Closely Held Businesses and Their Owners Ask: What’s Big and Beautiful in the Recent Tax Law?

The “One Big Beautiful Bill Act” (the “Act”)[i] was signed into law last week, on July 4. As promised by the White House, the Act extends – i.e., purports to make “permanent” – many of the otherwise expiring provisions that were introduced by the Tax Cuts and Jobs Act (P.L. 115-97) in 2017.[ii] The legislation also adds some new provisions to the Code, while “updating” others.

Although it may be said the Act has something for practically every taxpayer, what follows is a brief summary of certain provisions of the Act that may be of interest primarily to many closely held businesses and their owners.

• Individual Income Tax Rate – IRC Sec. 1. The 37% top marginal income tax rate for individuals is extended indefinitely, as are the rate brackets introduced by the TCJA [eff. TYE after 12/31/2025]
  • This rate applies to individual taxpayers with income in the highest tax bracket.
  • Absent this change, the top rate would have increased to 39.6% for TYE after 12/31/2025, and the pre-TCJA rate brackets would have been restored
  • The 37% tax rate applies only to that part of an individual’s taxable income that is in the highest bracket
    • This includes all manner of ordinary income; for example, consideration received in exchange for services or for products sold in the ordinary course, for the use of property (such as rent, interest, or royalties), and depreciation recapture
    • This income may be received directly by the individual taxpayer, or it may represent the taxpayer’s share of such income from a partnership or S corporation in which the taxpayer is an owner
  • For TYE 12/31/2025, the highest bracket for married individuals filing joint returns begins at taxable income over $751,600
    • The brackets will continue to be adjusted for inflation based on the chained CPI (which accounts for consumer substitution when prices change)
  • Non-grantor trusts and decedents’ estates will remain subject to the same top marginal rate of 37% for ordinary income, except it applies, in 2025, to taxable income over $15,650
• QBI Deduction – IRC Sec. 199A. The Act makes the deduction under Section 199A permanent
  • Section 199A generally allows individuals, trusts, and estates with income from pass-through businesses (sole proprietorships, partnerships, S corporations) to deduct up to 20% of their qualified business income (“QBI”) in determining their federal tax liability. The Section 199A deduction applies to a broad range of business activities.
    • In addition to income arising in the ordinary course of a business, QBI may include gain from the sale of the assets of a business, such as inventory, receivables, and depreciation recapture property
    • A limitation based on W–2 wages, or W–2 wages and capital investment (as applicable), phases in above a threshold amount of taxable income.
    • A disallowance of the deduction on income of “specified service” trades or businesses also phases in above the same threshold amount of taxable income.
  • The Act increases by 50% the threshold amount at which the above-referenced limitations apply
  • Without the Act, this deduction would no longer have been available for TY beginning on or after 1/1/2026
• Estate/Gift Taxes: Exclusion Amount – IRC Sec. 2010. The federal “basic exclusion” amount is increased to $15 million in the case of estates of U.S. decedents dying, and gifts made by U.S. persons, after 12/31/2025
  • The basic exclusion amount (as adjusted, below) represents the aggregate taxable fair market value of property (determined as of the date of the transfer) that a U.S. individual (a citizen or domiciliary) may transfer during their life or at their death, and for which no marital or charitable deduction is available, without incurring federal estate or gift tax
    • The highest federal gift and estate tax rate is 40%
  • This new basic exclusion amount does not have a termination date
  • Beginning after 2026, the basic exclusion amount will be indexed annually for inflation based on the chained CPI
  • In the case of married individuals, each spouse will have the benefit of their own $15 million exclusion amount in 2026 – between them, the two may transfer up to $30 million of property without estate or gift tax liability
  • If the predeceasing spouse does not exhaust their basic exclusion amount (as adjusted), the surviving spouse may add the remaining balance to their own exclusion amount (“portability”), thereby ensuring the couple the opportunity to use their combined $30 million benefit
  • Without the Act, the basic exclusion amount – which is equal to $13.99 million for transfers made during 2025 – would have returned to $5 million (adjusted for inflation after 2010) for decedents dying and gifts made after 12/31/2025
