2025 Tax Reform Is Signed into Law: What to Know

On July 4, 2025, the President is expected to sign into law the highly anticipated domestic spending and tax reform package known as the One Big Beautiful Bill Act (OBBBA) that was passed by Congress on July 3.

The consequential legislation makes permanent several tax-cutting provisions passed in 2017 that were set to expire soon and changes many other areas of tax law. Some tax measures take immediate effect, while others are retroactive to the beginning of the year. There are also other items that do not begin until 2026.

Here are the major business and individual tax items passed in the OBBBA. Note: This article reflects our initial review of the One Big Beautiful Bill Act (OBBA), which spans hundreds of pages and contains complex, detailed provisions. The information provided is subject to clarification or correction as further guidance becomes available. We will continue to update this article as we analyze the legislation more deeply and as additional information is released.

Business Tax Provisions

Accelerated Depreciation

First-year additional depreciation, also known as bonus depreciation, is reinstated to 100% for property placed in service after January 19, 2025. The provision has also been made permanent.

Additionally, a separate first-year depreciation measure (under Section 179) is expanded to provide a deduction of up to $2.5 million for qualifying property placed into service during the tax year, available after December 31, 2024. The maximum deduction limit is reduced for qualifying property purchases that exceed $4 million. These amounts will be adjusted for inflation after 2025.

Prior law: We haven’t had 100% bonus depreciation since 2022. Until the OBBBA passed, the bonus depreciation percentage was supposed to drop by 20 percentage points each year from 2023 through 2026 until it reached 0% in 2027.

Before the OBBBA, Section 179 provided a maximum deduction of $1 million.

Research & Development Expenditures

Domestic research and development (R&D) expenditures incurred after December 30, 2024, may now be expensed in the year incurred, just as they were before 2022. This provision does not expire.

The law change also lets small businesses apply the change retroactively to 2022, when capitalization and amortization requirements began. All other businesses can accelerate remaining R&D amortization deductions over one or two years.

The legislation doesn’t affect foreign R&D expenditures, which must still be capitalized and amortized over a 15-year period.

Prior law: Before 2022, businesses deducted R&D expenses in the year incurred. The Tax Cuts and Jobs Act of 2017 (TCJA) changed that, requiring R&D expenses to be treated as an asset, or capitalized, and deducted over a five-year (for domestic R&D) or 15-year (for foreign R&D) period.

Business Interest Limitation

The business interest limitation under Section 163(j) will resemble its pre-2022 form for tax years beginning after December 31, 2024. As before, business interest deductions will be limited, in part, to 30% of a company’s earnings before interest, taxes, depreciation, and amortization (EBITDA).

However, the limitation won’t look exactly as it did in 2022. For example, certain foreign-sourced income will be excluded from taxable income for purposes of applying the limitation. Also, ordering rules for capitalization are changing.

Prior law: Starting in 2022, taxpayers could only deduct business interest expenses up to 30% of the business’s earnings before interest and tax (EBIT), generally. The TCJA changed the limitation to the more-restrictive EBIT baseline to help offset some of the legislation’s tax-cutting measures.

Excess Business Loss Limitation

The limitation on a noncorporate taxpayer’s deduction of excess business losses has been made permanent. Taxpayers can continue to treat carried-over excess business losses as net operating losses.

An earlier draft of the bill would have required that carryover excess business losses be treated as regular excess business losses, making the carryover losses more difficult to deduct.

Prior law: The excess business loss limitation was set to expire after 2028.

Pass-Through Entity Tax Deductions

Drafts from the House and Senate initially included limitations on the deduction of pass-through entity taxes (PTETs), which are entity-level state income taxes. However, none of these proposed provisions made it into the final package. That means PTETs remain fully deductible.

Insight: PTETs became popular after the $10,000 federal deduction cap on state and local taxes (SALT, discussed later) went into effect in 2018. With more than 30 states offering a PTET, they provide a way for owners of S corporations and partnerships to claim more than $10,000 in SALT on their federal returns.

QBI Deduction

The qualified business income (QBI) deduction, which provides owners of pass-through businesses with a deduction of up to 20% of qualifying income, is now permanent.

