Ind Federal Income Tax

The 2025 OBBB created a new senior deduction that provides a $6,000 deduction for taxpayers who have reached age 65 by the end of the tax year. The senior deduction is available regardless of whether the taxpayer itemizes or elects to take the standard deduction.

The 2025 OBBB created a new deduction for "qualified passenger vehicle loan interest". The amount of the deduction is limited to $10,000 (not to be adjusted for inflation). The deduction phases out and is reduced by $200 for every $1,000 (or portion thereof) by which the taxpayer's modified adjusted gross income exceeds $100,000 ($200,000 for joint returns).

The OBBBA created a temporary deduction for overtime pay mandated by the Fair Labor Standards Act (FLSA) (overtime compensation paid above the taxpayer's normal rate). The deduction amount is limited to $12,500 for individual returns and $25,000 for joint returns. The deduction is allowable regardless of whether the taxpayer itemizes or takes the standard deduction.

The OBBB created a temporary deduction for up to $25,000 in qualified tip income (the $25,000 limit applies to both single and joint filers).[1] The deduction only applies for tips received in an occupation where tipping is traditional and customary.

<div class="Section1">Depreciation is a deduction that permits recovery, over a period of time, of capital invested in tangible property used in a trade or business or held for the production of income.<a href="#_ftn1" name="_ftnref1">¹</a> It is a deduction taken in arriving at adjusted gross income.<a href="#_ftn2" name="_ftnref2">²</a><div class="Section1"><br /> <br /> Only property that has a limited useful life may be depreciated. Land does not have a limited life and, therefore, cannot be depreciated. However, the improvements on land can be depreciated. Inventory and stock in trade are not depreciable.<a href="#_ftn3" name="_ftnref3">³</a> A taxpayer who purchases a term interest in property cannot amortize or depreciate the cost of the property during any period in which the remainder interest is held by a related person.<a href="#_ftn4" name="_ftnref4">⁴</a> On the other hand, life tenants and beneficiaries of estates and trusts may be allowed the regular depreciation deduction if the property is depreciable property.<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> The method used to determine the rate of depreciation depends on when the property was placed into service. Property is &ldquo;placed into service&rdquo; when it is first placed in a condition or state of readiness and availability for a specifically assigned function for use in a trade or business, for the production of income, or in a tax-exempt or personal activity.<a href="#_ftn6" name="_ftnref6">⁶</a> <em><em>See</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id=""></a> for a discussion of the bonus depreciation rules that apply post-tax reform.<br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; IRC &sect;&sect;&nbsp;167(a), 168(a), as amended by ATRA and Pub. Law No.&nbsp;115-97 (the 2017 reform legislation).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; IRC &sect;&sect;&nbsp;62(a)(1), 62(a)(4).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.167(a)-2.<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp; IRC &sect;&nbsp;167(e).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp; IRC &sect;&nbsp;167(d).<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp; Prop.&nbsp;Treas. Reg. &sect;&nbsp;1.168-2(l)(2).<br /> <br /> </div></div><br />

<div class="Section1">The 2017 tax reform legislation created a special rule to allow partnerships to carry forward certain disallowed business interest (the rule does not apply to S corporations or other pass-through entities, although the new law specifies that similar rules will apply).&nbsp;The general rules governing carrying forward disallowed business interest (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id=""></a>) do not apply to partnerships.<div class="Section1"><br /> <br /> Instead, disallowed business interest is allocated to each partner in the same manner as non-separately stated taxable income or loss of the partnership.<a href="#_ftn1" name="_ftnref1">¹</a>&nbsp;The partner is entitled to deduct his or her share of excess business interest in any future year, but only:<br /> <blockquote>(1)&nbsp;&nbsp; against excess taxable income (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id=""></a>) attributed to the partner by the partnership, and<br /> <br /> (2)&nbsp;&nbsp; when the excess taxable income is related to the activities that created the excess business interest carryforward.<a href="#_ftn2" name="_ftnref2">²</a></blockquote><br /> Such a deduction also requires a corresponding reduction in excess taxable income. Further, if excess business interest is attributed to a partner, his or her basis in the partnership interest is reduced (not below zero) by the amount of the allocation even though the carryforward does not permit a partner&rsquo;s deduction in the year of the basis reduction.&nbsp;The partner&rsquo;s deduction in a future year for the carried forward interest will <em>not</em> require another basis adjustment.<br /> <br /> If the partner disposes of the partnership interest after a basis adjustment occurred, immediately before the disposition the partner&rsquo;s basis will be increased by the amount that any basis reduction exceeds the amount of excess interest expense that has been deducted by the partner.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> The IRS has released proposed regulations stating that business interest is first accounted for at the partner level, and then allocated to the partners. A partner cannot later include his or her share of the partnership&rsquo;s business interest income for the year except to the extent of the partner&rsquo;s share of the excess of (i) the partnership&rsquo;s business interest income over (ii) the partnership&rsquo;s business interest expense (excluding floor plan financing). A partner cannot include his or her share of floor plan financing interest in determining his or her individual business interest expense deduction limitation.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> <em><em>See</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id=""></a> for a discussion of the general rules governing the corporate deduction for business interest.<br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp; IRC &sect;&nbsp;163(j)(4).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp; IRC &sect;&nbsp;163(j)(4)(B).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp; IRC &sect;&nbsp;163(j)(4)(B)(iii).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp;&nbsp; Notice 2018-28.<br /> <br /> </div></div><br />

