In July 2025, major tax legislation was signed into law - the One, Big, Beautiful Bill Act (Public Law 119-21). This act introduced significant changes to US tax law, affecting both businesses and individuals. The IRS has already issued official guidance and updated instructions. Here's a breakdown of the key changes and what they mean for you.
Business: R&D Expense Revolution
§174A: Immediate Expensing for Domestic R&D
Who it affects: Any company with US research expenses (C-Corp, S-Corp, partnerships, self-employed via 1040)
What changed:
Prior to 2025, mandatory capitalization of R&D expenses (introduced by TCJA under §174) was in effect. Now, for tax years beginning after December 31, 2024, new section §174A allows current-year deduction of domestic R&D expenses. Alternatively, you can elect capitalization and amortization under §174A(c).
What to do:
- Review your R&D accounting policy: switch to current expensing or consciously elect amortization
- When changing methods, follow procedural rules in Rev. Proc. 2025-28
- Update tax models and effective tax rate projections
Source: IRS Rev. Proc. 2025-28
Individuals: Three New Tax Deductions (2025–2028)
1. "No Tax on Tips" — Qualified Tips Deduction
Who it affects: Workers and self-employed individuals receiving tips
What changed:
Starting in 2025, a deduction for qualified tips is available. There are income limits (phase-out) and exclusions for certain business categories (SSTB).
What to do:
- Claim the qualified tips deduction on Form 1040
- Monitor reporting requirements on W-2, 1099, and Form 4137
- For 2025, the IRS provides transitional relief — relaxed reporting requirements
Source: IRS Individuals & Workers Guidance
2. "No Tax on Overtime" — Qualified Overtime Deduction
Who it affects: Workers receiving overtime pay
What changed:
A deduction is available for the "premium" portion of overtime pay (above the base rate). Income limits and phase-outs apply.
What to do:
- Claim the deduction only on the difference between overtime and base rate
- Verify eligibility criteria and limits
- Use transitional relief for 2025
Source: IRS Individuals & Workers Guidance
3. Additional Deduction for Seniors 65+ ($6,000)
Who it affects: Taxpayers age 65 and older
What changed:
Beyond the standard "senior add-on," an additional $6,000 deduction is now available (effective through 2028).
What to do:
- Add the additional deduction to Form 1040
- Check phase-out based on MAGI
- Note special rules for married filing jointly (MFJ)
Source: IRS Individuals & Workers Guidance
Individuals: Car Loan Interest Deduction
Who it affects: Individuals purchasing vehicles on credit for personal use
What changed:
Starting in 2025, you can deduct car loan interest (personal use) up to $10,000. Requirements:
- Loan originated after December 31, 2024
- Vehicle is a "qualified vehicle" (final assembly in the US)
- VIN must be reported when claiming the deduction
What to do:
- Report VIN on Form 1040 when claiming the deduction
- Verify "qualified vehicle/loan" criteria
- Account for limits and phase-outs
Source: IR-2025-129
Inflation Adjustments for 2026
Who it affects: All individuals and families
What changed:
The IRS released updated tax parameters for 2026 incorporating OBBBA amendments:
- New tax bracket thresholds (including the top 37% rate)
- Updated standard deduction for different filing statuses (MFJ / Single / HOH)
- Personal exemption remains zero (permanently codified)
- Estate and gift tax: basic exclusion for 2026 is $15,000,000
What to do:
- Update withholding and estimated tax calculations
- Revise tax planning and budgeting for 2026
- Account for new thresholds when structuring income
Source: IR-2025-103
Form 1099-K: Threshold Reverts to $20,000
Who it affects: Online sellers, payment platform operators, self-employed
What changed:
The Form 1099-K reporting threshold "reverts" to $20,000 (instead of the previously planned reduction to $600).
What to do:
- Track revenue so gross 1099-K amounts don't automatically equal taxable income
- Reconcile amounts, subtract returns, fees, and other adjustments
- Update client instructions and W-9 forms
Source: IR-2025-107
Backup Withholding: Threshold Raised to $2,000
Who it affects: Payers and platforms subject to backup withholding
What changed:
The "aggregate reportable payment threshold" is raised to $2,000 for 2026 for certain payments (§6041/6041A). Proposed regulations for third-party payments have also been issued.
What to do:
- Update W-9 collection and TIN-matching procedures
- Review withholding logic
- Monitor new threshold rules and final regulations
Source: IR-2026-03
Business: Bonus Depreciation (§168(k))
Who it affects: Businesses with major capital expenditures (equipment, assets)
What changed:
The IRS issued updated guidance on additional first-year depreciation (§168(k)) under OBBBA changes.
What to do:
- Review depreciation and bonus depreciation policies
- Pay special attention to assets placed in service during relevant periods
- Make elections and comply with disclosure formats per new guidance as needed
Source: IR-2026-06
Business: Interest Expense Limitation (§163(j))
Who it affects: Businesses with debt obligations and interest expenses
What changed:
The IRS updated FAQs on the business interest expense limitation incorporating OBBBA changes.
What to do:
- Recheck interest limitation and ATI calculations
- Update carryforwards and working papers
- Follow current FAQs for disclosure requirements
Source: IR-2025-126
ERC: Updated FAQs and Limitations
Who it affects: Companies that claimed or plan to claim the Employee Retention Credit (ERC)
What changed:
The IRS released updated FAQs on ERC compliance requirements and limitations under OBBBA.
What to do:
- Verify status of filed claims
- Check eligibility and documentation
- Assess risks, especially for borderline claims
- Act in accordance with new FAQs
Source: IR-2025-106
HSA: Expanded Availability
Who it affects: Individuals with Health Savings Accounts (HSA) and High-Deductible Health Plans (HDHP); employers offering benefits
What changed:
The IRS issued Notice 2026-05 expanding HSA availability.
What to do:
- Update eligibility requirements and plan documents
- Review employer withholding policies
- Correctly report HSA contributions on Form 1040 via Form 8889
Source: Notice 2026-05
Relief for Estimated Tax Underpayment
Who it affects: Taxpayers who made a special election under Section 10 and face potential penalty 6654/6655
What changed:
The IRS issued Notice 2026-03 providing relief from underpayment penalty for certain categories.
What to do:
- Document the election
- Apply relief when calculating penalty
- Update estimated tax workflow
Source: Notice 2026-03
The 2025–2026 changes affect virtually all taxpayer categories, from freelancers and employees to large corporations with R&D operations. Key recommendation: don't wait until April, start adapting to the new rules now to optimize your tax position and avoid filing errors.
For detailed information on each change, refer to the official IRS sources cited in this digest or consult with a tax professional.
This article is for informational purposes only and does not constitute tax advice. For decisions regarding your specific situation, please book a free consultation with Konstantin.