The legislation also expands certain phase-out provisions for owners of specified service trades or businesses (SSTBs). The deduction limit phase-in range is moving up from $50,000 ($100,000 if filing jointly) to $75,000 ($150,000 if filing jointly).

Prior law: Introduced by TJCA, the QBI deduction was scheduled to expire at the end of 2025. The QBI deduction has helped owners of partnerships, S corporations, and sole proprietorships keep their tax liabilities on par with C corporations, which have paid a flat 21% since 2018.

Foreign Tax Credit Foreign-Sourced Income Taxes: BEAT, GILTI, FDII

The OBBBA makes several complex changes to international tax provisions that apply to U.S. taxpayers that earn from foreign sources. Here’s a brief overview of several tax rate changes, which take effect after December 31, 2025:

• The base erosion and anti-abuse tax (BEAT) rate will increase from 10% to 10.5%. The rate was scheduled to rise to 12.5%.
• The effective tax rate for foreign-derived intangible income (FDII) will increase from 13.1% to 14%. The rate was scheduled to rise to 16.4%.
• The effective tax rate for global intangible low-taxed income (GILTI) will increase from 10.5% to 14%. Absent new legislation, the GILTI rate would’ve increased to 16.4%.

FDII has also been renamed “foreign-derived deduction-eligible income,” and GILTI has been renamed “net CFC tested income.” The legislation also changes the computation of the foreign tax credit.

Prior law: Several tax regimes affecting multinational businesses with a U.S. presence were set to change at the end of 2025, resulting in meaningfully higher taxes imposed on these businesses. The OBBBA stunts the previously planned rate hikes.

Opportunity Zones

Opportunity zones are made permanent by the OBBBA. Some eligibility requirements are changing, as are designation rules for some communities in Puerto Rico. Most of the changes are effective as of the OBBBA’s enactment.

Prior law: Opportunity zones were scheduled to go away after 2026.

Energy Credits

The following clean energy tax credits and deductions will be phased out:

• Commercial clean vehicle credit (after September 30, 2025)
• New clean vehicle credit (after September 30, 2025)
• Previously owned clean vehicle credit (after September 30, 2025)
• Sustainable aviation fuel credit (after September 30, 2025)
• Alternative fuel vehicle refueling property credit (after June 30, 2026)
• Energy-efficient home credit (after 2025)
• Energy-efficient commercial buildings deduction (for construction beginning after June 30, 2026)
• Residential clean energy credit (after 2025)
• Advanced manufacturing production credit (for wind components after 2027 and critical minerals after 2034)
• Clean electricity production credit (for wind and solar facilities after 2027)
• Clean electricity investment credit (after 2027)
• Clean hydrogen production credit (for facilities beginning construction after 2027)

Some energy credits, such as the technology-neutral energy credit, were spared. Also, the clean fuel credit is extended through 2029, and the advanced manufacturing investment credit is increased from 25% to 35% for property placed in service after 2025.

Qualified Small Business Stock

Owners of qualified small business stock (QSBS), also known as Section 1202 stock, can exclude up to 100% of their capital gain when they sell their stock, up to a total of $15 million for stock acquired after the OBBBA’s enactment. The $15 million figure will be adjusted for inflation after 2026.

A taxpayer’s Section 1202 gain exclusion phases in over time:

• Owners who hold their QSBS for at least three years get a 50% gain exclusion.
• Owners who hold their QSBS for at least four years get a 75% gain exclusion.
• Owners who hold their QSBS for at least five years get a 100% gain exclusion.

To qualify as QSBS, the business must meet several requirements. For example, the must be a corporation with no more than $75 million in aggregate gross assets when the stock is issued.

Prior law: Since 2015, the maximum gain exclusion on the sale of QSBS has been only 50% after holding the stock for at least five years. In addition, qualifying small businesses could have no more than $50 million in aggregate gross assets at issuance. Finally, the gain exclusion remains limited to $10 million for QSBS acquired before the OBBBA’s enactment.

Corporate Charitable Contribution Deductions

Effective permanently starting in 2026, for a corporation to claim a charitable contribution deduction, the total amount of contributions must be greater than 1% of the company’s taxable income for the year. The deduction is limited to 10% of taxable income.

Prior law: Previously, there was no floor on a corporation’s charitable contribution deduction, but the 10%-of-taxable-income deduction limitation has been in effect for some time.