    • It had been projected that the exclusion, as adjusted for inflation (since 2010), would have been equal to approximately $7 million beginning in 2026
  • The extension of the ever increasing federal exclusion amount affords many individual taxpayers the opportunity to pass along more of their assets – including interests in businesses or in investments – to family members without incurring federal estate tax liability.
  • It’s important to note that a state’s exclusion amount may differ from the Code’s – in other words, a transfer that would be protected from federal tax thanks to the increased exclusion amount may not enjoy the same protection under a state’s tax law.
    • Take New York, for example.[iii] Its estate tax exemption for a decedent dying in 2025 is $7.16 million, as compared to a $13.99 million exclusion for purposes of the federal estate tax.
• GST Tax: Exemption Amount – IRC Sec. 2631. The generation-skipping transfer (“GST”) tax exemption amount is likewise increased to $15 million (and increased annually for inflation after 2026) for GSTs made after 12/31/2025.
  • In general, a GST is a testamentary or lifetime transfer to an individual who is more than one generation below the transferor
  • A GST may also occur with respect to a trust that includes beneficiaries who are more than one generation below the grantor of the trust
  • The GST tax rate is equal to the highest federal gift and estate tax rate, which is currently 40%
  • The GST tax exemption is typically used in conjunction with a lifetime gift or testamentary transfer to a trust from which property may be distributed to beneficiaries who are skip persons.
    • In general, the allocation of the exemption to property that is transferred to a trust will shield from GST tax all or a portion of future distributions attributable to such transfer, depending on the FMV of the property when it is received by the trust.
    • Including appreciation on the transferred property
  • For now, the dynasty trust lives.[iv]
• Miscellaneous Itemized Deductions – IRC Sec. 67. The deduction for miscellaneous itemized deductions is eliminated for most taxpayers for taxable years beginning after 12/31/2025
  • Prior to the 2017 Tax Cuts and Jobs Act (“TCJA”), individuals could deduct certain expenses in computing taxable income that did not reduce adjusted gross income only if, in the aggregate, they exceeded 2% of the taxpayer’s adjusted gross income (“miscellaneous itemized deductions”). The TCJA suspended these deductions for the 2018 through 2025 tax years.
  • These expenses are defined as ordinary and necessary expenses paid or incurred in a taxable year: (1) for the production or collection of income; (2) for the management, conservation, or maintenance of property held for the production of income; or (3) in connection with the determination, collection, or refund of any tax.
• Limitation on Itemized Deductions – IRC Sec. 68. The amount of the itemized deductions otherwise allowable for the taxable year shall be reduced by 2/37 of the lesser of (1) such amount of itemized deductions, or (2) so much of the taxpayer’s taxable income for the taxable year as exceeds the dollar amount at which the 37% rate bracket for ordinary income begins with respect to the taxpayer.
  • The foregoing limitation applies after the application of any other limitation on the allowance of any itemized deduction
  • It replaces the Pease limitation, under which an individual taxpayer’s itemized deductions were reduced if their adjusted gross income exceeded a specified threshold amount
  • This change is effective for TY beginning after 12/31/2025
• Deduction for State and Local Taxes – IRC Sec. 164. The cap on the deduction for state and local taxes (“SALT”; for example, income and property taxes) – other than those paid or accrued in carrying on a trade or business, or for the production or collection of income – that may be claimed by individual taxpayers for a taxable year is temporarily increased from $10,000 per individual taxpayer ($5,000 for a married taxpayer filing separately) to the following “applicable limitation amounts” (half the amount for a married individual filing separately):
  • $40,000 for 2025;[v]
  • $40,400 for 2026;
  • for any taxable year beginning after 2026 and before 2030, the cap is increased by an additional 1% every year;
  • for any taxable year beginning after 2029, we’re back to $10,000;[vi]
  • in the case of any taxable year beginning before January 1, 2030, the applicable limitation amount shall be reduced by 30 percent of the excess (if any) of the taxpayer’s modified adjusted gross income over the “threshold amount” (half the threshold amount in the case of a married individual filing a separate return)
    • the applicable threshold amount is $500,000 in 2025;
    • it is $505,000 in 2026;
    • for any taxable year beginning after 2026 and before 2030, the amount is increased by an additional 1% every year.