<p> Businesses that operate as pass-through entities (partnerships, S corporations, sole proprietorships) are permitted to deduct interest expenses incurred in operating the business. The 2017 tax reform legislation generally limits the interest expense deduction to the sum of (1) business interest income, (2) 30 percent of the business' adjusted taxable income and (3) floor plan financing interest.¹ Businesses with average annual gross receipts of $32 million for 2026 ($31 million in 2025, $30 million in 2024, $29 million in 2023, $27 million in 2022, $26 million in 2019-2021) for the three-taxable year period that ends with the previous tax year are exempt from this new limitation (i.e., businesses that meet the gross receipts test of IRC Section 448(c)).² <em><em>See</em></em> Q for more information on the small business exemption. </p><p> These rules are applied at the partnership level, and the deduction for business interest must be taken into account in determining the non-separately stated taxable income or loss of the partnership.³ Under the 2017 tax reform legislation, the limit on the amount that is allowed as a deduction for business interest is increased by a partner's distributive share of the partnership's excess taxable income.⁴</p><p> "Excess taxable income" is the amount that bears the same ratio to the partnership's adjusted taxable income as: <br/><blockquote>(x) the excess (if any) of (1) 30 percent of the adjusted taxable income of the partnership over (2) the amount (if any) by which the business in-terest of the partnership, reduced by floor plan financing interest, ex-ceeds the business interest income of the partnership bears to (y) 30 percent of the adjusted taxable income of the partnership.5 </blockquote><br/> Excess taxable income must be allocated in the same manner as non-separately stated income and loss. A partner's adjusted basis in his or her partnership interest must be reduced (not below zero) by the excess business interest that is allocated to the partner. The new law provides that similar rules will apply to S corporations and their shareholders.⁶</p><p> As expressed in the Senate amendment to the 2017 tax reform legislation, the intent of this calculation was to allow a partner to deduct additional interest expense that the partner may have paid to the extent that the partnership could have deducted more business interest. </p><p> "Business interest" means interest paid on indebtedness that is properly allocated to a trade or business, but excluding investment interest.⁷ The final regulations released in 2020 specifically exclude commitment fees and debt issuance costs from the definition of interest. While partnership guaranteed payments and hedging gains or losses are not specifically included in the definition of business interest, examples in the regulations provide guidance on when such payments may be included. The final regulations retain substitute interest payments in the definition of interest because the payments generally are economically equivalent to interest. However, the final regulations provide that a substitute interest payment is treated as interest expense to the payor only if the payment relates to a sale-repurchase or securities lending transaction that is not entered into by the payor in the payor's ordinary course of business. Further, the rules provide that a substitute interest payment is treated as interest income to the recipient only if the payment relates to a sale-repurchase or securities lending transaction that is not entered into by the recipient in the recipient's ordinary course of business. </p><p> "Business interest income" means the amount of interest income that is included in the entity's income and properly allocated to a trade or business, excluding investment interest income.⁸</p><p> "Trade or business" specifically excludes the trade or business of being an employee, any electing real property trades or businesses, electing farming businesses, furnishing or selling electrical, water or sewage disposal services, and gas or steam distribution and transportation.⁹</p><p> "Adjusted taxable income" for purposes of these rules means taxable income computed without regard to non-business items of income, gain deduction and loss, business interest and business interest income, the net operating loss deduction under Section 172, the deduction for pass-through entities under IRC Section 199A and any deductions for depreciation, amortization or depletion.¹⁰</p><p> <em><em>See</em></em> Q for a discussion of the rules governing carryforwards of disallowed partnership business interest. <em><em>See</em></em> Q for a discussion of the general rules governing the corporate deduction for business interest. <br/><strong>CARES Act Elections</strong></p><p> The IRS gave businesses added flexibility in making and revoking elections related to business interest expense deduction under the CARES Act. A taxpayer could elect under Section 163(j)(10)(A)(iii) not to apply the 50 percent ATI limitation for a 2019 or 2020 taxable year (2020 only for partnerships). </p><p> A taxpayer permitted to make the election could elect not to apply the 50 percent ATI limitation by timely filing a federal income tax return or Form 1065 (or amendments) using the 30 percent ATI limitation. No formal statement was required to make the election. The taxpayer could then later revoke that election by filing an amended return or form using the 30 percent limit. Similarly, to use 2019 ATI for 2020, the taxpayer filed using 2019 ATI (and could later revoke that election by filing a timely amended return or form). </p><p> Partnerships could elect out of the 50 percent EBIE rule by not applying the CARES Act rule on their return, but could later revoke that election on an amended return or form.¹¹</p><p><hr align="left" size="1" width="33%"></hr></p><p> <a href="#_ftnref1">1</a>. IRC § 163(j)(1). </p><p> 2. IRC §§ 163(j)(2), 448(c). </p><p> 3. IRC § 163(j)(4). </p><p> 4. IRC § 163(j)(4)(A)(ii)(II). </p><p> 5. IRC § 163(j)(4)(C). </p><p> 6. IRC § 163(j)(4)(D). </p><p> 7. IRC § 163(j)(5). </p><p> 8. IRC § 163(j)(6). </p><p> 9. IRC § 163(j)(7). </p><p> 10. IRC § 163(j)(8). </p><p> <a href="#_ftnref14">11</a>. Rev. Proc. 2020-22. </p>