Individual Tax Provisions

Income Tax Brackets

The current income tax rates for ordinary income, ranging from 0% to 37%, have been made permanent. For 2026, all except the top three tax brackets will get an additional inflation bump.

Prior law: Ordinary income tax rates were scheduled to revert to their pre-2018 levels, which would translate to higher taxes for most taxpayers.

Standard Deduction

The 2025 standard deduction has been increased for all filing statuses:

• Married filing jointly and surviving spouse: $31,500 (from $30,000)
• Head of household: $23,625 (from $22,500)
• Single and married filing separately: $15,750 (from $15,000)

After 2025, the standard deduction amounts will be adjusted for inflation each year. In addition, for tax years 2025–2028, taxpayers who are at least 65 years old will receive an additional $6,000 deduction with a phase-out for seniors whose modified adjusted gross income exceeds $75,000 ($150,000 if filing jointly).

Prior law: Current legislation would roughly halve the current standard deduction levels after 2025.

Itemized Deductions for High-Income Taxpayers

The legislation limits the total amount of itemized deductions for those with income firmly in the 37% bracket. The limitation is tricky; it reduces the total amount of itemized deductions by 2/37 of the lesser of

• Itemized deductions, before taking into account the itemized deductions, to the extent that it exceeds the allowable SALT deduction, or
• Taxable income, before taking into account the itemized deductions, to the extent that it exceeds the 37% bracket.

The limitation doesn’t affect the QBI deduction mentioned earlier.

Prior law: We haven’t had a limitation on itemized deductions in recent years. This new limitation is similar to, but not the same as, the so-called Pease limitation that applied before 2018.

SALT Deduction Cap

The limit on an individual’s federal tax deduction for state and local taxes (SALT) is raised from $10,000 ($5,000 for those married filing separately) to $40,000 ($20,000 for those married filing separately) in 2025. The cap increases by 1% each year from 2026 through 2029. The $10,000 cap is slated to return for 2030 and beyond.

However, a person’s SALT deduction is reduced by 30% of income that exceeds $500,000 ($250,000 for those married filing separately) in 2025, but the SALT cap cannot be reduced below $10,000. The $500,000 threshold increases by 1% each year.

Prior law: The TCJA set a $10,000 cap on SALT deductions for all taxpayers from 2018 through 2025.

Income Tax on Tips and Overtime

For 2025 through 2028, up to $25,000 in tips and up to $12,500 in overtime pay are not taxable for those earning up to $150,000 per year.

The OBBBA provides tax relief to tipped and hourly workers through a deduction that’s available to itemizers and non-itemizers. To claim the deduction, individuals will need to report the total amount of tipped or overtime income earned. The deduction is reduced by $100 for every $1,000 that the taxpayer’s income exceeds $150,000 ($300,000 if filing jointly).

The legislation also includes safeguards to prevent businesses and individuals from avoiding taxation by recharacterizing regular income as tips. Tip and overtime income continue to be subject to state income taxes and payroll taxes, such as Social Security and Medicare taxes.

Prior law: For tax purposes, tips and overtime pay have historically been treated the same as all other wages.

Estate, Gift, Generation-Skipping Transfer Tax Exemption

The bill raises the tax exemption for estate, gift, and generation-skipping transfers to $15 million starting in 2026, with an annual inflation adjustment starting in 2027. The 2025 exemption amount of $13.99 million is unchanged.

Prior law: Without intervening legislation, the estate tax exemption was slated to halve after 2025, similar to the standard deduction.

Child Tax Credit

The child tax credit increases to $2,200 per qualifying child in 2025, with a permanent annual inflation adjustment starting in 2026. Up to $1,400 of the credit is partially refundable.

Parents and children must have valid Social Security numbers to be eligible for the credit.

Prior law: Absent new legislation, the child tax credit would’ve fallen from $2,000 per qualifying child in 2025 to $1,000 per qualifying child in future years.

Charitable Contribution Deductions

The bill makes several changes to an individual’s charitable contribution deduction, effective after 2025:

• Those who take the standard deduction can deduct up to $1,000 ($2,000 if filing jointly) in cash contributions.
• A soon-to-expire provision that allows cash charitable deductions up to 60% of the individual’s contribution base is made permanent.
• An itemizer’s charitable contributions are deductible only when they exceed 0.5% of their contribution base.

