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What the One Big Beautiful Bill Act Means for Taxpayers, Businesses

By Contributor
Accounting and Tax Planning Special Coverage

A Sweeping Tax Overhaul

By Tim Provost, CPA

In a dramatic display of legislative determination, the U.S. Congress passed, and President Trump signed into law, a sweeping tax reform package on July 4. Though stripped of its campaign-era title for procedural reasons, the One Big Beautiful Bill Act represents one of the most comprehensive overhauls of the U.S. tax code since the Tax Cuts and Jobs Act (TCJA) of 2017.

Packed with both solidified extensions of soon-to-expire provisions and a host of new reforms aimed at individuals and businesses, the legislation reshapes the tax landscape for years to come. It also dramatically curtails green energy tax incentives to offset the substantial cost of these reforms, estimated to exceed $5 trillion over a decade.

 

Making TCJA Permanent

At its core, the bill cements many key provisions of the TCJA that were set to expire at the end of 2025. These include the maintenance of reduced individual income tax brackets (10% to 37%), the higher standard deduction, the elimination of personal exemptions, and the expanded alternative minimum tax thresholds.

The final legislation increases the standard deduction beginning in 2025, setting it at $31,500 for joint filers, $23,625 for heads of household, and $15,750 for single or married individuals filing separately. These figures will continue to be indexed for inflation.

The child tax credit is permanently increased to $2,200 per child, with inflation adjustments and a refundable portion of $1,700 for 2025.

The act also preserves the expanded estate tax exemption at $15 million (indexed for inflation) and makes permanent several itemized deduction limits and changes to the mortgage interest deduction, which will now include mortgage insurance premiums.

Tim Provost“In a move that drastically shifts federal energy policy, the act eliminates or shortens a range of green energy tax credits introduced in the Inflation Reduction Act.”

Tax Relief for Workers and Families

Among the most headline-grabbing provisions are new deductions designed to benefit middle-income earners in specific professions:

• A new tax deduction of up to $25,000 is available for tip income received in specific occupations (excluding highly compensated employees). The deduction begins to phase out at $150,000 of modified adjusted gross income for individuals and $300,000 for joint filers. This deduction is available through 2028.

• Overtime compensation is now partially shielded from taxation, with a deduction capped at $12,500 per taxpayer and income limits similar to those for tips.

• Seniors age 65 and over are eligible for a bonus standard deduction of $6,000 through 2028, subject to income phaseouts.

 

SALT Cap Expansion, Expiration

Long a point of contention, the state and local tax (SALT) deduction cap sees a temporary reprieve. The cap is lifted from $10,000 to $40,000 in 2025, increasing slightly each year through 2029, before reverting to the original limit in 2030. However, phaseouts apply for taxpayers with high incomes, starting at a modified adjusted gross income of $500,000.

 

Business Provisions Made Permanent

For businesses, the bill makes several long-advocated provisions permanent:

• It reinstates 100% bonus depreciation for qualified property placed in service after Jan. 19, 2025 and makes it permanent. The bill further includes expanded eligibility for manufacturing property and broader asset classes.

• The bill permanently reinstates full expensing of domestic research and experimental (R&E) costs from 2025. Small business taxpayers with average annual gross receipts of $31 million or less may even retroactively apply this change back to 2022 through amended returns. Taxpayers who previously capitalized R&E costs after Dec. 31, 2021, and before Jan. 1, 2025, may elect to accelerate the remaining deductions for such expenditures over a one-year period or ratably over a two-year period.

• Though the House bill proposed increasing the qualified business income (Sec. 199A) deduction to 23%, the final law keeps it at 20% while expanding phase-out thresholds. The deduction is now permanent.

• The maximum small business expensing (Sec. 179) deduction is increased to $2.5 million, with a phase-out beginning at $4 million of property acquisition.

 

IRS Reform and International Tax Tweaks

The Act terminates the IRS Direct File program, reallocating funds to study a public-private partnership model for free tax filing solutions.

