Okay, so I had planned on a third part to our Energy Trader Tax SNAFU series. But the biggest tax bill in (checks notes) 5 years ๐ was signed on July 4. So we'll deviate from the plan and run through the provisions.
๐บ But first - with 100% bonus depreciation back on the menu, loss allocations will be easier than ever to screw up.
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If you prepare or approve K1s for investors, you need a professional to review your operating agreement and K1s to get them right.
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My main takeaways from the One Big Beautiful Bill (OBBB) are threefold:
- It's expensive - when TCJA was passed (Trumps first tax bill in 2017), no one really batted an eye on the cost as much as we have this time around. This could be a watershed moment in fiscal responsibility. Or we could just continue printing money. ๐จ๏ธ
- It's very employee friendly - TCJA was incredible for business owners. This extends those friendly provisions but gives some great tax breaks to employees earning overtime and employees earning tips. ๐
- It's very debt friendly - it's almost overkill on the inducement to take on debt. ๐ฆ Car loan interest is now deductible - encouraging high interest auto loans for relatively low earners. Interest deductibility for real estate is restored - lowering the penalty for leveraging up and bonus depreciating all assets. Bonus depreciation screams for more leverage - it's BNPL's sister DNPL (deduct now pay later). And lastly it increases the size of QSBS-eligible businesses - encouraging more leverage to grow it bigger.
Let's jam on the main sections - we won't get into the detail on this edition. I have a webinar planned for Tuesday with my partner and we'll get more into the weeds - https://lu.ma/yg5s3xti.
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Business Provisions
- Bonus Depreciation and 179 Expensing - it's back and permanent. Bonus to 100% for assets ACQUIRED after Jan 19, 2025 (inauguration day was Jan 20). 179 eligible for assets placed in service after Dec 31, 2024 - a planning opportunity for assets acquired between those dates. ๐ข
- 163j Adjusted Taxable Income Addback - with bonus being back, this provision makes sense. It takes the bite out of the 30% interest deduction limitation for a lot of real estate properties (though we still had elections to work around them).
- QBI is Permanent - they didn't change the percentage. And they actually helped specified service providers (SSTBs) with a bigger phaseout for the deduction. ๐จโโ๏ธ So if you make under like $550k as a CPA, lawyer, doctor, etc. you will now get some QBI deduction action.
- R&D Expensing is Back - made permanent, but applies only to domestic R&D. Small businesses have the option to amend prior year returns and all businesses can otherwise take a 2025 deduction for the remaining unamortized basis. ๐งช This is also a big planning opportunity.
- Pass Through Entity Tax (SALT Workaround) - remains in tact. There was versions of the OBBB that limited this for SSTBs and everyone else. But that all got killed.
- Excess Business Losses - made permanent and kept the same. Previous versions changed how these suspended losses were treated in succeeding years but those changes didn't survive the final bill. This provision limits how much in pass-through losses (a la massive depreciation) can be used to offset other non-pass through income (W2s, etc).
- QSBS - Qualified Small Business Stock exclusion got a boost in several aspects. It changes to a partial exclusion with 3 and 4 year partial gain exclusion eligibility instead of a 5 year cliff. It also increases the $10 million exclusion to $15 million and increases the eligible businesses to those with $75 million in assets (up from $50 million). ๐๏ธ
- Opportunity Zones 2.0 - ๐๏ธ this will take some time to digest and plot out. It creates permanent rolling 10-year OZ deferral windows. Deferred gains will be eligible for a basis adjustment if held for 5 years by the date of income inclusion (you eventually pay tax on those deferred gains). The 10 year holding window for full step up stays, but there is now a 30 year cap on how much gain can be deferred.
Individual Provisions
- Tax Rate Brackets - made permanent instead of reverting back to higher rates. โช๏ธ
- Standard Deduction and Child Tax Credit Increased - not by much but at least they're not reverting back to the old amounts pre-TCJA (like 1/2 of what they are now).
- Wagering Losses Limited to 90% of Actual - this hurts professional gamblers, who depend on volume to make a thin margin of income. ๐ฐ
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The Four New Deductions - ๐ ๐ ๐ ๐
- Social Security ๐จโ๐ฆณ - technically a personal exemption for anyone 65 or older of $6,000.
- No Tax on Tips ๐โโ๏ธ - technically a deduction of up to $25,000 PER INDIVIDUAL. Phase out starts at $150k/$300k (single / married).
- No Tax on Overtime ๐งโ๐ญ - technically a deduction of up to $12,500 / $25,000 (single / married). Same phase out as Tips Deduction.
- Car Loan Interest ๐ - technically a new deduction of up to $10,000 with a phase out starting at $100k / $200k (single / married).
- State and Local Tax (SALT) Cap - increased from $10,000 to $40,000 with phase out starting at $500,000 (married) and full phase out by $600,000 with a minimum allowed of $10,000. This isn't great but it's better than a poke in the eye.
- Estate Tax Exemption - makes the higher lifetime exemption permanent and sets it at $15 million starting 2026 (currently at like $13.99 million). ๐จโ๐ฉโ๐งโ๐ง
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[[Worth pointing out that there other provisions in this bill that impact international and energy credits that I won't cover - as that's not where I spend most my time with clients. But if that's you, be sure to check it out.]]
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Notably Missing Provisions
- No Corporate Tax Rate Changes - were some initial ideas of taking C-Corps to 20% or manufacturer C-Corps to 15%.
- Carried Interest Restrictions - come on. We knew that wasn't going to happen. ๐คฃ
- Capital Gains Tax Rate - a higher rate on high earners capital gains was floated at ordinary rates. Didn't make it. ๐ค
- Higher Ordinary Rate for High Earners - a top rate back up to 39.6% was thrown out. Didn't happen.
What's Next
The IRS has a lot of work to do to put out guidance, new forms, interpretations, etc. of these new laws. And over the next few weeks, the strategy will shake out to maximize the most of these new deductions especially. Stay tuned in to me on X / Twitter and this newsletter as we get more insights to share.
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