OBBBA: What Professional Services Firms Need To Know

The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, shifts the tax landscape for virtually every business and individual paying U.S. income taxes. Professional services firms and their owners can expect their 2025 tax filing to look quite different from recent years. 

While many of the OBBBA’s changes take immediate effect, others don’t come into play until 2026 or later. Leaders of professional services firms benefit from understanding the effects of current and upcoming tax and tax reporting changes on their business and the opportunities they provide. 

OBBBA Tax Compliance for Professional Services Firms 

Forms 1099 (-NEC and -MISC) 

Prior law: For years, companies have been required to issue a Form 1099-NEC, Nonemployee Compensation, to any contractor who is paid more than $600 during the year. The same $600 threshold applies to certain types of payments reportable on Form 1099-MISC, Miscellaneous Payments. 

New law: The OBBBA raised the $600 threshold to $2,000 for calendar year 2026. The $2,000 figure will be adjusted for inflation starting in 2027. 

Note that the heightened reporting threshold for Forms 1099-NEC and 1099-MISC applies to payments made after 2025, which means that professional services firms must continue to apply the $600 threshold for any payments made in 2025. 

Individual Deduction for Overtime Pay 

Prior law: For employers and employees, overtime pay was treated the same as regular wages: deductible by the employer and fully taxable to the employee. 

New law: The OBBBA introduced an individual income tax deduction of up to $12,500 ($25,000 if married filing jointly) for overtime pay earned. The deduction is available from 2025 through 2028 for contractors (those receiving a Form 1099) and employees (those receiving a Form W-2, Wage and Tax Statement), regardless of whether they itemize. The deduction starts to phase out as income exceeds $150,000 ($300,000 if married filing jointly). Overtime pay continues to be deductible by the employer and subject to state income taxes. 

Although the deduction provides no direct benefit to employers, companies will still need to report workers’ overtime pay to the IRS and state tax authorities. The IRS announced in early August that it won’t update Form W-2 for tax year 2025 but plans to provide guidance to help employers comply with their reporting requirements. However, the recently released draft Form W-2 for tax year 2026 provides space for reporting overtime wages in Box 12 using code TT.  

Professional service firm leaders should hear from their payroll processing providers nearer to the end of 2025 to help prepare for this new reporting requirement. To reduce year-end stress, we recommend that employers maintain a tracking report within their financials reporting software to ensure they are properly considering overtime pay throughout the year. 

OBBBA Tax Changes for Professional Service Firms 

Depreciation 

Prior law: For most types of asset purchases, businesses can’t deduct the entire purchase cost in the year of acquisition; rather, businesses must take annual depreciation deductions over a period of several years. However, two tax provisions — bonus depreciation and Section 179 expensing — let businesses elect to deduct a larger-than-normal portion of depreciation in the year the asset is placed in service in the business. In 2025, the bonus depreciation rate was set at 40%, and the Section 179 expensing limit was set at $1.25 million for purchases up to $3.13 million. 

New law: OBBBA permanently raised the bonus depreciation rate to 100% for assets acquired and placed in service after January 19, 2025. The Section 179 limit was raised to $2.5 million for purchases up to $4 million for property placed in service after 2024. The Section 179 figures will be adjusted for inflation annually starting in 2026. 

Accelerating depreciation is known predominantly to benefit companies in capital-intensive industries, such as manufacturing and construction. However, professional services firms benefit, too; Section 179 and bonus depreciation apply to furniture, computer equipment, office renovations and many other types of investments common in professional services firms. 

Electing 100% bonus depreciation or Section 179 may seem like an obvious choice, but it’s not always the best option. Consider a company that finances an extensive office build-out. To better match the cash flow of loan repayments, it may make more sense for the business to claim annual depreciation deductions to help offset loan payoffs in future years from a cash flow perspective. Working with a trusted tax advisor can help firm leaders arrive at the best option for them. 

Research and Development 

Prior law: Starting in 2022, research and development (R&D) expenses could no longer be deducted in the year incurred. Instead, companies were required to treat these expenses as an asset (capitalized) and claim annual proportionate deductions (amortized) over a period of five (for domestic research) or 15 (for foreign research) years. 

New law: R&D expenses incurred after 2024 may be deducted in the year incurred.  Foreign research must still be capitalized and amortized over 15 years. 

Qualified business income 

Prior law: The qualified business income (QBI) deduction, introduced by the Tax Cuts and Jobs Act of 2017 (TCJA), gives business owners a deduction of up to 20% of pass-through business income. The QBI deduction was originally scheduled to expire after 2025. 

New law: The QBI deduction has been made permanent. The phase-in range for the deduction limitation for SSTBs (discussed next) has been raised from $50,000 ($75,000 if married filing jointly) to $100,000 ($150,000 if married filing jointly) starting in 2026. 

Most professional services firms are considered a specified service trade or business (SSTB). SSTB owners are subject to a limitation on their QBI deduction that kicks in once their income reaches a certain threshold. Although the OBBBA didn’t change how the complicated limitation is calculated, it enhanced one aspect of it to make the QBI deduction available to more high-income business owners. 

The deduction limitation for SSTB owners affects owners with income that exceeds $197,300 in 2025 (double if married filing jointly). The deduction is entirely disallowed once income exceeds $50,000 ($75,000 if married filing jointly) above that amount. Starting in 2026, the QBI deduction won’t be entirely disallowed for the SSTB owner until income exceeds $100,000 ($150,000 if married filing jointly) of the SSTB limitation threshold. For owners in professional service firms, this phase-out expansion could provide a potentially substantial federal tax benefit if partner earnings from Schedule K-1 fall below or within the SSTB phase-out range. 

State and local taxes 

Prior law: From 2018 to 2025, individuals who itemize their deductions were permitted to deduct up to $10,000 in state and local taxes (SALT) paid. The $10,000 cap applied to state taxes paid on pass-through income, real estate taxes and other non-federal taxes. The SALT cap was scheduled to end after 2025. 

New law: The OBBBA increased the SALT cap to $40,000 for qualified taxpayers with up to $500,000 in adjusted gross income for the year. This deduction phases down to $10,000 (where it was before the law) once a taxpayer earns more than $600,000 for the year.The SALT cap and phase-down threshold are set to increase by 1% each year through 2029. After 2029, the SALT cap is set to return to $10,000.  

The $10,000 SALT cap had a profound effect on leaders of professional services firms that are taxed as partnerships and S corporations because it curbed their deduction on SALT paid on their share of firm earnings. A temporarily heightened SALT cap should be a welcome change. 

The upped SALT cap should prompt firm owners to reconsider the use of pass-through entity tax (PTET) programs that became popular after the $10,000 cap was introduced in 2018. The OBBBA’s expansion of the SALT cap can make PTETs less necessary for firms whose owners earn less than $500,000 each year. Now, firm owners may actually benefit more from forgoing the PTET election and maximizing their personal itemized deductions. PTET may still be a good option for the firm, but it is worth reviewing the efficacy of the program for the partners considering the new law. 

Professional services firms need to revisit their SALT strategy whenever there is a tax change affecting the firm or its owners. It pays to work with an experienced SALT expert who can evaluate the firm’s options on a state-by-state basis. 

Smith + Howard: Proactive Advisors for Proactive Firms 

Our advisors know that tax reform affects each firm in a unique way. A national firm with a global reach, Smith + Howard prides itself on taking a tailored approach to serving clients in the fields of law, consulting, architecture, insurance and more.  

To optimize your firm’s approach in light of the OBBBA, contact an advisor.