How can tax advisors help clients maximize benefits from tax changes in OBBBA?
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Tax advisors can play a critical role in helping clients maximize the benefits of the sweeping tax changes introduced by the One Big Beautiful Bill Act (OBBBA, P.L. 119-21). The Act, effective primarily for tax years beginning after December 31, 2025, introduces new opportunities and limitations for individuals, businesses, and investors. Below is a comprehensive analysis of key areas where tax advisors can provide value, with references to the relevant statutory changes and legal nuances:
1. Qualified Business Income (QBI) Deduction (IRC §199A)
Key Change:The 20% QBI deduction is made permanent, with the phase-in threshold for wage/investment limitations increased to $75,000 ($150,000 joint), and a $400 minimum deduction for active business income (with inflation adjustments) is established for taxpayers with at least $1,000 of QBI from active trades or businesses in which they materially participate.
Advisor Actions:- Entity Structure Review: Evaluate whether clients’ business structures (e.g., S corporation, partnership, sole proprietorship) are optimal for maximizing the QBI deduction.- Income Smoothing: Advise on timing and deferral of income or acceleration of deductions to stay within the expanded phase-in thresholds.- Material Participation: Ensure clients meet the material participation requirements for the minimum deduction.- Specified Service Trade or Business (SSTB) Planning: For SSTBs, consider restructuring or reclassifying activities to maximize eligibility.
2. State and Local Tax (SALT) Deduction Cap (IRC §164(b)(6)-(7))
Key Change:The SALT deduction cap is increased to $40,000 ($20,000 MFS) for 2025–2029, indexed for inflation, with a phase-down for high-income taxpayers (30% reduction for MAGI over $500,000, not below $10,000). The cap reverts to $10,000 after 2029. The PTET (pass-through entity tax) workaround remains fully available, including for SSTBs.
Advisor Actions:- PTET Elections: Advise clients in high-tax states on the continued benefits of PTET elections to bypass the SALT cap.- Timing of Payments: Recommend timing state and local tax payments to maximize the deduction under the new cap.- Income Monitoring: Monitor clients’ MAGI to anticipate and plan for phase-downs of the SALT deduction.
3. Itemized Deductions and Charitable Contributions (IRC §170, §68)
Key Changes:- Standard Deduction: Permanently increased to $15,750 (single), $23,625 (head of household), $31,500 (joint), with inflation adjustments.- Miscellaneous Itemized Deductions: Permanently eliminated, except for expanded educator expenses.- Overall Limitation: New limitation reduces itemized deductions by 2/37 of the lesser of itemized deductions or taxable income above the 37% bracket threshold.- Charitable Deduction Floor: For itemizers, only contributions exceeding 0.5% of AGI are deductible; for corporations, the floor is 1% of taxable income. Carryforwards are allowed only if the taxpayer has charitable carryforwards from the same year.- Above-the-Line Deduction: Nonitemizers can deduct up to $1,000 ($2,000 joint) for cash contributions to public charities.- 60% AGI Limit: The 60% AGI limit for cash contributions to public charities is made permanent.
Advisor Actions:- Bunching Contributions: Recommend bunching charitable contributions in a single year to exceed the 0.5% AGI floor and maximize deductions.- Donor-Advised Funds: Suggest using donor-advised funds to time deductions and maintain flexibility in charitable giving.- Carryforward Planning: Track and manage charitable carryforwards to ensure disallowed amounts are not permanently lost.- Standard vs. Itemized Deduction Analysis: Reassess whether clients should itemize or take the standard deduction each year, given the new thresholds and limitations.- High-Income Taxpayer Planning: Model the impact of the new overall limitation on itemized deductions for high earners.
4. Qualified Small Business Stock (QSBS) Exclusion (IRC §1202)
Key Changes:- Tiered Exclusion: For QSBS acquired after July 4, 2025, 50% exclusion for stock held at least 3 years, 75% for 4 years, and 100% for 5 years or more.- Per-Issuer Cap: Increased from $10 million to $15 million (indexed for inflation).- Gross Asset Test: Increased from $50 million to $75 million (indexed for inflation).
Advisor Actions:- Investment Timing: Advise clients on the timing of QSBS acquisitions to maximize the exclusion.- Entity Qualification: Ensure companies meet the expanded gross asset test and other QSBS requirements.- Documentation: Maintain thorough records of acquisition dates and basis to substantiate future exclusions.
