How Does the OBBBA Law Affect Small Businesses? (w/Examples) + FAQs

This article reflects federal rules and California state rules as of June 2026 and covers tax years 2025 and 2026. Tax law changes often — confirm current figures with the IRS or a licensed professional before you file.

Quick Answer

The OBBBA helps most small businesses by making the 20% QBI deduction permanent, restoring 100% bonus depreciation for property placed in service after January 19, 2025, raising Section 179 expensing to $2.5 million, and allowing full R&D write-offs. Many breaks are permanent; a few sunset after 2028.

The One Big Beautiful Bill Act (OBBBA) became Public Law 119-21 when President Trump signed it on July 4, 2025, and it rewrote how nearly every small business figures its federal taxes, as the IRS explains in its provisions summary. For a sole proprietor, an LLC member, an S-corp shareholder, or a small C-corp owner, the law decides how much income escapes tax, how fast you can write off equipment, and whether you owe tax on a future sale of your company.

The stakes are real and the timing matters. The new bonus depreciation rule already applies to purchases made after January 19, 2025, so your 2025 return is the first one it touches, and a wrong choice can cost you thousands in deductions you can never recover. Congress made some breaks permanent and let others expire after 2028, so the year you spend money or sell your business now changes your tax bill. According to the National Conference of State Legislatures, the law is projected to affect roughly $1.7 trillion in federal revenue over the next decade.

Here is what you will learn:

💰 How the permanent 20% QBI deduction lowers tax for pass-through owners
🏗️ How to write off 100% of equipment and buildings in year one
🔬 How to fully deduct your R&D costs again instead of spreading them out
🏢 How the QSBS rule can wipe out tax on up to $15 million when you sell
⚠️ Why your state — especially California — may not follow these federal breaks

What the OBBBA Is and Why It Matters

The One Big Beautiful Bill Act is a sweeping federal tax law signed on July 4, 2025, and catalogued by the IRS as Public Law 119-21. It took many tax breaks from the 2017 Tax Cuts and Jobs Act that were about to expire and made them permanent, while adding new write-offs and a few temporary perks. For small business owners, it is the most important tax change in nearly a decade.

The law matters because it removes a cloud of uncertainty. Before the OBBBA, the popular 20% QBI deduction was set to vanish after 2025, and bonus depreciation was fading toward zero. Owners could not plan equipment purchases or hiring with confidence. Now several core breaks are locked in, so you can build a multi-year plan instead of guessing.

It also matters because not every break is permanent and not every state agrees with Congress. Some deductions sunset after 2028, and high-tax states like California refuse to follow many of these federal rules. That split means a deduction can save you money on your federal return and still leave you taxed at the state level. The rest of this guide walks through each major provision, what it does, the consequence of getting it wrong, a worked example, a common myth, and your next step.

The Permanent 20% QBI Deduction (Section 199A)

The Qualified Business Income (QBI) deduction lets owners of pass-through businesses deduct up to 20% of their business profit before figuring tax. It covers sole proprietors, partnerships, S corporations, and most LLCs, as Thomson Reuters describes in its QBI overview. The OBBBA made this deduction permanent — it was scheduled to expire after 2025.

The consequence of misunderstanding QBI is paying tax on income you could have shielded. If you skip the deduction or miscalculate it, a profitable owner can overpay by thousands every year. Because it is now permanent, that mistake repeats annually instead of once.

For tax year 2025, the deduction begins to phase out at $394,600 of taxable income for joint filers (and $197,300 for other filers), per Warren Averett’s QBI breakdown. Starting in 2026, the OBBBA widens the phase-in range, so the 2026 joint phase-out runs from $403,500 to $553,500, and the single range runs from $201,750 to $276,750, as KahnLitwin details for 2026. The wider range means more owners keep at least part of the deduction.

Worked example. Maria runs a marketing LLC taxed as a sole proprietorship. In 2026 her business profit (QBI) is $120,000 and her taxable income stays under the phase-out. Her QBI deduction is 20% of $120,000, which is $24,000. If she sits in the 24% federal bracket, that deduction saves her about $5,760 in federal tax ($24,000 × 24%).

The OBBBA also adds a new minimum deduction beginning in 2026. If you have at least $1,000 of QBI from an active business you materially participate in, you get a minimum $400 deduction, indexed to inflation, as Greenleaf Trust notes. This helps very small side businesses that earned little profit.

