2025 Business Planning Guide

This Guide outlines strategies that may help lower your tax bill. However, careful planning involves more than focusing solely on reducing taxes for the current and future years. Each potential tax saving opportunity must be considered in the context of its impact on your entire business. In addition, tax planning for closely held business entities requires a careful balance between planning for the business and planning for its owners. There are also new opportunities available through the One Big Beautiful Bill Act (OBBBA) that may be relevant to your situation. WellsColeman is available to answer any questions or help you with your planning needs.

 

Additional Business Opportunities Due to The One Big Beautiful Bill Act (OBBBA)

• Third-party network transaction reporting threshold: Form 1099-K, Payment Card and Third Party Network Transactions, reporting reverts back to previous rules where reporting is required if transactions exceed $20,000 and the aggregate number of transactions exceeds 200.
• Qualified Small Business Stock (Section 1202): Provides a 50% exclusion for QSB stock held three years and a 75% exclusion for stock held four years. Increases the current limit on the exclusion from $10 million (or 10 times basis) to $15 million indexed to inflation beginning in 2027. Increases the current limit on assets at the time of stock issuance from $50 million to $75 million, indexed to inflation beginning in 2027. Provisions are generally effective for stock issued after the date of enactment.
• R&E expenditures: Immediate deduction of domestic research or experimental expenses paid or incurred in 2025 is allowed. However, research or experimental expenses attributable to research that is conducted outside the United States will continue to be capitalized and amortized over 15 years.

 

Virginia Pass-Through Entity Tax

During the 2022 session, the Virginia General Assembly enacted the Virginia Pass-Through Entity Tax option, which permits a qualifying pass-through entity (PTE) to make an annual election to pay income tax (the pass-through entity tax or PTET) at a rate of 5.75% at the entity level. The legislation also allows a corresponding refundable income tax credit to certain PTE owners for the elective income tax imposed at the entity level. In addition, eligible PTEs that make this election will be able to deduct the state tax payment from their federal business tax return in the year a payment is made as long as an electronic payment of the PTET is made by December 31, 2025.

Qualifying pass-through entities include:

• Limited partnerships
• Limited liability partnerships
• General partnerships
• Limited liability companies
• S corporations

The election is officially made each year by filing the new PTET form, Virginia Form 502PTET. Once filed, the election for that tax year is binding. Individual owners will not have an option to opt out of an entity’s election with the Virginia Department of Revenue once the Form 502PTET has been filed.

 

Consider Tax Accounting Method Changes

More small businesses are eligible to use the cash (as opposed to accrual) method of accounting in earlier years. To qualify as a small business, a taxpayer must, among other things, satisfy a gross receipts test. For 2025, the gross-receipts test is satisfied if, during a three-year testing period, average annual gross receipts do not exceed $31 million. Cash method taxpayers may find it easier to shift income or accelerate expenses.

 

Qualified Business Income Deduction

Taxpayers other than corporations can deduct up to 20% of their qualified business income. For 2025, if taxable income exceeds $394,600 for a married couple filing jointly or $197,300 for single, married filing separately, and heads of household, the deduction may be limited based on:

• Whether the taxpayer is engaged in a service-type trade or business (such as law, accounting, health or consulting);
• The amount of W-2 wages paid by the trade or business; and/or
• The unadjusted basis of qualified property (such as machinery and equipment) held by the trade or business.

The limitations are phased in. For example, the phase-in applies to joint filers with taxable income between $394,600 and $494,600, and to all other filers with taxable income between $197,300 and $247,300.

 

Business Property Section 179 Expensing and First Year Bonus Depreciation Deductions

Section 179 Expensing

Businesses should consider making expenditures that qualify for the liberalized business property expensing option. For tax years beginning in 2025, the expensing limit is $2,500,000, and the investment ceiling limit is $4,000,000.

• Expensing is generally available for most depreciable property (other than buildings) and off-the-shelf computer software.
• It is also available for qualified improvement property, such as:

• • Any improvement to a building’s interior (but not for enlargement of a building, elevators or escalators, or the internal structural framework);
  • Roofs; and
  • HVAC, fire protection, alarm, and security systems.

The generous dollar ceilings mean that many small and medium sized businesses that make timely purchases will be able to deduct most, if not all, of their outlays for machinery and equipment. As an additional value consideration, the expensing deduction is not prorated for the time that the asset is in service during the year.

• The expensing deduction may be claimed in full (if you are otherwise eligible to take it) regardless of how long the property is in service during the year and can be a useful tool for year-end tax planning.
• Property acquired and placed in service at any time during 2025 can result in a full expensing deduction for 2025.
• Please note that there are some additional limits to expensing vehicles that may prevent a full write-off in the year of purchase.

Bonus Depreciation

Businesses can claim a 100% first year bonus depreciation deduction for machinery and equipment bought used (with some exceptions) or new (if purchased and placed in service after January 19, 2025), and to specified plants planted or grafted after such date.  Property acquired on or before January 19, 2025, and placed in service after that date remains subject to the bonus depreciation phasedown rules under the Tax Cuts and Jobs Act (TCJA), which is 40%.

 

Safe Harbor Election

Businesses may be able to take advantage of the de minimis safe harbor election (also known as the book-tax conformity election) to expense lower-cost assets and materials and supplies, assuming the costs do not have to be capitalized under the Code Sec. 263A uniform capitalization (UNICAP) rules.

To qualify for the election, the cost of a unit of property can’t exceed $5,000 if the taxpayer has an applicable financial statement (AFS; i.e., a certified audited financial statement along with an independent CPA’s report). If there’s no AFS, the cost of a unit of property can’t exceed $2,500.

