Allgood Bookkeeping

Introduction

Several significant tax law changes took effect between 2024 and 2025 that impact U.S. small businesses and sole proprietors. New federal legislation – notably the One Big Beautiful Bill Act (OBBBA) signed in mid-2025 – introduced many updates to business deductions, credits, and reporting requirements. Additionally, routine IRS adjustments and policy changes (like inflation-indexed thresholds and expanded e-filing mandates) came into play. In Texas, recent state legislation substantially raised the franchise tax exemption threshold and eased filing obligations for small entities. This report organizes the key federal and Texas-specific tax updates, explaining what changed from 2024 to 2025 and what each change means in practical terms for small business owners and sole proprietors.

Federal Tax Updates for Small Businesses (2024–2025)

Enhanced Business Deductions and Expensing

• 100% Bonus Depreciation Restored: Starting in 2025, businesses can again immediately deduct 100% of the cost of qualifying new or used business property in the year it’s placed in service(landmarkcpas.com). (Without this change, bonus depreciation was only 40% for 2025 under prior law.) Practically, this boosts cash flow for small businesses making capital investments – for example, a sole proprietor who buys $50,000 of equipment in 2025 can write off the entire amount on that year’s taxes instead of depreciating it over several years.
• New 100% Deduction for Manufacturing Buildings: OBBBA created a special “qualified production property” deduction that allows 100% first-year depreciation for eligible nonresidential real property used in manufacturing (e.g. a new factory or production facility). To qualify, construction must begin after Jan 1, 2025 and before 2029, and the building must be placed in service in the U.S. (landmarkcpas.com). This incentivizes small manufacturers to expand or build facilities by providing an immediate write-off of building costs, rather than having to depreciate a new building over 39 years.
• Higher Section 179 Expensing Limits: The maximum amount of investments that can be immediately expensed under Section 179 was increased to $2.5 million for 2025, with a higher phase-out threshold at $4 million in total asset purchases (landmarkcpas.com). (Previously, the 2024 limit was about $1.16 million with phase-out starting ~$2.89 million after inflation adjustments.) These Section 179 amounts will index for inflation starting in 2026 (landmarkcpas.com). In practice, this expansion lets small businesses deduct more equipment and vehicle purchases upfront. A sole proprietor could buy up to $2.5M of equipment in 2025 and deduct it fully (so long as total purchases don’t exceed $4M), simplifying tax accounting for large purchases.
• Immediate Deduction of R&D Expenses: The 2025 law repealed the recent requirement to amortize research and experimentation (R&E) costs. Domestic R&D expenditures can once again be fully deducted in the year incurred (starting with 2025 expenses) (landmarkcpas.com). Furthermore, businesses are allowed a retroactive catch-up – they can elect to write off any remaining unamortized R&D costs from 2022–2024 on the 2025 return (landmarkcpas.com). This is a major relief for innovative small firms. Instead of spreading research costs over 5 years (as had been required starting in 2022), a tech startup or product developer can immediately deduct its qualifying research spending, reducing taxable income and freeing up cash for operations.
• Business Interest Deduction Relief: Beginning in 2025, the calculation of the limit on business interest expense (the 30% of income limit under IRC §163(j)) is loosened. The OBBBA law allows businesses to add back depreciation and amortization when computing adjusted taxable income for the interest limitation (landmarkcpas.com). In effect, the interest deduction limit reverts to a 30% of EBITDA basis instead of 30% of EBIT. This means capital-intensive small businesses can deduct more of their interest expense. For example, a manufacturing S-corp with heavy equipment depreciation will have a higher income threshold for interest deductions, making it less likely to be capped.