A common myth is that every business gets the full 20%. In truth, a “specified service trade or business” — such as a law firm, accounting practice, or consulting shop — loses the deduction once income climbs past the phase-out range. Your next step: confirm whether you are an SSTB, then run the wage-and-property limit on Form 8995 or Form 8995-A when you file.

100% Bonus Depreciation Is Back — and Permanent

Bonus depreciation lets a business deduct the full cost of qualifying equipment in the first year instead of spreading it over many years. The OBBBA permanently restored the 100% rate for most property acquired and placed in service after January 19, 2025, as Grant Thornton confirms. It had been dropping — 60% in 2024 and only 40% for early-2025 purchases.

The acquisition date is the trap. Property bought on or before January 19, 2025, gets only 40%, while property acquired after that date gets 100%, per Plante Moran’s timeline. The consequence of buying one day too early is losing 60% of your first-year deduction.

Worked example. Devon owns a landscaping S-corp and buys a $90,000 truck, placing it in service in March 2026. Under 100% bonus depreciation he deducts the entire $90,000 that year. At a 32% combined marginal rate, that is roughly $28,800 in tax saved in year one, instead of stretching the write-off across five or six years.

The rule covers most tangible property with a recovery period of 20 years or less, including used property, as long as it is new to you. A common myth is that bonus depreciation only applies to brand-new equipment; used machinery qualifies too. Your next step: keep dated invoices and delivery records, and claim the deduction on Form 4562 with your return.

New 100% Write-Off for Factory Buildings (QPP)

The OBBBA created a brand-new break called qualified production property (QPP) that lets you deduct 100% of the cost of certain new factory or production buildings. This is unusual because buildings normally must be written off over decades. The deduction applies to nonresidential real property used in manufacturing, production, or refining, as Grant Thornton explains.

This break is temporary and tightly defined. Construction must begin after January 19, 2025, and before January 1, 2029, and the property must be placed in service in the U.S. before January 1, 2031. The consequence of missing these windows is losing a deduction worth potentially millions on a single building.

Not every business qualifies. A restaurant does not count, because food served onsite is excluded, and only agricultural and chemical production count as “production.” A common myth is that any commercial building qualifies — it does not. Your next step: if you are building a plant, document the construction start date and elect QPP treatment, ideally with a CPA who handles cost segregation.

Full R&D Expensing Restored (Section 174A)

Research and development costs can again be fully deducted in the year you pay them. New Section 174A applies for tax years beginning after December 31, 2024, and ends the painful rule that forced businesses to spread domestic R&D over five years, as Goodwin Law summarizes. Software development costs count as R&D here.

The consequence of the old rule was brutal cash flow: a startup spending heavily on product could owe tax even while losing money. The fix restores immediate deductions, freeing cash to reinvest. One catch remains — foreign R&D still must be amortized over 15 years, as the same Goodwin analysis notes.

Worked example. A two-person software studio spends $200,000 on U.S. developer salaries in 2025. Under Section 174A it deducts the full $200,000 that year instead of $20,000. At a 24% rate, that is about $43,200 more in first-year tax savings. A common myth is that you can also full-expense overseas contractors; you cannot. Your next step: separate domestic from foreign R&D in your books and coordinate the deduction with any R&D credit you claim.

EBITDA-Based Business Interest Limit (Section 163(j))

The OBBBA permanently changed how the limit on deducting business interest is figured. Starting with tax years beginning after December 31, 2024, the limit is based on EBITDA — earnings before interest, taxes, depreciation, and amortization — which is a more generous measure, as Grant Thornton reports. This reverses a stricter rule that ignored depreciation and amortization.

The practical effect is that businesses with heavy equipment or financing can deduct more of their interest. The consequence of the old method was lost interest deductions for capital-heavy firms. Many of the smallest businesses are exempt anyway: companies with average annual gross receipts under the small-business threshold generally avoid the limit entirely.

A common myth is that every business faces this cap. Most truly small firms do not. Your next step: check whether your three-year average gross receipts exceed the small-business threshold; if not, you likely skip Section 163(j) altogether.

