Key Tax Reforms for Pass-Through Businesses in 2025

What You Need to Know:

In 2025, significant tax reforms have been enacted in the United States, particularly affecting pass-through businesses. These changes aim to provide tax relief to small and medium-sized enterprises (SMEs) and address disparities between pass-through entities and C corporations. This blog post delves into the latest laws and codes impacting pass-through business deductions, offering insights into their implications and providing resources for further understanding.

What Is a Pass-Through Entity?

A pass-through entity is a business structure where profits and losses are passed directly to the owners’ personal tax returns, avoiding the double taxation faced by C corporations. Common pass-through entities include:

Sole Proprietorships
Partnerships
Limited Liability Companies (LLCs)
S Corporations

These entities benefit from various tax deductions and credits, which have been updated for the 2025 tax year.

1. Extension and Enhancement of the Pass-Through Deduction

The Tax Cuts and Jobs Act (TCJA) introduced a 20% deduction for qualified business income (QBI) from pass-through entities such as sole proprietorships, partnerships, and S corporations. This provision was set to expire at the end of 2025. However, recent legislation has extended this deduction and increased it to 23%, aiming to provide continued tax relief to pass-through business owners. ICSC+1U.S. Chamber of Commerce+1 U.S. Chamber of Commerce+1JD Supra+1

For high-income earners, the deduction is subject to limitations based on the amount of wages paid to employees and the value of qualified property owned by the business. These thresholds ensure that the deduction primarily benefits small and medium-sized businesses. Bipartisan Policy Center+1U.S. Chamber of Commerce+1

The QBI deduction allows eligible pass-through business owners to deduct up to 20% of their qualified business income. For 2025:

Thresholds: The deduction is available if your taxable income before the QBI deduction is less than or equal to $383,900 for married filing jointly and $191,950 for other filers.
Limitations: The deduction may be limited based on W-2 wages paid and the unadjusted basis of qualified property.

For detailed instructions, refer to the IRS Form 8995 Instructions: IRS Form 8995 Instructions

Extension and Expansion of the QBI Deduction (§199A)

The 20% QBI deduction, originally set to expire after tax year 2025, has been:

Extended through 2035,
Increased to 23% for qualified taxpayers earning below $400,000 (single) or $500,000 (married filing jointly),
Adjusted for inflation starting in 2026.

Important Considerations:

The deduction does not apply to investment income (capital gains, dividends).
Specified Service Trades or Businesses (SSTBs) — such as law, accounting, and health — remain subject to income phaseouts.
High earners face wage and capital limitations, linking deduction eligibility to employee wages paid and tangible property held.

Resource:
Bipartisan Policy Center: Pass-Through Deduction Overview

2. State and Local Tax (SALT) Deduction Cap Adjustments

The SALT deduction cap, which limits the amount of state and local taxes that can be deducted, has been a point of contention, particularly for residents in high-tax states. Recent proposals suggest raising the SALT deduction cap to $40,000 for middle- to high-income earners in 2025, with gradual increases over the next decade. This adjustment aims to provide relief to taxpayers affected by the cap. The Washington Post+3CBIA+3MarketWatch+3 The Washington Post+1MarketWatch+1

The IRS provides detailed information on the State and Local Tax (SALT) deduction in IRS Topic No. 503. This resource outlines the types of taxes that qualify for the deduction, the limitations on the amount you can deduct, and guidance on how to claim the deduction when itemizing your taxes. https://www.irs.gov/taxtopics/tc503?utm_source=chatgpt.com

You can access this information directly from the IRS website here: IRS

As of the 2025 tax year, the SALT deduction remains capped at $10,000 for single filers and married individuals filing jointly, or $5,000 for married individuals filing separately. This cap applies to the total of state and local income, sales, and property taxes you pay. It’s important to note that this cap is set to expire at the end of 2025 unless Congress enacts new legislation to extend or modify it. https://www.irs.gov/credits-deductions/individuals/use-the-sales-tax-deduction-calculator?utm_source=chatgpt.com

Adjusted State and Local Tax (SALT) Deduction Caps

Originally capped at $10,000 under the TCJA, the SALT deduction has long been a point of controversy, particularly for residents of high-tax states like New York and California.

2025 Reforms:

The SALT cap is raised to $40,000 for joint filers and $20,000 for individuals,
Indexed for inflation through 2030,
Provides relief to pass-through owners in states with high property or income taxes.

