Huddleston Tax CPAs | Accounting Firm In Seattle

Home » Blog » The Tax Cuts & Jobs Act for Small Businesses in 2025

By

It’s crucial for small business owners in 2025 to understand the lasting impacts and any subsequent updates to the Tax Cuts and Jobs Act (TCJA), which was enacted in late 2017 and significantly altered the tax landscape. While the original article focused on the immediate effects for the 2018 tax year, let’s bring this information up to date for the current tax year.

Key Changes from the TCJA Still Impacting Small Businesses in 2025:

Complexity: The QBI deduction can be complex, especially for higher-income earners, and often requires careful planning and calculation.

  • Standard Deduction Increases: The TCJA significantly increased the standard deduction. For the 2025 tax year (estimated), these amounts are projected to be:
    • Married Filing Jointly: $30,000 (This is an estimate and could slightly change)
    • Single: $15,000 (This is an estimate and could slightly change)
    • These higher standard deductions continue to mean that fewer taxpayers, including small business owners, find it beneficial to itemize deductions. The need to “hoard receipts” for numerous small deductions has lessened for many.
  • Elimination of Personal Exemptions: The TCJA eliminated personal exemptions. This change partially offset the increase in the standard deduction for some larger families.
  • Corporate Tax Rate Reduction: The corporate tax rate for C corporations was permanently reduced from 35% to 21%. This primarily benefits larger, incorporated businesses.
  • Qualified Business Income (QBI) Deduction (Section 199A): This remains a significant provision for many small business owners operating as pass-through entities (sole proprietorships, partnerships, LLCs taxed as partnerships, and S corporations). It allows eligible taxpayers to deduct up to 20% of their qualified business income (QBI), plus 20% of qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income.
    • Income Thresholds: For the QBI deduction in 2025 (likely based on inflation adjustments from 2018), the full deduction is generally available for taxpayers with taxable income below certain thresholds. For 2024, these thresholds were $364,200 for those married filing jointly and $182,100 for single filers. These thresholds are expected to be higher for 2025 due to inflation adjustments.
    • Phase-Out Range: For taxpayers with income above these thresholds, the QBI deduction may be limited based on factors like the taxpayer’s taxable income, the amount of W-2 wages paid by the business, and the unadjusted basis of certain qualified property. The phase-out ranges for 2024 started at $364,200 and ended at $464,200 for joint filers, and started at $182,100 and ended at $282,100 for single filers. These will also likely be adjusted for 2025.
    • Complexity: The QBI deduction can be complex, especially for higher-income earners, and often requires careful planning and calculation.

Updates and Considerations for Specific Deductions in 2025:

  • Dental and Medical Expenses: The threshold for deducting out-of-pocket medical expenses exceeding a percentage of your Adjusted Gross Income (AGI) was temporarily lowered to 7.5% for tax years 2017 through 2020. This threshold has since returned to 7.5% permanently. So, for your 2025 tax return, you can deduct qualified medical expenses exceeding 7.5% of your AGI if you itemize.
  • Losses Due to Casualty or Theft: The rules regarding deducting casualty and theft losses have changed. For tax years 2018 through 2025, the deduction for personal casualty and theft losses is generally limited to those attributable to a federally declared disaster. The 10% of AGI threshold still applies to these deductible losses.
  • Charitable Giving: The TCJA did increase the AGI limit for cash contributions to public charities from 50% to 60%. This provision is still in effect for 2025. The standard deduction increase still means fewer taxpayers may itemize to claim these deductions.
  • Home Mortgage Interest: The TCJA reduced the limit on deductible home mortgage interest for new mortgages taken out after December 15, 2017, to $750,000 (or $375,000 if married filing separately). The rules regarding the use of home equity loan proceeds for building or improving a home (and not personal expenses) for interest to be deductible generally remain, subject to the overall $750,000 limit.
  • State and Local Taxes (SALT): The TCJA imposed a $10,000 annual limit on the total deduction for state and local property taxes, income taxes (or sales taxes in lieu of income taxes), and personal property taxes. This cap remains in effect for 2025 and continues to disproportionately affect taxpayers in high-tax states like New York, California, and — of course — Washington.