The Act does not limit the deduction of pass-through entity taxes (“PTET”)[vii] imposed by a state or local government (for example, the optional New York State or New York City taxes that partnerships and S corporations may annually elect to pay on certain income) – see IRS Notice 2020-75 and its tax treatment of specified income tax payments made by partnerships or S corporations.

• Deduction of Qualified Residence Interest – IRC Sec. 163(h). Interest paid or accrued during the taxable year on acquisition indebtedness (i.e., qualified residence interest) is allowed as an itemized deduction, subject to limitations.
  • A qualified residence means the taxpayer’s principal residence and one other residence of the taxpayer selected to be a qualified residence.
  • The TCJA reduced the maximum amount treated as acquisition indebtedness to $750,000 ($375,000 in the case of a married person filing a separate return) for taxable years beginning after December 31, 2017, and beginning before January 1, 2026
  • The Act makes this limitation permanent, effective for taxable years beginning after December 31, 2025
• Bonus Depreciation – IRC Sec. 168(k). Effective for property acquired after January 19, 2025, the Act makes the deduction for bonus depreciation permanent
  • This additional first-year depreciation deduction is equal to 100% of the adjusted basis of qualified property acquired and placed in service
  • Qualified property generally means depreciable property which has a recovery period of 20 years or less
    • the original use of the property commences with the taxpayer or,
    • if the property is used property, it must not have been used by the taxpayer prior to its acquisition, and
    • certain other requirements are satisfied
  • The Act expands the list of qualified property to include “self-constructed” property
• Deduction for Research or Experimental Expenditures – IRC Sec. 174A. The Act permits the immediate deduction of domestic research or experimental expenditures paid or incurred in connection with the taxpayer’s trade or business other than such expenditures that are attributable to research that is conducted outside of the U.S. (which are required to be capitalized and amortized ratably over a 15-year period)
  • The Act clarifies that the deduction is not available to any expenditure for the acquisition or improvement of land, or for the acquisition or improvement of property to be used in connection with the research or experimentation and of a character for which depreciation deductions may be claimed.
  • In some cases, the taxpayer may instead elect to capitalize and amortize these expenditures ratably over a period of not less than 60 months.
  • The foregoing changes apply to amounts paid or incurred in taxable years beginning after December 31, 2024.
  • In some cases, a small business may elect to apply the changes retroactively to amounts paid or incurred in taxable years beginning after December 31, 2021.
  • A taxpayer with certain unamortized domestic research or experimental expenditures paid or incurred in taxable years beginning after December 31, 2021 and before 1/1/2025 may be able to deduct them in the first taxable year beginning after 12/31/2024
• Section 179 Deduction – IRC Sec. 179.[viii] A taxpayer generally must capitalize the cost of property used in a trade or business or held for the production of income and recover such cost over time through annual deductions for depreciation or amortization
  • However, a taxpayer may elect under section 179 to deduct (or ‘‘expense’’) the cost of qualifying property, rather than recover such costs through depreciation deductions, subject to limitations
  • In general, qualifying property is defined as depreciable tangible personal property that is purchased for use in the active conduct of a trade or business
  • Effective for property placed in service in taxable years beginning after 12/31/2024, the Act increases the maximum amount a taxpayer may expense under section 179 to $2,500,000, and increases the phaseout threshold amount to $4,000,000.
    • Thus, the maximum amount a taxpayer may expense is $2,500,000 of the cost of section 179 property placed in service placed in service after 12/31/2024. The $2,500,000 amount is reduced (but not below zero) by the amount by which the cost of section 179 property placed in service during the taxable year exceeds $4,000,000. These amounts are indexed for inflation for taxable years beginning after 2025.
• Qualified production property – IRC Sec. 168(n). The Act adds a new provision pursuant to which a taxpayer may elect to expense the cost for “qualified production property” when the property is placed in service in the U.S.
  • This property includes nonresidential real property that is used by the taxpayer as an integral part of a qualified production activity, the original use of which commences with the taxpayer, the construction of which begins after January 19, 2025, and before January 1, 2029, and which is placed in service before January 1, 2031.
    • There is an exception to the original use test if the property was not previously used by the taxpayer, and it was acquired from an unrelated party.
  • “Qualified production activity” means the manufacturing, production, or refining of a qualified product. The activities of any taxpayer do not constitute manufacturing, production, or refining of a qualified product unless the activities of such taxpayer result in a substantial transformation of the property comprising the product.
  • The term “qualified product” means any tangible personal property if such property is not a food or beverage prepared in the same building as a retail establishment in which such property is sold.
  • If, at any time during the 10-year period beginning on the date that any qualified production property is placed in service by the taxpayer, such property ceases to be used for a qualifying purpose, then the property will be treated as having been disposed of by the taxpayer and IRC Sec. 1245 will be applied to recapture the deduction as ordinary income.
  • The amendments made by this section shall apply to property placed in service after the date of the enactment of this Act.