Pass-Through Income and Other Individual Deductions

• Qualified Business Income (QBI) Deduction Made Permanent: The valuable 20% deduction for pass-through business income (§199A, available to sole proprietors, partnerships, S-corps) was scheduled to expire after 2025, but the 2025 OBBBA permanently extended this deduction (rsmus.com). Small business owners can now count on the QBI deduction beyond 2025 for long-term tax planning, reducing taxable income by up to 20% each year. OBBBA also made technical tweaks: it expanded the income phase-out ranges for owners in specified service businesses (like consultants, accountants, etc.), giving a wider buffer before the deduction is reduced (rsmus.com). And it introduced a minimum deduction of $400 for anyone with at least a small amount of qualified business income – ensuring even very small side businesses get some benefit. In practical terms, more entrepreneurs at the margin will qualify for full or partial QBI write-offs, and even a freelancer with, say, $1,000 of business profit would get a $400 deduction minimum.
• “No Tax on Tips” Deduction (2025–2028): A temporary provision now allows employees and self-employed individuals in certain tipped service industries to deduct their tip income from 2025 through 2028. Workers who customarily receive gratuities (waitstaff, bartenders, hairstylists, ride-share drivers, etc.) can exclude up to $25,000 of tips from federal taxable income each year (up to $25k for single filers, $25k for joint filers as well). This deduction phases out for higher earners (no deduction if income exceeds $150k single / $300k joint) (ogletree.com). For a sole proprietor who receives tips – say a barber or taxi driver – this effectively makes a large portion of their tips tax-free, increasing their take-home pay. Small business owners with tipped employees should also be aware: while this is a deduction on the individual’s return, it encourages proper tip reporting and may necessitate new recordkeeping (see reporting section below).
• Overtime Pay Tax Deduction (2025–2028): Similarly, for 2025–2028 the IRS will allow a deduction for qualified overtime compensation earned by employees. Workers can deduct up to $12,500 (single) or $25,000 (joint) of overtime pay from income. The deduction only applies to the FLSA-required overtime premium (the “time-and-a-half” portion for hours over 40 per week) (ogletree.com). In practice, this rule is aimed at wage earners – for example, a non-exempt employee who works substantial overtime can exclude the extra pay from taxes up to the cap. Small businesses don’t get a direct tax break from this, but it could make it easier to ask employees to work overtime (since the employees keep more after-tax). Business owners should note the compliance angle: employers are supposed to report to employees the amount of qualified overtime pay to facilitate the deduction, though the IRS provided transition relief on that reporting for 2025 (discussed later).
• Standard Deduction and SALT Cap Increases: While not business-specific, owners filing individual returns should note a few personal tax updates in 2025 that can impact their overall tax planning. The large standard deductions from the 2017 tax law were made permanent and slightly increased for 2025 (e.g. $31,500 for joint filers in 2025) (hrblock.com). Additionally, the cap on state and local tax deductions (SALT) was raised – the $10,000 limit (per return) in effect through 2024 jumps to $40,000 cap going forward. (This higher cap especially benefits married joint filers in high-tax states, and will make itemizing more worthwhile for some; however, Texas has no state income tax, so Texas sole proprietors mainly deduct property or sales tax, which often stayed below the old cap.) There’s also a new $6,000 additional deduction for seniors 65+, substantially increasing the tax break for older business owners. Bottom line: many small business owners will see lower personal taxable income due to these changes – either via a bigger standard deduction or the ability to write off more SALT, which can indirectly reduce the tax on their business profits.