 

Maximize Tax Benefits of NOLs

Net operating losses (NOLs) are valuable assets that can reduce taxes owed during profitable years, thus generating a positive cash flow impact for taxpayers. Businesses should make sure they maximize the tax benefits of their NOLs.

• For tax years beginning after 2020, NOL carryovers from tax years beginning after 2017 are limited to 80% of the excess of the corporation’s taxable income over the corporation’s NOL carryovers from tax years beginning before 2018 (which are not subject to this 80% limitation, but may be carried forward only 20 years). If the corporation does not have pre-2018 NOL carryovers, but does have post-2017 NOLs, the corporation’s NOL deduction can only negate up to 80% of the 2025 taxable income with the remaining subject to the 21% federal corporate income tax rate. Corporations should monitor their taxable income and submit appropriate quarterly estimated tax payments to avoid underpayment penalties.
• Losses from pass-through entities must meet certain requirements to be deductible at the partner or S corporation owner level.

 

Defer Tax on Capital Gains

Tax planning for capital gains should consider not only current and future tax rates, but also the potential deferral period, short and long-term cash needs, possible alternative uses of funds and other factors.

Noncorporate shareholders are eligible for exclusion of gain on dispositions of Qualified Small Business Stock. For other sales, businesses should consider potential long-term deferral strategies, including:

• Reinvesting capital gains in Qualified Opportunity Zones;
• Reinvesting proceeds from sales of real property in other “like-kind” real property; and
• Selling shares of a privately held company to an Employee Stock Ownership Plan.

 

Claim Available Tax Credits

Businesses should make sure they are claiming all available tax credits. The U.S. offers a variety of tax credits and other incentives to encourage employment and investment. These tax credits are often in targeted industries or areas such as innovation and technology and low-income or distressed communities. Many states and localities also offer tax incentives.

• Opportunity zones provisions are made permanent under the OBBBA, but with several changes, including narrowing the definition of “low-income community.” The changes will generally take effect in 2027.
• Other incentives for employers include the Work Opportunity Tax Credit, which expires December 31, 2025.

 

Considerations for Employers

Employers should consider the following issues as they close out 2025 and enter 2026:

• Employers with operations in Virginia must report all newly hired or rehired employees within 20 days of their start date, including basic employee and employer information, to help ensure compliance with Virginia Statute 63.2-1946 and federal law (PRWORA). Electronic reporting is available and recommended, and multistate employers can centralize reporting through one state. For more information, visit https://va-newhire.com

 

• Employers have until the extended due date of their 2025 federal income tax return to retroactively establish a qualified retirement plan and to fund the new or an existing plan for 2025. However, employers cannot retroactively eliminate existing retirement plans (such as simplified employee pensions (SEPs) or SIMPLE plans) to make room for a retroactively adopted plan (such as an employee stock ownership plan (ESOP) or cash balance plan).

 

• Contributions made to a qualified retirement plan by the extended due date of the 2025 federal income tax return may be deductible for 2025. Contributions made after this date are deductible for 2026.

 

• Small businesses can contribute the lesser of (i) 25% of employees’ salaries or (ii) an annual maximum set by the IRS each year to a SEP plan by the extended due date of the employer’s federal income tax return for the year that the contribution is made. The maximum SEP contribution for 2025 is $70,000. The maximum SEP contribution for 2026 is $72,000. The calculation of the 25% limit for self-employed individuals is based on net self-employment income, which is calculated after the reduction in income from the SEP contribution (as well as for other things, such as self-employment taxes).

 

• Year-end bonuses can be timed for maximum tax effect by both cash-basis and accrual-basis employers. Cash basis employers deduct bonuses in the year paid, so they can time the payment for maximum tax effect. Generally, for calendar year accrual basis taxpayers, accrued bonuses must be fixed and determinable by year end and paid within 2.5 months of year end (by March 16, 2026) for the bonus to be deductible in 2025. However, the bonus compensation must be paid before the end of 2025 if it is paid by a Personal Service Corporation to an employee-owner, by an S corporation to any employee-shareholder, or by a C corporation to a direct or indirect majority owner.

 

State and Local Taxes

Businesses should monitor the tax laws and policies in the states in which they do business to understand their tax obligations, to identify ways to minimize their state tax liabilities, and to eliminate any state tax exposure. The following are some of the state-specific areas taxpayers should consider when planning for their tax liabilities in 2025 and 2026:

Nexus rules

• Has the business reviewed the nexus rules in every state in which it has property, employees or sales to determine whether it has a tax obligation? State nexus rules are complex and vary by state. Even minimal or temporary physical presence within a state can create nexus (i.e., temporary visits by employees for business purposes; presence of independent contractors making sales or performing services, especially warranty repair services; presence of mobile or moveable property; or presence of inventory at a third-party warehouse). In addition, many states have adopted a bright-line factor-presence nexus threshold for income tax purposes (i.e., $500,000 in sales). Also keep in mind that foreign entities that claim federal treaty protection are likely not protected from state income taxes, and those foreign entities that have nexus with a state may still be liable for state taxes.

 

• Has the business considered the state income tax nexus consequences of its mobile or remote workforce, including the impacts on payroll factor and sales factor sourcing? Most states that provided temporary nexus and/or withholding relief relating to teleworking employees lifted those orders during 2021.

 

These are just some of the year-end tax planning strategies that could potentially benefit you and your business. Please contact us if you have questions, want more information, or would like us to assist with year-end planning.

 

Sincerely,

WellsColeman

5004 Monument Ave

Richmond, VA 23230

T: 804.249.3328

www.wellscoleman.com