• Deduction for Business Interest – IRC Sec. 163(j). The TCJA limited the deduction for business interest to the sum of the taxpayer’s business income plus 30% of the adjusted taxable income of the taxpayer
  • Business interest means any interest paid or accrued on indebtedness properly allocable to a trade or business; business interest income means the amount of interest includible in the gross income of the taxpayer for the taxable year which is properly allocable to a trade or business – it does not include investment interest
  • Any excess interest may be carried forward indefinitely
  • The adjusted taxable income was computed without regard to any deduction allowable for depreciation or amortization for taxable years beginning after December 31, 2017 and before January 1, 2022.
  • For taxable years beginning after December 31, 2021, adjusted taxable income has been computed with regard to deductions allowable for depreciation and amortization, thus reducing the deductible amount
  • Effective for taxable years beginning after 12/31/2024, the Act modifies these rules so that the limitation on the deduction of business interest is computed without regard to deductions allowable for depreciation and amortization
• Charitable Contribution by Corporation – IRC Sec. 170. A charitable contribution by a corporation that is otherwise allowable as a deduction will be allowed only to the extent that the aggregate amount of such contributions for the taxable year exceeds 1% but not more than 10% of the corporation’s taxable income for such year.
  • Any shortfall or excess if carried forward for 5 years.
  • This change is effective for taxable years beginning after 12/31/2025.
• Charitable Contribution by Individuals – IRC Sec. 170. Prior to the Act,an individual’s charitable contribution was not required to exceed a floor before it became deductible.
  • The Act sets a floor equal to 0.50% of the individual’s adjusted gross income (their contribution base) for contributions made after 12/31/2025 – an otherwise deductible contribution will have to be reduced to the extent it exceeds this floor.
  • The Act also makes permanent the 60% ceiling for cash contributions to public charities (which would have expired after 2025)
  • The foregoing provisions are effective for taxable years beginning after 12/31/2025.
• Excess Business Loss – IRC Sec. 461(l). Effective for taxable years beginning after December 31, 2017, the TCJA added a provision that disallowed the excess business loss of a taxpayer other than a corporation. The disallowed excess business loss is treated as a net operating loss (‘‘NOL’’) for the taxable year for purposes of determining any NOL carryover to subsequent taxable years.
  • An excess business loss for the taxable year is the excess of aggregate deductions of the taxpayer attributable to trades or businesses of the taxpayer over the sum of aggregate gross income or gain attributable to trades or businesses of the taxpayer plus a threshold amount (are adjusted annually for inflation).
    • For the 2025 tax year, the threshold is $626,000 for joint filers.
  • This limitation was set to expire after 2025, but was extended to taxable years beginning before 2029 by the Inflation Reduction Act of 2022.[ix]
  • The Act makes the limitation permanent.
• Qualified Small Business Stock – IRC Sec. 1202. IRC 1202 allows individual investors to exclude 100% of the gain from the sale of stock in a domestic C corporation w/r/t which certain requirements are satisfied. The Act makes some long overdue changes to certain of these requirements.
  • The stock must have been acquired directly from the issuing corporation (original issuance).
  • At the time of issuance, the corporation must have been engaged in an active business, excluding certain service businesses.
  • Also at that time, the “aggregate gross assets” of the corporation must not have exceeded $50 million.
    • The Act increases this limitation to $75 million, subject to adjustment for inflation.
    • This is effective for stock issued after 7/4/2025.
  • The shareholder must have held the stock sold for more than 5 years. If the stock is sold before then, the shareholder loses the benefit.
    • The Act allows a 50% exclusion for gain recognized between 3 and 4 years; a 75% exclusion for gain recognized between 4 and 5 years;, and a 100% exclusion after 5 years.
  • The amount excludible by the selling shareholder is capped at the greater of (i) $10 million ($5 million for a married taxpayer filing separately), or (ii) 10 times the shareholder’s adjusted basis for the stock sold.
    • The Act increases this to $15 million (subject to adjustment for inflation), or 10 times the adjusted basis of the stock sold.
    • This is effective for tax years beginning after 7/4/2025.
  • The Act adjusts these amounts for inflation after 2026
• Partner-Partnership Transactions – IRC Sec. 707. If a partner engages in a transaction with a partnership other than in his capacity as a member of such partnership, the transaction will be considered as occurring between the partnership and one who is not a partner.
  • For example, if a partner performs services for a partnership or transfers property to a partnership, there is a related direct or indirect allocation and distribution to such partner, and the performance of such services (or such transfer) and the allocation and distribution, when viewed together, are properly characterized as a transaction occurring between the partnership and a partner acting other than in his capacity as a member of the partnership, then such allocation and distribution shall be treated as a transaction between the partnership and a non-partner.
  • As stated in the Code, this recharacterization is dependent upon the IRS’s issuing regulations that address the transaction – there are situation with respect to which such regulations have not yet been issued.
  • The Act eliminates this restriction, effective for transactions occurring after 7/4/2025, thereby allowing the IRS to recharacterize these when necessary without issuing regulations.

