2025 Year-End Small Business Tax Saving Tips
There is still time for small businesses and their owners to implement strategies to save on taxes for 2025. Traditional strategies remain effective, but the One Big Beautiful Bill Act (OBBBA) introduces several changes that can also help reduce federal income tax obligations for small businesses and their owners in 2025. Here are year-end tax planning tips to consider.
1. Manage Pass-Through Entity Income
Federal income tax rates are crucial for sole proprietorships and pass-through entities, such as:
– Single-member LLCs
– Partnerships
– LLCs taxed as partnerships
– S corporations
In these cases, taxable income is reported on the owners’ personal tax returns.
If you expect to be in the same or a lower tax bracket in 2026, consider deferring taxable income to next year and accelerating deductible expenses this year. This can postpone part of your 2025 tax liability and potentially lead to permanent tax savings if your tax bracket decreases.
Cash Basis Businesses
A.Lower 2025 Income
i. Income
Typically, cash-basis businesses don’t need to report income until they actually receive cash or checks, whether in hand or through the mail. To take advantage of this guideline, consider delaying the sending of some invoices to customers until just before the end of the year. However, this strategy should be applied only to customers with a reliable history of timely payments.
ii. Expenses
Cash-basis businesses can reduce taxable income for the current year by:
a. Charging recurring expenses to a credit card at year-end, allowing 2025 deductions even if paid in 2026.
b. Mailing checks for expenses a few days before year-end. You can deduct these expenses in the year the checks are mailed, regardless of when they are cashed.
c. Prepaying certain expenses. You can deduct these in the year paid if the benefit doesn’t extend beyond 12 months or the end of the next tax year.
Note: These timing strategies may also reduce your qualified business income (QBI) deduction and other tax breaks. Consult your tax lawyer to find the best approach for your situation.
B. Accelerate Income into 2025
If you anticipate being in a higher tax bracket next year, consider taking a different approach. Try to accelerate your income for this year, and postpone any deductible expenses until 2026. This way, a larger portion of your income will be taxed at this year’s lower rate instead of next year’s higher rate.
2. Maximize the QBI Deduction
The OBBBA permanently allows a deduction for Qualified Business Income (QBI) from pass-through business entities, up to 20%, with restrictions at higher income levels. You can also claim this deduction on qualified dividends from real estate investment trusts (REITs) and income from publicly traded partnerships.
To optimize your deduction, manage your taxable income by considering strategies like harvesting capital losses and delaying Roth IRA conversions.
Be cautious, as certain decisions, such as significant first-year depreciation deductions or large retirement plan contributions, can reduce your allowable QBI deduction. It’s best to consult with your tax lawyer and tax preparer for informed guidance.
3. Buy Fixed Assets
Suppose you’re planning to purchase machinery, equipment, or computer systems. In that case, you may write off most or all of the purchase price on your 2025 tax return if placed in service by December 31, 2025. The OBBBA reinstates 100% first-year bonus depreciation for eligible assets acquired and placed in service after January 19, 2025, up from 40%.
Eligible assets include most new and used tangible property with a recovery period of 20 years or less, such as:
– Office furniture and equipment
– Computer hardware and peripherals
– Commercially available software
– Certain vehicles (vehicles over 6,000 pounds GVWR and used over 50% for business qualify for 100% bonus depreciation)
You can also claim first-year bonus depreciation for qualified improvement property (QIP) related to nonresidential buildings, excluding costs for building enlargements, elevators, escalators, or structural framework, which depreciate over 39 years.
Most tangible, depreciable business assets—such as off-the-shelf software and qualified improvement property (QIP)—qualify for a separate first-year tax benefit known as the Section 179 deduction. Section 179 expensing is also applicable for:
– Roofs, HVAC equipment, fire protection and alarm systems, and security systems for nonresidential real property.
– Depreciable personal property predominantly used in connection with furnishing lodging.
For qualifying property placed in service in 2025, the OBBBA increases the Section 179 expensing limit to $2.5 million (up from $1.25 million for 2025 before the new law). A phase-out rule reduces the maximum Section 179 deduction when qualifying asset purchases exceed $4 million (up from $3.13 million for 2025 before the new law).
Additionally, there is a special limitation on Section 179 deductions for heavy SUVs used more than 50% for business. This limitation applies to vehicles with Gross Vehicle Weight Ratings (GVWRs) between 6,001 and 14,000 pounds. For tax years beginning in 2025, the maximum Section 179 deduction for a heavy SUV is $31,300.
