The One Big Beautiful Bill Act (OBBBA), recently passed by Congress, introduces significant changes to the federal tax landscape for both individuals and businesses.
The final version of the OBBBA signed by President Trump on July 4 is approximately 870 pages and encompasses a very large number of provisions, many of which are very detailed or complex. For example, the OBBBA made permanent many of the tax provisions of the Tax Cuts and Jobs Act (TCJA) and included a wide array of additional legislation.
This alert summarizes the most impactful provisions included in the OBBBA and their expected effects for subsequent tax years beginning after Dec. 31, 2025.
Tax Impacts for Individuals
Individual Income Tax Rates and Brackets
- Extension of Lower Rates: The OBBBA permanently extends the lower individual income tax rates and thresholds originally set by the TCJA, which were scheduled to expire after 2025. This will result in continued lower tax bills for most taxpayers.
- Practically speaking, because the OBBBA extended the tax rates already in effect from the TCJA, the actual impact of this provision for most taxpayers will be minimal.
- Bracket Adjustments: Income thresholds for tax brackets were adjusted upwards, reducing the risk of bracket creep due to inflation. This will result in minor tax savings for many taxpayers.
Standard Deduction and Personal Exemptions
- Standard Deduction: The doubled standard deduction introduced by the TCJA was made permanent, with the inclusion of annual inflation adjustments through 2028. For 2026, the deduction for singles increases to $16,550 and for married couples to $33,100.
- Supplemental Deduction: An extra $1,000 for singles and $2,000 for married couples is added from 2025-2028.
- Personal Exemptions: The OBBBA permanently repeals personal exemptions, which were scheduled to return in 2026.
Child Tax Credit (CTC) and Other Family Benefits
- Child Tax Credit Expansion: The OBBBA accelerates the phase-in for large families, expands refundability, and indexes the credit to inflation, providing greater benefits to low- and middle-income families.
- The credit was increased to $2,200 and was made permanent, along with a $1,400 refundable credit and $500 dependent credit.
- All taxpayers claiming the CTC must have a valid social security number.
Tax Deductions for Tips and Overtime Pay
- Taxpayers earning tips or overtime pay may claim a deduction on their tax returns for this income annually through 2028.
- The OBBBA allows deductions of up to $25,000 for annual tip income and up to $12,500 for qualified overtime compensation, both subject to income-based phasedowns for taxpayers earning over certain thresholds.
Other Individual Provisions
- Additional Standard Deduction for Seniors: Taxpayers over 65 receive a temporary additional deduction from 2025 through 2028. The deduction is $6,000 for single taxpayers and $12,000 for married couples on top of the regular standard deduction and the existing extra deduction for age.
- State and Local Tax (SALT) deduction limit: The SALT deduction is set at $40,000, adjusted for inflation, from 2025 through 2029, before reverting to $10,000 in 2030. This increased deduction is also subject to income limitations.
- Elimination of Clean Energy Credits from Inflation Reduction Act (IRA): Several clean energy tax breaks included in the IRA are phased out or eliminated. Specifically, the $7,500 consumer tax credit for electric vehicles is eliminated for purchases made after Sept. 30, 2025.
Alternative Minimum Tax (AMT) and Other Provisions
- AMT Adjustments: The phaseout threshold for AMT exemption is increased, offering relief to more middle- and upper-middle-income taxpayers.
Tax Impacts for Businesses
The Return of 100% Bonus Depreciation
- Businesses can once again deduct the entire cost of qualified property in the year it is placed in service, rather than depreciating it over several years.
- Includes most tangible depreciable property with a recovery period of 20 years or less, as well as qualified improvement property.
- Applies to property acquired after Jan. 19, 2025, and placed in service after that date. There is a transitional election to use the pre-existing lower bonus percentages for property acquired before Jan. 19, 2025, but placed in service after that date.
- Unlike prior bonus depreciation rules, which were scheduled to phase down, the 100% expensing under the OBBBAA is permanent for qualifying property.
- Special Rule for Manufacturing Facilities: The OBBBAA also introduces a new 100% bonus depreciation for “Qualified Production Property” (QPP) used in manufacturing, production, or refining, with additional requirements and a longer eligibility window for certain assets.
Qualified Business Income Deduction (QBID)
- Section 199A Deduction: The 20% deduction for qualified business income is made permanent. The OBBBA also streamlines phase-in rules for higher-income taxpayers and introduces an inflation-adjusted minimum deduction.
- Deduction Rate Increase: Some proposals suggested increasing the deduction to 23%, but the OBBBA retained the 20% rate with more favorable calculation methods for high earners.
Business Interest and Loss Limitations (Section 163j)
- Interest Deduction: The calculation for deductible business interest expense is liberalized by excluding depreciation, amortization and depletion from the adjusted taxable income base, increasing allowable deductions.
- Reverts to its pre-2022 calculation, allowing for the inclusion of depreciation, amortization and depletion addbacks in adjusted taxable income.
- Excess Business Losses: The limitation on excess business losses for noncorporate taxpayers is made permanent and modified to be more favorable with inflation-indexed thresholds.
Research & Development (R&D) and Capital Investment
- R&D Expensing: Immediate expensing for R&D costs is restored for 2022 and 2023 with retroactive relief for businesses that previously had to capitalize such expenses.
- Businesses can now deduct unamortized domestic R&D costs from prior years entirely in 2025, or split them between 2025 and 2026 with small taxpayers having the option to amend prior returns.
Other Business Provisions
- Qualified Small Business Stock Exclusion: The exclusion is expanded, allowing greater tax-free gains for investments in qualifying small businesses.
- Employee Retention Credit Enforcement: Tighter enforcement and anti-fraud measures are implemented, offsetting some of the revenue loss from business tax cuts.
- Section 179 Expensing: The OBBBA also raises the Section 179 expensing limit to $2.5 million with phase-outs beginning at $4 million, adjusted for inflation.
Distributional Effects
- For Individuals: The largest after-tax income gains are seen at the top and bottom of the income spectrum. Households in the lowest quintile see modest increases, while the top 1% receive the largest average dollar benefit.
- For Businesses: Benefits are concentrated among pass-through entities and firms investing in R&D and capital equipment. Shareholders and high-income business owners stand to gain the most from permanent QBI deductions and expanded exclusions.
Key Takeaways
- Individuals: Most taxpayers will see continued lower tax rates, higher standard deductions, and expanded credits with the most significant dollar benefits accruing to high earners.
- Businesses: The OBBBA delivers permanent and expanded tax relief for pass-through businesses and incentivizes investment through enhanced deductions and expensing provisions.
- Planning: Taxpayers and businesses should review their tax positions in light of these changes, particularly regarding QBID eligibility, depreciation, R&D activities, and family credits.
For detailed modeling or to discuss how these changes may impact your specific situation, consult your tax practitioner or CPA.