By Michael Smith.
- The immediate expensing of R&D deductions—as opposed to amortizing over five years—is a significant update for both small and large businesses
- Improved Childcare and FMLA credits can be an asset to companies recruiting and retaining talent
- For hospitality and service businesses, the expanded FICA tip credits are top of mind
Signed into law on July 4, 2025, H.R. 1—also known as the The One Big Beautiful Bill Act —spans nearly 900 pages and addresses a broad range of tax and employee benefit topics. The Act has substantial implications for employers seeking compliance and operational improvements.
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While many provisions await Treasury and IRS guidance, small business clients are already asking how the law will affect their taxes in 2025 and beyond. This overview highlights key changes relevant to their planning.
Research & Development (R&D) Expensing
Although qualification rules remain unchanged for the Research and Development Tax Credit, the Act expands R&D access and accelerates deductions, especially for small businesses.
Key changes:
- Immediate Section 174 expensing: The Act allows immediate deduction of domestic R&D expenditures incurred after December 31, 2024. Foreign R&D must still be amortized over 15 years.
- Retroactive deductions: Small businesses with average gross receipts of $31 million or less (2022–2024) can amend prior returns to deduct R&D expenses incurred after December 31, 2021.
Others taxpayers that made domestic R&D expenditures after December 31, 2021, and before January 1, 2025, are permitted to accelerate the remaining deductions for those expenditures over a one-year or two-year period.
Impact to income and employment taxes
2017 TCJA Updates
The new legislation extends and modifies several provisions of the 2017 Tax Cuts and Jobs Act (TCJA), P.L. 115-97, many of which were scheduled to expire after 2025.
These include:
- The TCJA’s seven-bracket individual income tax structure becomes permanent, preventing the scheduled post-2025 reversion to pre-2018 rates. Beginning in 2025, bracket thresholds increase and will be indexed annually for inflation.
- Increased standard deduction, which rises in 2025 and adjusts annually for inflation
- A temporary $6,000 annual deduction (2025–2028) for taxpayers aged 65 and older
State and Local Tax Deduction (SALT Cap)
Beginning in 2025, the $10,000 SALT cap rises to $40,000, adjusted for inflation through 2029, before reverting in 2030. For taxpayers with modified adjusted gross income above $500,000, the cap begins to phase down to $10,000.
Deductions for Qualified Overtime and Tips (2025–2028)
New federal income tax deductions are available for:
- Qualified overtime: Up to $12,500 ($25,000 for joint filers)—only the premium portion mandated under Section 7 of the FLSA qualifies. Overtime mandated by state law, collective bargaining, or employer policy does not qualify. Only the premium portion of overtime pay is deductible—for example, if regular pay is $10/hour and overtime is $15/hour, only the $5/hour premium qualifies.
- Qualified tips: Cash tips up to $25,000 are deductible in occupations that customarily and regularly received tips as of December 31, 2024. A list of eligible occupations is forthcoming from the Treasury Department but it expands beyond food and beverage to include salons, spas and similar businesses. If tips exceed minimum wage, employers can receive a credit on the taxes they’ve paid on that tip income. This will help smaller restaurant groups or businesses with a few locations. “Cash tips” include direct cash, charged tips, and tips received through tip-sharing arrangements, but exclude mandatory service charges or gratuities.
These deductions apply retroactively to January 1, 2025. Employers can use “any reasonable method” to estimate amounts for the 2025 tax year, with Treasury guidance forthcoming. Note: Medicare and Social Security taxes still apply.
Changes to Employee Benefits
Enhanced Employer-Provided Childcare Credit
The Act permanently increases the employer-provided childcare tax credit.
- The annual cap rises from $150,000 to $500,000
- The credit rate increases from 25% to 40% of qualified childcare expenses
- To claim the full credit, an employer must spend at least $1.25 million on eligible childcare services.
- For eligible small businesses, the maximum credit increases to $600,000 with a 50% credit rate, requiring $1.2 million in qualified expenses to receive the full amount. A small business is defined as one with average gross receipts of $25 million or less (inflation-adjusted) over a 5-year lookback period; for 2025, the threshold is $31 million.
The Act also permits small businesses to pool resources to offer childcare and allows all businesses to use third-party intermediaries to deliver childcare services on their behalf.
Paid Family and Medical Leave Tax Credit
The Act permanently extends and expands the paid family and medical leave tax credit originally established under the TCJA, which was set to expire after 2025.
Under the original framework, eligible employers could claim a general business credit of 12.5% of wages paid during family and medical leave, increasing by 0.25% for each percentage point above 50% of regular wages paid, up to a 25% maximum.
The updated law lowers the tenure requirement to six months, broadening eligibility. It also allows state or local paid leave mandates to count toward the credit’s eligibility rules without reducing the credit amount. Additionally, employers can now claim the credit for premiums paid toward qualifying paid leave insurance policies.
Student Loan Repayment Assistance
The TCJA introduced a tax deduction for employers offering student loan repayment assistance. The Act makes permanent the provision that allows employers to make student loan repayments (up to $5,250) for employees on a tax-favored basis and indexes the amount for inflation.
What’s coming
For many of these provisions, we expect federal guidance on how these measures will be implemented. Now is the time to help your clients understand the provisions most relevant to their circumstances and prepare them for compliance. Staying informed and proactive will ensure they can take full advantage of the incentives available under the new law.
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Michael Smith is a Director of Tax, Strategic Partnerships & Alliances, at ADP.
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Tags: Income Taxes, obbba, Taxes