Tax Credit Changes and Extensions

• Paid Family and Medical Leave Credit – Now Permanent: The employer credit for providing paid family or medical leave, originally a temporary incentive, was made a permanent part of the tax code by the 2025 legislation (landmarkcpas.com). This credit allows eligible employers to claim a percentage of wages paid to employees on family/medical leave (subject to certain conditions). For small businesses that voluntarily offer paid maternity leave, for instance, this credit (generally 12.5% to 25% of the leave wages) can significantly offset the cost. With permanence, companies can confidently incorporate such leave programs into long-term benefits, knowing the credit will continue to reduce their taxes each year.
• Enhanced Credit for Employer-Provided Child Care: Beginning in 2026, the tax credit for employer-provided child care facilities or support will become much more generous. The credit rate increases from 25% to 40% of qualified child care expenditures (and even 50% for eligible small businesses), and the annual cap per employer jumps from $150,000 of expenses to $500,000 (or $600,000 for eligible small businesses). These amounts will be inflation-indexed after 2027. This means a small business that helps provide child care for employees – for example, by subsidizing a daycare or running a childcare facility – can get a tax credit up to $200k–$300k (40–50% of costs up to the higher limits). While the change takes effect in 2026, businesses may want to begin planning or investing in child care support to take advantage of the much larger credits.
• Energy and Clean Vehicle Incentives Phasing Out: Small businesses involved in clean energy projects or looking to purchase electric vehicles should be aware of upcoming expiration of certain credits enacted in recent years. OBBBA set sunset dates for several incentives. For example, the tax credit for commercial clean vehicles (electric or fuel cell vehicles) ends after September 30, 2025, and the credit for installing EV charging stations (alternative fuel refueling property) expires after June 30, 2026. Deductions for energy-efficient commercial building improvements and credits for energy-efficient new homes also terminate after mid-2026. The practical impact: if a sole proprietor was planning to buy an electric work van or install a solar array on their facility, they should act before the cutoff dates to secure the tax credits. After those dates, the incentive value will drop or vanish, so timing purchases or construction in 2024–2025 could yield substantial tax savings that won’t be available later.
• Other Credit Updates: The OBBBA and related 2025 tax changes also addressed various individual credits (for example, the Child Tax Credit was raised to $2,200 per child and the Credit for Other Dependents was made permanent). The Adoption Credit was enhanced to be partially refundable (up to $5,000). While these are personal credits, they may benefit small business owners with families. Additionally, existing business credits like the Work Opportunity Tax Credit (WOTC), which was already scheduled through 2025, continue to be available – and we may see legislative extension of WOTC and other general business credits in future bills. (No major changes to the small-business health insurance tax credit or retirement plan start-up credit occurred during 2024–25, though remember that beginning in 2023 the start-up retirement plan credit was significantly increased by prior legislation.)

