are significant updates to both Section 179 expensing and bonus depreciation rules for 2025 and beyond:
Section 179 deductions (2025 and after). For qualifying property placed in service in tax years beginning in 2025, the maximum Section 179 deduction has been increased to $2,500,000 with a $4 million phaseout. (See “Which Purchases Are Eligible for Sec. 179 Deductions?” at right.)
The Section 179 deduction remains limited by taxable income and cannot be taken when the business is operating at a net loss.
Also, the Sec. 179 deduction limitation rules can be tricky if you own an interest in a pass-through business entity, such as a partnership, limited liability company (LLC) treated as a partnership for tax purposes or S corporation.
Bonus Depreciation (2025 and after). For most qualified property placed in service from January 1 through January 19, 2025, the bonus depreciation rate is 40%. For property acquired and placed in service after January 19, 2025, the bonus depreciation rate is permanently reinstated at 100%. Without the Bill, the bonus depreciation rates would have been 40% in 2025, 20% in 2026, and 0% in 2027 and beyond.
Depreciation deductions for heavy SUVs, pickups and vans. The 2025 Act significantly enhances depreciation deductions for heavy SUVs, pickups, and vans (those with a gross vehicle weight rating over 6,000 pounds). 100% bonus depreciation is permanently reinstated for vehicles acquired and placed in service after January 19, 2025, allowing full first-year expensing if the vehicle is used more than 50% for business purposes.
The Section 179 deduction limit for these vehicles is $31,300 per vehicle for 2025. However, certain vehicles—such as pickups with a cargo bed of at least six feet and some large vans—are exempt from this cap and can use the full Section 179 limit of $2,500,000 for 2025.
Depreciation deductions for cars, light SUVs, light trucks and light vans. For these vehicles that are used over 50% for business, special luxury auto depreciation limitations apply. Thankfully, the limitations aren’t that strict. For passenger autos placed in service in 2025, the maximum luxury auto depreciation deductions are:
- $20,200 for year 1 if bonus depreciation is claimed ($12,200 if bonus depreciation isn’t claimed),
- $19,600 for year 2,
- $11,800 for year 3, and
- $7,060 for year 4 and thereafter until the vehicle is fully depreciated.
The $12,200 first-year luxury auto depreciation limit applies to vehicles costing more than $61,000; for vehicles costing $61,000 or less, the first-year deduction is simply 20% of the cost (the MACRS rate), not the full $12,200 limit.
Qualified Production Property (“QPP”). The OBBA has introduced a new class of assets eligible for enhanced tax expensing opportunities. Assets categorized as QPP are now eligible for a 100% bonus depreciation deduction. QPP is generally defined as nonresidential real property used in the manufacturing and agricultural production industries when used to produce a qualified product.
3. Time Business Income and Deductions for Tax Savings
If you conduct your business using a pass-through entity, your shares of the business’s income and deductions are passed through to you and taxed at your personal rates. Pass-through entities include:
- Sole proprietorships,
- S corporations,
- LLCs, and
- Partnerships.
Assuming no further legislative changes, individual federal income tax rates will remain stable in 2026, as the One Big Beautiful Bill Act (OBBB) of 2025 extended the 2017 Tax Cuts and Jobs Act (TCJA) tax brackets through 2029. This includes the preservation of lower marginal tax rates and widened brackets. Additionally, the IRS will continue to adjust the tax bracket thresholds annually for inflation.
The traditional strategy of deferring income into next year while accelerating deductible expenditures into this year makes sense if you expect to be in the same or lower tax bracket next year. This strategy will, at a minimum, postpone part of your tax bill from 2025 until 2026. And, after the inflation adjustments to 2026 rate bracket thresholds, the deferred income might be taxed at a lower rate.
On the other hand, if you expect to be in a higher tax bracket in 2025, take the opposite approach. That way, more income will be taxed at this year’s lower rate instead of next year’s higher rate.
4. Maximize Section 199A qualified business income (QBI) Deduction under the new provisions
The Qualified Business Income (QBI) deduction, first introduced by the Tax Cuts and Jobs Act (TCJA) of 2017, has become a valuable tax benefit for owners of pass-through businesses such as sole proprietorships, partnerships, S corporations, and certain trusts and estates. The 2025 Act (One Big Beautiful Bill) has made several important updates to this deduction, ensuring its continued availability.
The QBI deduction allows eligible taxpayers to deduct up to 20% of their qualified business income from their taxable income. This break is subject to restrictions that can apply:
- At higher business income levels, and
- Based on the owner’s taxable income.
The QBI deduction is only available to individuals, including pass-through entity owners, trusts and estates. It can also be claimed for up to 20% of income from qualified real estate investment trust dividends and 20% of qualified income from publicly traded partnerships.
Because of the limitations on the QBI deduction, tax planning decisions may increase or decrease your allowable QBI deduction. For example, claiming big first-year depreciation deductions can reduce QBI and lower your allowable QBI deduction. So, if you can benefit from the deduction, be careful making tax planning moves. Your tax advisor can help you put together strategies that give you the best overall tax results.
Key Updates from the 2025 Act
- The QBI deduction is now permanent; it no longer sunsets after 2025 as originally scheduled under the TCJA.
- The phase-in thresholds for the wage/investment limitation and the specified service trade or business (SSTB) limitation have increased to $150,000 for joint filers and $75,000 for other filers, indexed for inflation after 2026.
- A new minimum QBI deduction of $400 (indexed for inflation) is available for taxpayers with at least $1,000 of aggregate active QBI from trades or businesses in which they materially participate.
GRF Can Help
This article covers just the tip of the tax planning iceberg for small businesses. Contact your tax advisor or the GRF Tax Team to discuss mid-year planning strategies to determine the right course of action based on your situation, or contact the GRF Tax Team for assistance.