5. Qualified Opportunity Zones (QOZ) (IRC §1400Z-1, §1400Z-2)
Key Changes:- Permanent Extension: The QOZ program is made permanent, with rolling 10-year designations and updated definitions for low-income communities.- Deferral and Exclusion: Investors can defer gain recognition for up to five years and receive a basis increase after a five-year hold. Special rules apply for investments in qualified rural opportunity funds.
Advisor Actions:- Capital Gain Deferral: Advise clients on deferring capital gains by investing in QOFs under the new rules.- Rural Opportunity Funds: Explore new incentives for investments in rural areas.- Compliance: Ensure clients meet new reporting and eligibility requirements for QOFs.
6. Estate and Gift Tax Exemption (IRC §2010(c)(3))
Key Change:The exemption is permanently increased to $15 million per individual ($30 million joint), indexed for inflation.
Advisor Actions:- Lifetime Gifting: Encourage clients to utilize the higher exemption for lifetime gifts and estate planning.- Review Existing Plans: Revisit estate plans to ensure they align with the new exemption amounts and client objectives.
7. Excess Business Loss (EBL) Limitation (IRC §461(l))
Key Change:The EBL limitation is made permanent; disallowed losses continue to carry forward as NOLs.
Advisor Actions:- Loss Planning: Advise clients on the timing and use of business losses, especially for noncorporate taxpayers.- NOL Utilization: Monitor and plan for the use of NOL carryforwards under the new rules.
8. Other Notable Provisions
- No Tax on Tips and Overtime: Temporary deductions for qualified tips (up to $25,000) and overtime pay (up to $12,500/$25,000 joint) for 2025–2028, with phaseouts at higher incomes. Advisors should help clients document and report these amounts properly to claim the deductions.
- Car Loan Interest Deduction: Temporary deduction for interest on loans for new U.S.-assembled passenger vehicles, up to $10,000/year, for 2025–2028, with phaseouts at higher incomes. Advisors should ensure clients meet the requirements and report the necessary information (e.g., VIN).
- Permanent Expensing of Domestic R&D: Immediate expensing of domestic research or experimental expenditures is allowed, while foreign R&D must still be amortized over 15 years. Advisors should help clients distinguish between domestic and foreign R&D and elect the most beneficial treatment.
9. International Tax Planning
Key Changes:- GILTI Renamed and Modified: GILTI is now “net CFC tested income” (NCTI), with the exemption for a deemed return on tangible property eliminated, and the section 250 deduction reduced to 40% (raising the effective tax rate to 14%).- Foreign Tax Credit (FTC) Limitation: The FTC haircut for NCTI is reduced from 20% to 10% (i.e., 90% of foreign taxes are creditable), and interest and R&D expenses are no longer allocated to NCTI for FTC purposes, which can significantly reduce double taxation.- FDII Renamed and Modified: FDII is now “foreign-derived deduction eligible income,” with the deduction reduced to 33.34% and the base broadened by excluding interest and R&D expenses from the allocation.
Advisor Actions:- Modeling and Timing: Advise clients on whether to accelerate income or deductions into 2025 or defer to 2026, depending on which regime is more favorable.- Expense Allocation: Reassess the impact of the new rules on FTCs and FDII/NCTI calculations, especially for highly leveraged or R&D-intensive companies.- Supply Chain and IP Planning: Consider supply chain restructuring and IP transfer pricing to maximize benefits under the new FDII rules.
10. Implementation and Compliance
Key Considerations:- New Reporting Requirements: Many provisions (e.g., tips, overtime, QOZs, QSBS) have new or expanded reporting and documentation requirements. Advisors should ensure clients are prepared to comply.- IRS Guidance: Given the scale of changes and the need for new regulations and guidance, advisors should monitor IRS notices, FAQs, and proposed regulations for clarifications and updates.
11. Summary Table of Key Planning Opportunities
12. Conclusion
Tax advisors should take a proactive, holistic approach to help clients navigate the OBBBA’s new landscape. This includes:
- Reviewing and updating tax strategies for individuals and businesses in light of new deduction limits, floors, and phaseouts.
- Modeling the impact of timing income, deductions, and investments to maximize benefits under the new rules.
- Ensuring compliance with new reporting and documentation requirements.
- Monitoring IRS and Treasury guidance for further clarifications.
By staying informed and engaging in detailed, personalized planning, tax advisors can help clients unlock the full potential of the OBBBA’s tax changes and avoid costly pitfalls [[ID:
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