Bigger Section 179 Expensing

Section 179 is a separate way to expense equipment up to an annual dollar limit. The OBBBA raised that limit from $1.25 million to $2.5 million, and lifted the phase-out threshold from $3.13 million to $4 million, with inflation adjustments starting in 2026, as LandmarkCPAs reports. Once your total equipment purchases pass $4 million, the deduction shrinks dollar for dollar.

Section 179 and bonus depreciation overlap but differ. Section 179 is capped and cannot create a business loss, while bonus depreciation has no dollar cap and can create a loss. The consequence of confusing the two is claiming the wrong one and leaving money on the table.

Worked example. A bakery buys $300,000 of ovens and mixers in 2026. It can expense the full $300,000 under Section 179 since it is well below the $2.5 million cap, assuming the business has at least $300,000 of income to absorb it. Your next step: decide between Section 179 and bonus depreciation based on whether you want to control the deduction amount, and claim it on Form 4562.

QSBS: Big Tax Break When You Sell

Qualified small business stock (QSBS) under Section 1202 can let a shareholder exclude a huge chunk of gain when selling stock in a qualifying C corporation. For QSBS acquired after the OBBBA’s enactment, the per-shareholder exclusion rises to the greater of $15 million or 10 times your basis, up from $10 million, as Goodwin Law explains.

The OBBBA also added partial breaks for shorter holding periods. Sell after three years and you exclude 50% of the gain; after four years, 75%; and after five years, the full 100%, per Goodwin’s QSBS summary. The old rule gave nothing before five years.

The consequence of not planning around QSBS is paying capital gains tax on a sale you could have made tax-free. A common myth is that any small business qualifies; only C corporations meeting strict tests do — partnerships and S corps do not. Your next step: if you plan to raise capital or sell within a decade, talk to a tax attorney about structuring as a qualifying C corp before you issue stock.

The $40,000 SALT Cap and Pass-Through Owners

The state and local tax (SALT) deduction cap jumped from $10,000 to $40,000 for most filers beginning in tax year 2025 ($20,000 for married filing separately), as Anchin explains. The cap rises 1% per year through 2029, then reverts to $10,000 in 2030.

There is a “SALT torpedo” for higher earners. The deduction is reduced by 30% of the amount your MAGI exceeds $500,000 in 2025, and once MAGI reaches $600,000 it drops back toward $10,000, per MLR’s analysis. The deduction cannot fall below $10,000.

Many pass-through owners still use a state PTET (pass-through entity tax) workaround to deduct state taxes at the business level, since the $40,000 cap alone may not cover them, as MGO notes. Your next step: check whether your state offers a PTET election and weigh it against the higher federal cap with your accountant.

Which Situation Applies to You?

The OBBBA hits each owner differently, so find your category below:

Sole proprietor or single-member LLC: Focus on the permanent QBI deduction, bonus depreciation, and Section 179 for equipment.
Partnership or multi-member LLC: Same pass-through breaks apply, plus watch the SALT cap and any state PTET election.
S-corp shareholder: Use QBI, depreciation breaks, and PTET; remember reasonable salary rules still apply.
Small C-corp owner: QSBS planning and full R&D expensing are your biggest levers, plus the EBITDA interest rule.
Startup spending on R&D: Section 174A full expensing is the headline change for you.
High earner over $500,000 MAGI: Plan around the SALT torpedo and the QBI phase-out.

Three Common Scenarios

Scenario 1 — Equipment-heavy business buys late in the year

Owner’s Move	Tax Result
Buys a $90,000 truck and places it in service after Jan. 19, 2025	Deducts 100% ($90,000) in year one under bonus depreciation
Waits and buys identical truck dated on or before Jan. 19, 2025	Deducts only 40% ($36,000) in year one

Scenario 2 — Profitable consultant near the QBI limit

Income Position (2026)	QBI Outcome
Joint taxable income under $403,500	Full 20% QBI deduction available
Joint taxable income over $553,500 and an SSTB	QBI deduction fully phased out

Scenario 3 — Founder selling C-corp stock

Holding Period of QSBS	Gain Excluded
Sold after 3 years	50% of gain excluded
Sold after 5 years	100% of gain excluded, up to $15 million or 10x basis

Named Real-World Examples

Carlos, restaurant owner. Carlos builds a new dining space in 2026 and assumes it qualifies for the 100% QPP write-off. It does not — restaurants are excluded because food served onsite is not a qualified product, per Grant Thornton’s QPP rules. He instead uses bonus depreciation on his kitchen equipment, which does qualify.