International tax changes include renaming and modifying deductions:

• FDII and GILTI are renamed to FDDEI (foreign-derived deduction eligible income) and NCTI (net CFC tested income), respectively, with corresponding deduction percentages reduced slightly from current levels.

• The base erosion and anti-abuse tax rate is stabilized at 10.5% instead of the scheduled increase to 12.5%.

“Businesses, especially those involved in capital investment and research, will benefit from enhanced expensing rules and the permanence of deductions that had previously been temporary.”

Green Energy Rollbacks: A Major Offset

In a move that drastically shifts federal energy policy, the act eliminates or shortens a range of green energy tax credits introduced in the Inflation Reduction Act.

Clean vehicle credits, residential clean energy credits, alternative fuel infrastructure credits, and energy-efficient home credits are terminated after Dec. 31, 2025 (or slightly later in the Senate compromise).

Notably, the New Markets Tax Credit, supporting low-income investment, was preserved and even made permanent, a lone holdover in an otherwise sweeping repeal of energy-related incentives.

 

Final Thoughts

The One Big Beautiful Bill Act legislation brings a significant degree of clarity and continuity to the federal tax code. By making many provisions of the TCJA permanent and introducing new deductions targeted at workers and families, the law offers both simplification and expanded relief for a broad spectrum of taxpayers.

At the same time, the reduction or elimination of several green energy incentives reflects a reprioritization of fiscal resources aimed at offsetting the cost of these reforms. Businesses, especially those involved in capital investment and research, will benefit from enhanced expensing rules and the permanence of deductions that had previously been temporary.

As the new provisions take effect, taxpayers, advisors, and financial professionals will need to evaluate how the changes impact planning strategies and compliance obligations in both the near and long terms. Continued guidance from the IRS and Treasury will be critical to implementing the new rules effectively and ensuring that both individuals and organizations can make informed decisions under the updated tax framework.

 

Tim Provost, CPA is a partner at MP CPAs. He has more than 15 years of practice in personal and business taxation at both the federal and state levels, as well as experience working with international affiliates on foreign tax issues. He provides consulting and tax solutions to a diverse group of clients, including individuals, partnerships, limited liability companies, corporations, and trusts. Provost specializes in working with high-net-worth clients and private equity firms and their owners. He is also a certified valuation analyst who works with clients on the value of a particular business for the purpose of acquisitions, sales, and gift and estate tax purposes, to name a few.

Taxpayers Given Relief with Retirement-plan Loans, Distributions

By Contributor
Accounting and Tax Planning Special Coverage

By All Accounts

By Jim Moran CPA, MST

Jim Moran CPA, MST

Jim Moran CPA, MST

The Coronavirus Aid, Relief, and Economic Security (CARES) Act has provided taxpayers affected by COVID-19 with some relief in the area of retirement-plan distributions and loans.

A coronavirus-related distribution is allowed by a qualified individual from an eligible retirement plan made from Jan. 1, 2020 to December 31, 2020, up to an aggregate amount of $100,000. A qualified individual must meet one of these criteria:

• Diagnosed with the virus SARS-CoV-2 or with the coronavirus disease 2019 (COVID-19) by a test approved by the Centers of Disease Control and Prevention (CDC);

• Spouse or dependent is diagnosed with SARS-CoV-2 or COVID-19 by a test approved by the CDC;

• Experienced adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, or being unable to work due to lack of childcare due to SARS-CoV-2 or COVID-19; or

• Experienced adverse financial consequences as a result of closing or reducing hours of a business that is owned or operated by the individual due to the SARS-CoV-2 or COVID-19.

An ‘eligible retirement plan’ is defined as the type of plan that is eligible to accept tax-free rollovers. It includes 401(k) plans, 403(b) plans, governmental 457 plans, and IRAs (including SEP-IRAs and SIMPLE-IRAs). It does not include non-governmental 457(b) plans. The $100,000 withdrawal limit applies in aggregate to all plans maintained by the taxpayers.