Filing and Reporting Requirement Changes

• Mandatory E-Filing for 10+ Returns: The IRS dramatically lowered the threshold for required electronic filing of tax and information returns starting in 2024. Any business or organization that files 10 or more returns of any type in a year is now generally required to e-file (the old threshold was 250 returns of each type) (adp.com). This rule covers W-2s, 1099s, partnership and corporate tax returns, and many other forms (notably, it excludes a small number of forms like quarterly payroll returns from the 10-count). In effect, even very small businesses will need to file electronically if they have just a handful of employees or contractors. For example, if you issue 5 W-2s and 5 Form 1099-NECs, that’s 10 information returns – you must file them online via an IRS-approved system. Small employers should plan to use e-file services or software; paper filing of most business forms is no longer an option once you hit the 10-return limit.
• Higher 1099-NEC/1099-MISC Reporting Threshold (Effective 2026): Good news for those who pay independent contractors: Congress raised the de minimis reporting threshold for Form 1099. Beginning with payments in 2026, businesses won’t need to issue a 1099-NEC or 1099-MISC unless payments to the person total over $2,000 for the year (the current threshold through 2025 is $600) (littler.com). This new $2,000 threshold will be indexed for inflation from 2027 onward. Backup withholding requirements will likewise kick in only for payees over $2,000 who fail to furnish a taxpayer ID. This change will significantly reduce the volume of 1099s that small businesses have to prepare and mail out. For instance, if you hired a freelancer for a one-time $800 project in 2026, you would not need to send them a 1099 under the new law (though the income is still taxable to them). Businesses should still keep good records of all payments, but they can focus 1099 compliance efforts on contractors above the $2k annual threshold.
• Form 1099-K Threshold Reverted to $20k/200 Transactions: The reporting rules for third-party payment platforms (like PayPal, Venmo, Etsy, etc.) have been in flux. A 2021 law had dropped the Form 1099-K reporting threshold to a mere $600, but the IRS delayed implementing that in 2022–2024 due to confusion. Now, the 2025 OBBBA law permanently reversed that change and restored the original federal 1099-K thresholds (>$20,000 and >200 transactions), retroactive to 2022. In short, platforms only need to issue Form 1099-K to a payee if they processed over $20k and more than 200 business transactions for that person in the year. This is a relief for casual sellers and gig workers: small entrepreneurs will no longer receive a flurry of 1099-Ks for minor online sales. For example, an individual who made $2,000 from occasional eBay sales in 2024 or 2025 will not get a 1099-K under the reinstated threshold (whereas under the $600 rule they would have). Note, however, some states have their own lower 1099-K limits (as low as $600 in states like MA or MD), and all business income is still taxable even if no form is issued. Businesses using payment apps should continue to track their income – but they can expect far fewer IRS forms if their volume is modest.
• New Reporting for Digital Asset Transactions: Starting with tax year 2025, cryptocurrency exchanges and brokers will be required to report digital asset sales on a new Form 1099-DA. This stems from earlier legislation and IRS regulations that define crypto assets as “covered” securities for 1099-B/1099-DA purposes. The first 1099-DA forms (for 2025 activity) will be issued to taxpayers in early 2026. Small business owners who trade or accept cryptocurrency should be prepared for this reporting. For instance, if a sole proprietor accepts Bitcoin for payment and then sells it, the exchange might send a 1099-DA showing the sale proceeds. You’ll need to report any capital gains or losses on your tax return. The new form will make IRS compliance and matching easier, so ensure you document your crypto transactions.
• Employer Compliance – Tip and Overtime Reporting: With the introduction of the tip and overtime deductions discussed earlier, employers are technically required to report “qualified” tip amounts and overtime pay on employees’ W-2 forms (or in an annual statement) so that employees can claim the deductions. Recognizing the short timeline, the IRS granted transition relief for 2025 – employers will not be penalized if they don’t yet separately break out cash tips or overtime premium pay on 2025 W-2s. Nevertheless, businesses are encouraged to make this information available (e.g. via a payroll portal or in Box 14 of Form W-2. Practically, small businesses with tipped or overtime-paid staff should start adapting their payroll systems to track these items. Although 2025 is lenient, by 2026 employers may be expected to formally report, for example, the total cash tips an employee received (and their occupation) and the amount of FLSA overtime premium paid. This will help your employees take advantage of the new deductions without hassle. In the meantime, business owners should communicate with their staff that individuals will need to keep records of tips and overtime if they want to claim the tax break for 2025.

Texas-Specific Tax Updates (2024–2025)

No State Income Tax (Unchanged): Texas continues to have no state individual or corporate income tax, so federal tax changes like the QBI deduction and SALT cap mainly affect Texans only via their federal returns. However, Texas small businesses must consider state franchise tax obligations and local taxes.

Texas Franchise Tax Changes (Report Year 2024 and Beyond)

• “No Tax Due” Threshold Doubled: In mid-2023 Texas enacted Senate Bill 3, which raised the revenue threshold for owing franchise tax. Effective for 2024 franchise reports (covering tax year 2023) onward, a Texas business with annual total revenue of $2.47 million or less owes no franchise tax (comptroller.texas.gov). This is a substantial increase from the previous ~$1.23 million threshold in effect in 2022–2023. Practically, this change exempts a huge number of small and mid-sized businesses in Texas from paying the state franchise (margin) tax. For example, if your LLC’s gross revenue is $2 million, you now fall below the threshold and owe $0 in Texas franchise tax (whereas under the old limit, you would have owed tax on revenue above $1.23M). This reduction directly improves the bottom line for qualifying businesses.
• Elimination of Franchise Tax Filing for Small Businesses: Along with raising the exemption, Texas eliminated the need for “No Tax Due” filers to submit a franchise tax return at all. Previously, even if you owed $0 (by being under the threshold), you still had to file an annual No Tax Due Report. For report year 2024 and later, if your revenue is at or below $2.47M, you are not required to file the franchise tax return (No Tax Due report) anymore (forvismazars.us). This simplifies life for small businesses – it removes a paperwork burden. However, note that Texas still requires those entities to file an informational report: you must submit either a Public Information Report (PIR) or Ownership Information Report each year. The PIR is essentially an update of your company’s officers, address, and other public info. So, a Texas LLC under $2.47M revenue in 2024 will not file form 05-158 (No Tax Due), but it must file form 05-102 (PIR) by May 15. Failing to file the PIR can lead to forfeiture of rights or penalties, even though no tax is due. In short: far fewer Texas small businesses will owe franchise tax or need to do the complex calculations, but they should not ignore the PIR filing requirement to stay in good standing.
• Franchise Tax Rates and Deductions: The franchise tax rates in Texas remain 0.75% of taxable margin for most businesses (and 0.375% for qualifying wholesalers and retailers). These rates did not change for 2024–2025. However, the compensation deduction limit (an amount used in one method of computing taxable margin) was increased to $450,000 per person for report years 2024–25 (up from $400k). The EZ computation option (a simplified tax calculation available for those under $20 million revenue) continues to have a $20 million revenue cap and uses a 0.331% tax rate. For most small businesses under $2.47M revenue, these details won’t matter since no tax is due. But if you slightly exceed $2.47M and must pay franchise tax, you can still use these deductions and possibly the EZ form if under $20M. Texas lawmakers have indicated a desire to reduce or eliminate the franchise tax further in the future, but as of 2025, it’s still in effect above the threshold.