It is important to note that Section 179 deductions are subject to several limitations that do not apply to first-year bonus depreciation, particularly for S corporations, partnerships, and LLCs treated as partnerships for tax purposes. Conventional wisdom suggests claiming the allowable 100% first-year bonus depreciation deduction instead of Section 179 deductions for the same assets. Most tangible depreciable business assets (including off-the-shelf software and QIP) also qualify for a separate first-year tax break: the Section 179 deduction.
For qualifying property placed in service in 2025, the OBBBA increases the Sec. 179 expensing limit to $2.5 million (up from $1.25 million for 2025 before the new law). A phase-out rule reduces the maximum Sec. 179 deduction when qualifying asset purchases exceed $4 million (up from $3.13 million for 2025 before the new law).
There’s also a special limitation on Sec. 179 deductions for heavy SUVs used over 50% for business. The limitation applies to vehicles with GVWRs between 6,001 and 14,000 pounds. For tax years beginning in 2025, the maximum Sec. 179 deduction for a heavy SUV is $31,300.
Important: Sec. 179 deductions are subject to several limitations that don’t apply to first-year bonus depreciation, especially for S corporations, partnerships, and LLCs treated as partnerships for tax purposes. The conventional wisdom is to claim the allowable 100% first-year bonus depreciation deduction rather than the Sec. 179 deductions for the same assets.
4. Place Your New Factory in Service
The OBBBA allows businesses to claim an additional 100% first-year depreciation for qualified production property (QPP). This refers to nonresidential real estate, such as a factory building, that’s used as an integral part of a qualified production activity, such as the manufacturing, production, or refining of tangible personal property. Before the OBBBA, these buildings were generally depreciated over 39 years.
QPP doesn’t include any part of nonresidential real property that’s used for:
Offices,
Administrative services,
Lodging,
Parking,
Sales activities,
Research activities,
Software development,
Engineering activities, or
Other functions unrelated to the manufacturing, production, or refining of tangible personal property.
To qualify for this new break, construction of QPP must begin after January 19, 2025, and before January 1, 2029. The property must be placed in service in the United States or a U.S. possession, generally before 2031.
Suppose you began constructing an eligible building after January 19, 2025, and are nearing completion. In that case, you should do what you can to complete it and place it in service by December 31, 2025. That would make you eligible to claim QPP 100% first-year depreciation on your 2025 return.
5. Establish a Tax-Favored Retirement Plan
If your business doesn’t already have a tax-favored retirement plan, consider establishing one. Current rules allow significant annual deductible contributions.
For example, suppose you are self-employed and set up a Simplified Employee Pension (SEP) IRA. In that case, you can contribute up to 25% of your net self-employment income. If you work for your own corporation, you can contribute up to 25% of your salary, with a maximum contribution limit of $70,000 for 2025. This could save someone in the 32% tax bracket $22,400 (32% of $70,000).
Other retirement plan options include 401(k)s, Solo 401(k)s, defined benefit pension plans, and SIMPLE IRAs, which may offer larger deductible contributions depending on your situation.
You can adopt and fund a tax-favored retirement plan (except SIMPLE IRAs) by the due date of your federal income tax return, including extensions. For instance, if Tim, who operates a sole proprietorship, files for an extension for his 2025 return due on October 15, 2026, and establishes a SEP IRA by that date, he can deduct contributions on his 2025 return.
Note: To make a SIMPLE IRA contribution for 2025, the plan must be set up by October 1, 2025.
Consult your tax lawyer for more details on small business retirement plans, especially if you have employees, as you may need to contribute on their behalf.
6. Invest in R&E Activities
Before the OBBBA, research and experimental (R&E) expenditures were amortized over 5 years in the U.S. and 15 years outside the U.S. Starting in 2025, businesses can immediately deduct eligible domestic R&E expenditures, while those conducted abroad must still be amortized over 15 years.
The R&E deduction must be reduced by any credits claimed for increasing research activities related to those expenditures.
Taxpayers with R&E expenditures from 2022 to 2024 can choose to write off remaining unamortized amounts over one or two years, starting in 2025. Eligible small businesses (averaging $31 million or less in annual gross receipts for the past three years) can retroactively apply the immediate deduction rule to taxable years after 2021.
For more details on these elections and their impact on year-end planning, consult your tax lawyer.
Do not wait to plan!
Act quickly to reduce your 2025 taxes. The OBBBA simplifies year-end planning for businesses through 2028 and enhances certain tax breaks. Please call me at (856) 665-2121 to explore strategies and last-minute moves that can benefit you.
Ron Cappuccio -11/29/2025