Resource:
Washington Post: 2025 Individual Tax Changes

3. Bonus Depreciation and Section 179 Deduction Updates

In 2025, the bonus depreciation rate has been set at 40%, allowing businesses to immediately deduct a significant portion of the cost of qualifying property. Additionally, the Section 179 deduction limit has been increased to $1,250,000, with a phase-out threshold of $3,130,000. These changes encourage investment in business assets and provide immediate tax relief. Tax Extension+1huddlebc.com+1 huddlebc.com

Section 179 allows businesses to expense the full purchase price of qualifying equipment and software purchased during the tax year. For 2025:

Deduction Limit: The maximum deduction is $1,250,000.
Phase-Out Threshold: The deduction begins to phase out dollar-for-dollar after $3,130,000 in purchases.

For detailed information, refer to the IRS Publication 946: IRS Publication 946

Bonus Depreciation and Section 179 Expansion

To incentivize business investment, the government has revised accelerated depreciation rules:

Bonus Depreciation is now set at 40% in 2025 (phased down from 100% post-2022),
Section 179 Deduction raised to $1.25 million, with a phase-out threshold at $3.13 million,
Expanded eligibility for used property and leasehold improvements.

These updates are especially beneficial to small manufacturers, tech startups, and real estate investors using LLC or partnership structures.

4. Research and Development (R&D) Expense Deduction Reforms

Starting in 2025, businesses can fully deduct R&D expenses in the year they are incurred, reversing a previous requirement to amortize these costs over five years. This reform aims to incentivize innovation and investment in research and development. Tax Extension

Bonus depreciation allows businesses to depreciate a significant portion of the cost of qualified property in the year the property is placed in service. For 2025:

Depreciation Rate: The bonus depreciation rate is 40%.
Qualified Property: Includes new and used property with a recovery period of 20 years or less.

For more details, consult these IRS Publications: IRS Publication 946 IRS Research and Development Tax Credit

Restoration of Full R&D Expense Deductibility

One of the more business-friendly changes is the repeal of amortization rules for R&D costs:

Effective 2025, R&D expenses can again be deducted in full in the year incurred,
Encourages investment in innovation-heavy industries (biotech, software development),
Applies to domestic and international R&D activities.

This change is a reversal of TCJA rules that required spreading deductions over five years, which many business groups criticized for stifling innovation.

Implications for Pass-Through Business Owners

These tax reforms offer several benefits to pass-through business owners:U.S. Chamber of Commerce+2CBIA+2Bipartisan Policy Center+2

Increased Deduction: The enhanced pass-through deduction reduces taxable income, leading to potential tax savings.
Investment Incentives: Updates to depreciation rules and R&D expense deductions encourage investment in business assets and innovation. Tax Extension
State Tax Relief: Adjustments to the SALT deduction cap provide relief to taxpayers in high-tax states. AP News+3MarketWatch+3CBIA+3

However, it’s essential for business owners to consult with tax professionals to understand the full implications of these changes and ensure compliance with the new laws.

Tips for Business Owners:

Work with a CPA: These deductions come with complex limitations. A qualified tax advisor can help you maximize benefits without triggering IRS scrutiny.
Track QBI Eligibility Carefully: Not all business income qualifies. Passive income, investment earnings, and SSTB thresholds can affect eligibility.
Plan for Future Phases: Keep an eye on 2026 and beyond. Some provisions are indexed for inflation, while others could face political repeal.

Conclusion:

The 2025 tax reforms represent a renewed focus on supporting entrepreneurship and investment in the U.S. economy. For pass-through business owners, the expanded QBI deduction, increased depreciation allowances, and R&D flexibility offer meaningful tax relief — but they also come with increased complexity.

Now more than ever, strategic tax planning is essential. Use the available tools, consult professionals, and stay proactive to make the most of these changes.

Additional Resources

For more detailed information on the recent tax reforms and their impact on pass-through businesses, consider the following resources:

U.S. Chamber of Commerce: Impact of the 20% Pass-Through Deduction
Bipartisan Policy Center: The 2025 Tax Debate: The Corporate Tax Rate and Pass-Through Deduction
TaxExtension.com: New Business Tax Regulations in 2025: What You Need to Know

These resources provide in-depth analyses and updates on the latest tax laws affecting pass-through businesses. Staying informed and seeking professional advice are crucial steps for business owners to navigate the evolving tax landscape effectively.