For individuals who are under age 59½, the act waives the 10% early-withdrawal penalty tax. Although the 10% penalty will be waived, any potential income taxes associated with the retirement plan or IRA withdrawal will still be assessed. The act also suspends the 20% tax-withholding requirements that may apply to an early distribution from a 401(k) or other workplace retirement plan.

“Your tax liability owed to the IRS at the end of the year may be higher than expected if you choose not to withhold the suggested 20%.”

Just keep in mind, your tax liability owed to the IRS at the end of the year may be higher than expected if you choose not to withhold the suggested 20%.

When it comes to paying the resulting tax liability incurred due to the coronavirus-related distributions, the CARES Act allows you a couple of options: spread the taxes owed over three years, or pay the taxes owed on your 2020 tax return if your income (and, thus, your tax rate) is much lower in that year.

Taxpayers may also repay the coronavirus-related distributions to an eligible retirement plan as long as the repayment is done within three years after the date the distribution was received. If the taxpayer does repay the coronavirus-related distribution in the three-year time period, it will be treated as a direct trustee-to-trustee transfer so there will be no federal tax on the distribution. This may mean an amended return will have to be filed to claim a refund attributable to the tax that was paid on the distribution amount that was included in income for those tax years.

Retirement-plan Loans

Loans from eligible retirement plans up to $100,000 to a qualified individual are available for any loans taken out during the six-month period from March 27, 2020 to Sept. 23, 2020. This is up from the previously allowed amount of $50,000.

Participants must repay standard retirement-account loans within five years. The CARES Act allows borrowers to forgo repayment during 2020. The five-year repayment clock begins in 2021. The loan will, however, continue to accrue interest during 2020.

If you have an existing loan outstanding from a qualified individual plan on or after March 27, 2020, and any repayment on the loan is due from March 27, 2020 to Dec. 31, 2020, the due date for any loan repayments are delayed for up to one year.

Employers may amend their plans for the above hardship provisions to apply no later than the last day of the plan year that begins on or after Jan. 1, 2022 (Dec. 31, 2022 for a calendar-year-end plan). An additional two-year window is allowed for governmental plans; however, IRS Notice 2020-51 clarifies that employers can choose whether to implement these coronavirus-related distribution and loan rules, and notes that qualified individuals can claim the tax benefits of coronavirus-related distribution rules even if plan provisions are not yet amended.

Administrators can rely on an individual’s certification that the individual is a qualified individual (and provides a sample certification), but also notes that an individual must actually be a qualified individual in order to obtain favorable tax treatment. IRS Notice 2020-50 provides employers a safe-harbor procedure for implementing the suspension of loan repayments otherwise due through the end of 2020, but notes there may be other reasonable ways to administer these rules.

Please note that the loan provisions apply only to qualified plans such as 401(k), 403(b), and governmental 457 plans; loans may not be taken from IRAs.

Each retirement plan’s rules and requirements supersede the CARES Act. In addition, it is important to remember that not all retirement-plan sponsors allow loans. Before taking out any loan, it is important to check that your employer’s plan adopts these provisions.

Suspension of RMDs

The CARES Act has suspended required minimum distributions (RMDs) for 2020. Individuals over age 70½ (for those born prior to July 1, 1949) or 72 (for those born after July 1, 1949) were required to take a minimum distribution from their tax-deferred retirement accounts.

Most non-spousal heirs who inherited tax-deferred accounts were also required to take an annual RMD. Under the CARES Act, RMDs from qualified employer retirement plans such as 401(k), 403(b), and 457 plans, will be waived. Even those individuals not affected by the coronavirus can waive the RMDs.

For individuals who have already taken their 2020 RMD, the CARES Act allows you to put it back into your retirement account. IRS Notice 2020-51 qualifies the distribution as an eligible rollover distribution if repaid in full by Aug. 31, 2020.

Jim Moran is a tax manager at Melanson, advising clients on individual and corporate tax matters; [email protected]