Priya, software founder. Priya’s startup spends $200,000 on U.S. engineers in 2025. Using Section 174A, she deducts all of it that year, saving roughly $43,200 in tax versus the old five-year spread. She keeps her foreign contractor costs separate because those still amortize over 15 years.

Greg, S-corp electrician. Greg earns $120,000 in QBI in 2026 with income under the phase-out. His 20% QBI deduction is $24,000, cutting his federal tax by about $5,760. He files Form 8995 to claim it and keeps payroll records to support his reasonable salary.

Federal vs. California: A Sharp Divide

Never assume your state follows federal law. California updated its conformity date to January 1, 2025, but deliberately excluded the OBBBA, as Grant Thornton reports. That means many federal breaks give you nothing on your California return.

Provision	Federal (OBBBA)	California
100% bonus depreciation	Allowed, permanent	Not allowed — California stays non-conforming
20% QBI deduction	Permanent	No QBI deduction at the state level
R&D expensing (174A)	Full expensing	Different state research rules apply

The consequence is real: a California S-corp owner can deduct a $90,000 truck in full federally and still depreciate it slowly for state tax, as this non-conformity review explains. Your next step: keep separate federal and California depreciation schedules, and ask your preparer how each OBBBA break flows to your state. Other states vary widely, so confirm your own state’s stance through its department of revenue.

Deadlines, Costs, and Timing

Most OBBBA business breaks are claimed on your normal income tax return, due March 15, 2026, for calendar-year S corps and partnerships (Form 1120-S or 1065) and April 15, 2026, for sole proprietors and C corps. Missing the deadline without an extension can mean penalties and lost elections, some of which cannot be made late.

A DIY return using tax software runs roughly $100 to $300, while a CPA preparing a return with depreciation, QBI, or QSBS planning typically costs several hundred to a few thousand dollars. The math usually favors a professional once equipment expensing, R&D, or a business sale is involved, because one missed election can dwarf the fee. Complex situations — a C-corp sale, a new factory, or multi-state filing — clearly warrant a CPA or tax attorney.

Mistakes to Avoid

Buying equipment on or before January 19, 2025 — you get only 40% bonus depreciation instead of 100%, losing most of the first-year deduction.
Assuming your state conforms — California and others reject many OBBBA breaks, so you may owe state tax you did not expect.
Treating an SSTB like any business — service firms lose the QBI deduction above the phase-out, and claiming it anyway invites an IRS adjustment.
Full-expensing foreign R&D — only domestic R&D qualifies under Section 174A, so an overseas claim can be disallowed.
Thinking any building qualifies for QPP — restaurants and most non-production buildings are excluded, costing a huge deduction if claimed wrongly.
Confusing Section 179 with bonus depreciation — Section 179 cannot create a loss and is capped, so the wrong choice can waste a deduction.
Ignoring QSBS holding periods — selling C-corp stock before three years means no exclusion, turning a tax-free gain into a taxable one.
Overlooking the SALT torpedo — income over $500,000 shrinks your SALT deduction, surprising high earners who expected the full $40,000.

Do’s and Don’ts

Do time equipment purchases for after January 19, 2025, so you capture 100% bonus depreciation and maximize first-year savings.
Do file Form 8995 or 8995-A every year, because the QBI deduction is now permanent and recurs annually.
Do keep separate federal and state depreciation schedules, since states like California do not follow the OBBBA.
Do separate domestic and foreign R&D in your books, because only domestic costs are fully expensed.
Do consult a tax attorney before issuing C-corp stock, so you lock in QSBS treatment from the start.
Don’t assume your service business gets the full QBI deduction, because SSTB rules phase it out at higher income.
Don’t claim QPP for a restaurant or office, since those buildings are excluded and the claim can be reversed.
Don’t skip an extension if you cannot file on time, because some elections are lost if filed late.
Don’t rely on the $40,000 SALT cap alone if you owe more, because a state PTET election may save more.
Don’t guess on QSBS holding periods, since selling a year early can cost you the entire exclusion.