Prior law: Non-itemizers haven’t been allowed to take charitable contribution deductions since 2021. The 60% limitation on cash contribution deductions was set to expire at the end of 2025. There also has not been a floor on charitable contribution deductions for itemizers in recent history.

Alternative Minimum Tax

The alternative minimum tax (AMT) is a mechanism designed to prevent high-income taxpayers from paying less than a specified amount in tax. Many of the modifications made by the TCJA have been made permanent.

The bill keeps the exemption amounts where they are while continuing to adjust them for inflation. However, it brings the exemption phase-out threshold back to its 2018 level, which was $500,000 ($1 million if filing jointly), adjusted for inflation.

Prior law: The TCJA’s modifications to the AMT were set to expire at the end of 2025.

Home Mortgage Interest Deduction Limitation

The OBBBA makes existing home mortgage deduction limitations permanent. Homeowners can deduct mortgage interest on their primary homes for the first $750,000 of indebtedness. Interest paid on home equity lines of credit aren’t deductible.

However, the bill adds a new provision that requires mortgage interest premiums to be included in the $750,000 limit.

Prior law: Before the TCJA, the $750,000 limitation was $1 million, and interest on up to $100,000 in home equity loans was deductible. These measures were supposed to expire at the end of 2025.

529 Accounts

Those saving for their or a child’s education can now use their 529 funds for elementary, secondary, and post-secondary expenses. The new law also allows 529 money to cover tuition, study materials, and exam fees for credentials.

Plus, the OBBBA makes permanent the existing 529-to-ABLE conversion, which permits a tax-free transfer of 529 funds to an ABLE (Achieving a Better life Experience) account that benefits the same 529 beneficiary or a member of the 529 beneficiary’s family.

Prior law: Funds in a 529 account were generally reserved for higher education expenses. The 529-to-ABLE conversion was slated to expire after 2025.

Trump Accounts

The OBBBA introduces Trump accounts, a new kind of custodial individual retirement account (IRA) for minors. Parents who open a Trump account for their children born between January 1, 2025, and December 31, 2028, are eligible for a $1,000 tax credit.

The annual contribution limit to a Trump account is $5,000, with annual inflation adjustments starting in 2027.

Personal Exemption, Miscellaneous Itemized Deductions, Moving Expenses, Personal Casualty Losses

The legislation permanently repeals several provisions that were only temporarily suspended by the TJCA:

• Personal exemption: Before 2018, taxpayers could claim a specified deduction amount for themselves and dependents.
• Miscellaneous itemized deductions: The tax code allowed individuals to claim deductions for a variety of personal expenses — from job hunting to hobby losses to maintaining a home office as an employee — that exceeded 2% of their adjusted gross income.
• Moving expenses: Individuals used to be able to claim deductions for moving due to a new job when certain conditions were met. Military-related moving costs are currently deductible and are still deductible under the new legislation.
• Personal casualty losses: Individuals used to be permitted a deduction for the uninsured loss of personal property, including personally held real estate. The TCJA temporarily suspended this deduction for all personal casualty losses unless they were the result of a federally declared disaster approved by the U.S. President. This provision remains, and the OBBBA also permits personal casualty loss deductions for some state-declared disasters.

Smith + Howard: Providing Insights on Tax Reform

Our advisors are reviewing all aspects of the OBBBA to support clients with evolving tax situations. Although tax reform can create uncertainty, it also presents opportunities.

With the expansion of bonus depreciation and the return of R&D expensing, capital-intensive businesses may see immediate tax benefits. Likewise, individuals and owners of pass-through businesses are spared from the expiration of tax cuts that were scheduled to take effect at the end of 2025.

There are provisions in the OBBBA that affect nonprofit organizations. Look for a separate summary of that area of the OBBBA soon.

A reminder that this article reflects our initial review of the One Big Beautiful Bill Act (OBBA), which spans hundreds of pages and contains complex, detailed provisions. The information provided is subject to clarification or correction as further guidance becomes available. We will continue to update this article as we analyze the legislation more deeply and as additional information is released.

The provisions will affect taxpayers differently. To review how the OBBBA affects the taxation of you and your business, contact an advisor.