Other Texas Tax Notes

• Texas Sales Tax and Local Taxes: There were no major changes in Texas sales and use tax rates from 2024 to 2025. The state sales tax remains 6.25%, with local jurisdictions able to add up to 2% (for a maximum of 8.25% combined). Remote sellers and marketplace platforms are still required to collect Texas sales tax if they exceed the economic nexus threshold (which remains $500,000 in Texas annual sales) – this has been in place for a few years and did not change in 2024. Texas property taxes saw significant reforms in 2023 (especially for homeowners via increased homestead exemptions), but those do not directly change business tax filing obligations. Businesses should continue to file property tax renditions for tangible personal property with county appraisal districts annually (no new changes to that process).
• Local Business Filing Obligations: Texas generally does not impose local income taxes or separate city business taxes. One new federal compliance requirement worth noting: the Corporate Transparency Act requires many small businesses (corporations, LLCs, etc.) to file a beneficial ownership information report with FinCEN in 2024 (if existing) or upon formation for new entities. While not a tax filing, this is a new legal obligation in 2024 that Texas business owners should be aware of. Ensure your entity submits this report by the due date (end of 2024 for existing companies) to avoid penalties. (Again, this is a federal anti-money-laundering measure, not a tax change, but it coincides with the time frame and affects small business compliance.)

Implications and Planning Considerations for Small Business Owners

The 2024–2025 tax changes bring a mix of tax-saving opportunities and new compliance duties. Here are key takeaways for planning and financial management:

• Maximize Deductions and Credits: Take advantage of the enhanced deductions – for instance, plan major equipment purchases in 2025 to utilize the restored 100% bonus depreciation or increased Section 179 expensing. If your business involves R&D, budget those expenses knowing they’re fully deductible again (and consider amending or electing relief for 2022–24 amortized costs). Similarly, explore available credits: if you offer paid family leave, continue doing so and claim the now-permanent credit; if you foresee a need for employee child care assistance, ramp up before 2026 to leverage the expanded credit. Keep an eye on expiring energy credits and try to fast-track green investments before the deadlines to capture those incentives.
• Revisit Tax Structure and Income Strategy: The permanence of the 20% QBI deduction provides certainty – if you operate as a sole proprietor or other pass-through, you can now factor that deduction into long-term plans. This might influence decisions like whether to remain a pass-through vs. convert to C-corp, how much salary to draw vs. distributions (for S-corps), etc. The expanded QBI phase-out ranges mean some higher-income professionals may newly qualify for the deduction – worth recalculating if you were previously just above the limit. Also, the new tip and overtime deductions, while applying to individuals, could indirectly affect your business: they might help with employee retention or willingness to work extra hours, so educate your staff about these benefits. If you’re self-employed in a service industry with tips, consider claiming the tip deduction to lower your own tax – ensure you keep logs of tips received (especially cash tips) to substantiate the deduction (mcglinchey.com).
• Ensure Compliance with Reporting Changes: The IRS is modernizing and expecting more electronic data. Plan to e-file all your W-2s, 1099s, and business returns if you meet the low 10-return threshold – this may mean using an accounting software or payroll service that supports e-filing. Getting set up with IRS FIRE or IRIS systems (for information returns) in advance is wise for 2024 filings. Update your vendor onboarding processes to obtain W-9s, but note that you won’t need to send a 1099-NEC for one-off small payments under $2,000 starting in 2026 – this reduces paperwork, but continue to track all payments since the $2,000 threshold could be reached with multiple invoices. For the gig economy: if you use platforms like PayPal for business, be aware you likely won’t receive Form 1099-K unless you have high volume. However, report all your income regardless – just because the IRS doesn’t get a form for $1,000 of payments doesn’t mean it’s not taxable. With the return to $20k/200 threshold on 1099-K, you might need to rely on your own records more for lower amounts, so keep thorough sales records. Crypto-using businesses should similarly tighten recordkeeping in anticipation of Form 1099-DA – reconcile your blockchain transactions with invoices and be ready to report gains/losses.
• Adapt Payroll and Accounting Systems: If you have employees, especially in hospitality or trades, update how you track tips and overtime. Even though the IRS gave a one-year grace period, it’s expected that W-2 forms will soon have new boxes for “qualified tips” and “qualified overtime”. Work with your payroll provider to capture that data. In the interim, communicate with employees on how they can use existing info (like W-2 Box 7 for Social Security tips, and payroll stubs for OT hours) to claim the deductions. There may also be state-specific considerations – e.g., some states could possibly decouple from federal tip/OT deductions (Texas has no income tax so not an issue there). Also, consider the cash flow effect of these deductions on your employees: some may adjust their withholding or quarterly estimates down since a chunk of income won’t be taxed – you might get questions from staff on this, so be prepared to assist or direct them to IRS guidance.
• Texas Businesses – Simplify State Compliance: If your Texas business’s revenue is under $2.47 million, budget time to file the annual Public Information Report by May 15 each year, but enjoy the fact that you no longer have to calculate or pay franchise tax. This is a good opportunity to verify that your reported NAICS code and other company info with the Texas Comptroller is accurate (since that’s essentially all you file now). If your revenue fluctuates around the threshold, monitor it: exceeding $2.47M even slightly would trigger tax liability, so consider tax planning strategies to legally defer or exclude income (or accelerate deductible expenses) to remain under the limit if feasible. And if you’re comfortably over the threshold, nothing major changed aside from a higher deduction limit – continue to file as before, or consider the EZ computation if under $20M for simplicity. Lastly, maintain good standing by not ignoring notices – some companies mistakenly think they have “no filing at all” now; remember, the PIR is still required. Failing to file it can lead to your entity’s privileges being forfeited (administratively damaging your ability to do business).

Conclusion: In summary, the period from 2024 into 2025 brought meaningful tax relief to small businesses – from restored full expensing of assets to permanence of the QBI deduction – as well as administrative relief like higher 1099 thresholds and Texas’s franchise tax cut. At the same time, the IRS is stepping up reporting precision with new forms and e-filing mandates. Small business owners and sole proprietors should work closely with their tax professionals to capitalize on the new deductions/credits and update their compliance processes. By planning purchases and compensation strategically, keeping accurate records, and staying informed on deadlines, entrepreneurs can minimize their tax burden and avoid pitfalls. The net effect of these changes is largely positive for the small business community, providing opportunities to reinvest tax savings into growth while reducing some red tape – but diligence is required to ensure no detail is overlooked in this evolving tax landscape.

Sources: The information above is based on the latest IRS releases, federal law changes, and Texas Comptroller guidance, including the July 2025 OBBBA tax reform provisions, IRS fact sheets and notices, and Texas tax updates from official state publications. All references have been cited inline for further reading and verification.