For those of us who follow the life cycles of federal tax bills, this last go-round was a doozy. It was full of drama, name-calling, irrational positions, principled stands, grandstanding, arm-twisting, behind-closed-doors-deal-making, stalling, self-imposed deadlines, etc. – you name it, it had it.

Now that the One Big Whatever is the law, all eyes are turning to the federal agency that is charged with implementing it – the IRS. Yep, the very same agency that has lost many of its most experienced people.

The fact that many of the provisions won’t be effective until 2026 may help.

Stay tuned.

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The opinions expressed herein are solely those of the author(s) and do not necessarily represent the views of the Firm.

[i] You can’t make this up, right?

In case you’re interested in reading the Act: https://www.congress.gov/bill/119th-congress/house-bill/1/text If that’s too much excitement for you, I know a great place to watch grass grow.

[ii] In the sense that the Act does not provide an expiration date. Of course, a later Congress and Administration may decide to roll back many of these rules. It’s a risk that arises from the fact that most tax legislation no longer relies upon winning bipartisan support. Sadly, the parties have even abandoned the charade of seeking bipartisan support.

[iii] Please. Apologies to the spirit of Henny Youngman.

[iv] For better or worse.

[v] The change is effective for tax years beginning after 12/31/2024.

[vi] A product of politics and compromise.

[vii] The House bill would have eliminated this deduction. The Senate Finance Committee proposed limiting its use.

[viii] “Duh, Lou.” I know.

[ix] P.L. 117-169.