OBBBA’s Tax Shake-Up for Pass-Throughs

Permanence of the Section 199A Deduction

One of the most anticipated and impactful changes for pass-through entities is the OBBBA‘s permanent extension of the Section 199A Qualified Business Income (QBI) deduction. Previously set to expire at the end of 2025, this 20% deduction for eligible pass-through income now provides long-term stability and predictability for millions of business owners. This permanence allows for more robust long-term tax planning and entity structuring, as the significant tax benefit tied to pass-through income is no longer subject to sunset clauses. While earlier versions of the bill debated increasing the deduction, the final Act maintains the 20% rate, a welcome relief for those who rely on this reduction in their overall tax burden.

Expanded SALT Deduction Cap

The OBBBA also addresses the much-debated State and Local Tax (SALT) deduction cap. For tax years 2025 through 2029, the Act temporarily increases the SALT deduction cap to $40,000 for joint filers ($20,000 for separate filers), up from the previous $10,000. While this offers some immediate relief for pass-through entity owners in high-tax states, it’s important to note that this expanded cap is subject to income-based phase-outs. For taxpayers with modified adjusted gross income exceeding $500,000 ($250,000 for separate filers), the benefit will be progressively reduced, though the deduction will not drop below the original $10,000 floor. After 2029, the cap is scheduled to revert to $10,000, underscoring the temporary nature of this increased relief.

Continued Pass-Through Entity Tax (PTET) Deductibility

A crucial win for many pass-through entities is the OBBBA’s decision not to restrict state-level Pass-Through Entity Tax (PTET) workarounds. Many states had implemented PTETs as a mechanism to allow pass-through businesses to effectively bypass the federal SALT cap by paying state taxes at the entity level, which are then deductible for federal income tax purposes. Earlier legislative drafts had proposed eliminating or severely limiting these workarounds, which would have significantly impacted businesses in states utilizing these regimes. The final Act’s preservation of PTET deductibility means that pass-through entities in the numerous states that have adopted these taxes can continue to utilize this strategy to mitigate the impact of the federal SALT cap.

Changes to Bonus Depreciation and Business Interest Deduction

The OBBBA brings significant, permanent changes to business expensing rules that will directly benefit capital-intensive pass-through entities. The Act permanently reinstates 100% bonus depreciation for most qualified property acquired and placed in service after January 19, 2025. This allows businesses to immediately deduct the full cost of eligible assets, rather than depreciating them over several years. Furthermore, the OBBBA reverts to a more favorable calculation for the business interest deduction, reestablishing the limitation at 30% of earnings before interest, taxes, depreciation, and amortization (EBITDA) for tax years beginning after December 31, 2024. This is a return to the original calculation under the Tax Cuts and Jobs Act of 2017, offering greater flexibility for businesses with substantial interest expenses and potentially encouraging further capital investment.

Impact on Qualified Small Business Stock (QSBS)

For investors in certain pass-through entities structured as C corporations that issue Qualified Small Business Stock (QSBS), the OBBBA introduces enhanced benefits under Section 1202. The Act increases the capital gain exclusion cap to $15 million (or 10 times the shareholder’s stock basis, whichever is greater) for stock issued on or after July 5, 2025. It also provides a tiered exclusion structure, reducing the minimum holding period for partial exclusions: 50% exclusion for stock held at least three years, 75% for at least four years, and 100% for five years or more. Additionally, the gross asset threshold for a company to qualify as a small business for QSBS purposes is raised from $50 million to $75 million. These changes aim to incentivize investment in smaller, innovative businesses by offering more attractive tax benefits upon the sale of qualifying stock.

Disclaimer: This article provides general information and should not be considered professional financial or tax advice. Please consult with a qualified CPA or financial advisor for guidance specific to your individual business needs.