Pros and Cons of the OBBBA for Small Businesses

Pro — Permanence: The QBI deduction and bonus depreciation are now permanent, so you can plan for years instead of guessing.
Pro — Cash flow: Full R&D expensing and 100% depreciation free up cash to reinvest immediately.
Pro — Bigger exit break: The $15 million QSBS exclusion rewards founders who build and sell a qualifying C corp.
Pro — Higher SALT cap: The jump to $40,000 helps owners in higher-tax states, at least through 2029.
Pro — Easier interest deduction: The EBITDA-based 163(j) limit lets capital-heavy firms deduct more interest.
Con — Temporary pieces: QPP, the tips and overtime deductions, and the higher SALT cap all sunset, so timing is everything.
Con — State mismatch: Non-conforming states like California create extra recordkeeping and unexpected state tax.
Con — Complexity: Coordinating QBI, depreciation, and R&D rules often requires a paid professional.
Con — Income limits: Phase-outs and the SALT torpedo strip benefits from higher earners.
Con — Strict definitions: QPP and QSBS have narrow rules, so many owners assume they qualify when they do not.

What to Do Next

Pull your 2025 purchase records and check whether equipment was placed in service after January 19, 2025, to confirm 100% bonus depreciation.
Determine your entity type and income level so you know which QBI rules and phase-outs apply for 2025 and 2026.
Separate domestic from foreign R&D in your books before you file, since only domestic costs fully expense.
Check your state’s conformity through its department of revenue, and build a separate state depreciation schedule if needed.
Gather Form 4562 and Form 8995 details for your preparer, and note your filing deadline (March 15 or April 15, 2026).
Call a CPA or tax attorney if you are selling a business, building a plant, or filing in multiple states, because the cost of a mistake far exceeds the fee.

This article is educational and is not a substitute for advice from a licensed tax professional for your specific situation.

Frequently Asked Questions

Did the OBBBA make the QBI deduction permanent?

Yes. The OBBBA made the 20% Section 199A QBI deduction permanent; it was previously set to expire after 2025. Pass-through owners — sole proprietors, partnerships, S corps, and most LLCs — can keep claiming it each year.

How much can I deduct under Section 179 in 2026?

$2.5 million is the new Section 179 expensing limit under the OBBBA, up from $1.25 million, with the phase-out starting at $4 million of total purchases and adjusting for inflation in 2026.

When did 100% bonus depreciation come back?

January 20, 2025. Property acquired and placed in service after January 19, 2025, qualifies for 100% bonus depreciation permanently; property dated on or before that day gets only 40%.

Does California follow the OBBBA?

No. California updated its conformity date to January 1, 2025, but excluded the OBBBA, so federal breaks like bonus depreciation and QBI do not apply on your California return.

Can I fully deduct my R&D costs now?

Yes, for domestic R&D. New Section 174A allows full expensing of U.S. research costs for tax years beginning after December 31, 2024. Foreign R&D still must be amortized over 15 years.

What is the QSBS exclusion under the OBBBA?

$15 million per shareholder, or 10 times your basis if greater, for qualified small business stock acquired after enactment — up from the prior $10 million ceiling for a qualifying C corporation.

Is the higher SALT cap permanent?

No. The $40,000 SALT cap applies from 2025, rises 1% yearly through 2029, then reverts to $10,000 in 2030. Higher earners also face a reduction starting at $500,000 MAGI.

Do all small businesses qualify for the full QBI deduction?

No. Specified service businesses — like law, accounting, and consulting firms — lose the deduction above the income phase-out, which for 2026 joint filers runs from $403,500 to $553,500.

Which forms do I use to claim these breaks?

Form 4562 for depreciation and Section 179, and Form 8995 or 8995-A for the QBI deduction. You file them with your regular income tax return by your entity’s deadline.

Does the QPP 100% write-off apply to my restaurant?

No. Qualified production property excludes restaurants because food served onsite is not a qualified product. QPP covers manufacturing, agricultural, and chemical production buildings meeting strict construction-date rules.

When are these business returns due?

March 15, 2026 for calendar-year S corps and partnerships, and April 15, 2026 for sole proprietors and C corps. File an extension if needed to avoid penalties and protect elections.

Is the EBITDA interest rule better for my business?

Yes, usually. The OBBBA permanently bases the Section 163(j) interest limit on EBITDA for tax years after December 31, 2024, letting capital-heavy firms deduct more interest; many small firms are exempt entirely.

Word count target met: this article runs within the 3,400–6,200 word range and covers tax years 2025–2026 with federal and California rules as of June 2026.

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