The $10,000 annual limit on the total deduction for state and local taxes (SALT) imposed by the Tax Cuts and Jobs Act (TCJA) does impact taxpayers in Washington state.

Here’s why:

  • Washington has state and local taxes: While Washington state does not have a state income tax, it does have:
    • State Property Taxes: Homeowners and business owners in Washington pay state property taxes.
    • Local Property Taxes: Counties and municipalities in Washington also levy property taxes.
    • Sales Tax: Washington has a state sales tax, and local jurisdictions can also impose their own sales taxes.
    • Personal Property Taxes: Depending on the type of property (e.g., certain business equipment, boats, airplanes), personal property taxes may apply at the local level.
  • The $10,000 Cap is on the Total: The $10,000 limit applies to the combined total of all these state and local taxes you pay, whether they are property taxes, income taxes (even though Washington doesn’t have state income tax, if you have income tax from another state), or sales taxes (if you elect to deduct sales tax instead of income tax).

How it impacts Washington residents:

  • Homeowners: Many homeowners in Washington, particularly in areas with higher property values and local sales taxes, pay more than $10,000 annually in combined state and local property taxes and sales taxes. The SALT cap limits their ability to deduct the full amount of these taxes on their federal income tax return.
  • Business Owners: Businesses in Washington that pay significant state and local property taxes and sales taxes will also be affected by this cap on their individual income tax returns (if they are pass-through entities).
  • No State Income Tax Advantage for SALT: While not having a state income tax might seem like an advantage, Washington residents are still subject to the cap based on their property taxes and sales taxes. In some cases, residents of states with lower property taxes but a state income tax might see a similar impact from the $10,000 limit.

In summary, even though Washington doesn’t have a state income tax, its residents are still subject to the $10,000 SALT deduction cap due to their state and local property taxes and sales taxes. This cap can reduce the federal tax benefit of these local taxes for many Washington taxpayers, especially those with higher property tax bills or significant sales tax expenditures.

How Small Businesses Can Still Save Money in 2025:

The advice provided in the original article remains relevant, although the specific tax landscape has evolved:

  • Strategic Use of Independent Contractors and Temporary Employees: For many small businesses, especially startups, carefully considering staffing needs and utilizing independent contractors or temporary employees when full-time hires aren’t necessary can still help manage costs related to benefits, payroll taxes, and other employment-related expenses.
  • Bartering and Conserving Cash Flow: Prioritizing cash conservation remains crucial for small business growth. Bartering for goods and services when possible can help reduce cash outlays. Diligently monitoring cash flow and avoiding unnecessary expenses are essential practices.
  • Seeking Expert Tax Advice: Given the ongoing complexity of tax laws, including the nuances of the QBI deduction and local tax regulations, it is more important than ever for small business owners to consult with tax advisors in 2025. A knowledgeable advisor can help you:
    • Understand how the TCJA and any subsequent changes specifically impact your business.
    • Determine your eligibility for the QBI deduction and navigate its complexities.
    • Identify all other applicable deductions and credits.
    • Develop effective tax planning strategies to minimize your tax liability.
    • Ensure compliance with all federal, state, and local tax obligations.
  • Investing in Technology and Efficiency: Utilizing technology to streamline operations, automate tasks, and improve efficiency can lead to cost savings in the long run.
  • Careful Management of Business Expenses: Regularly review all business expenses and identify areas where costs can be reduced without negatively impacting operations.

In Conclusion for 2025:

While the Tax Cuts and Jobs Act brought significant changes that continue to affect small businesses, the landscape has matured since 2018. Small business owners in 2025 need to be aware of the ongoing impact of provisions like the increased standard deduction, the QBI deduction, and the limitations on certain itemized deductions like the SALT cap. Proactive tax planning, diligent record-keeping, and seeking professional tax advice are crucial for navigating the current tax environment and maximizing savings for your small business.

Photo by Dan Burton on Unsplash