<p> Under pre-2018 law, business owners were typically permitted to deduct interest expenses incurred in carrying on a trade or business (subject to limitations).¹ The 2017 tax reform legislation generally limits the interest expense deduction to the sum of (1) business interest income, (2) 30 percent of the business' adjusted taxable income (ATI) and (3) floor plan financing interest (<em><em>see</em></em> below).² Businesses with average annual gross receipts of $25 million ($32 million in 2026) or less for the three-taxable year period that ends with the previous tax year are exempt from this new limitation (i.e., businesses that meet the gross receipts test of IRC Section 448(c)).³</p><p> Generally, the limit applies at the taxpayer level, but in the case of a group of affiliated corporations that file a consolidated return, it applies at the consolidated tax return filing level. </p><p> "Business interest" generally excludes investment interest. It includes any interest paid or accrued on indebtedness properly allocable to carrying on a trade or business. "Business interest income" means the amount of interest that is included in the taxpayer's gross income for the tax year that is properly allocable to carrying on a trade or business. </p><p> "Adjusted taxable income" means taxable income computed without regard to (1) items of income, gain, deduction or loss not allocable to carrying on a trade or business, (2) business interest or business interest income, (3) any net operating loss deduction (NOL), (4) the deduction for pass-through income under Section 199A⁴ and (5) for years before 2022, any deduction for depreciation, amortization or depletion.⁵ For the purpose of the business interest deduction, adjusted taxable income is computed without regard for the deductions that are allowed for depreciation, amortization or depletion for tax years beginning after December 31, 2017 and before January 1, 2022. </p><p><hr></hr></p><p> <strong>Planning Point:</strong> In a chief counsel memorandum, the IRS found that to determine the allowable business interest expense deduction, ATI for the year includes any adjustments required under IRC Section 481(a) because of a change in accounting method for depreciation. The taxpayer in question here filed a Form 3115 to change accounting methods for depreciation for certain property placed in service during the 2017 tax year. The taxpayer had classified the property as seven-year property and later determined that the property should properly be classified as five-year property. The taxpayer then changed from an impermissible to permissible method of depreciating the property, resulting in a negative adjustment for the year of change (the taxpayer elected to forgo additional first year depreciation under Section 168(k)). According to the non-precedential memo, that adjustment must be reflected in the business' ATI for the tax year.⁶</p><p><hr></hr></p><p> "Floor plan financing interest" is interest paid or accrued on floor plan financing indebtedness, which is indebtedness incurred to finance the purchase of motor vehicles held for sale or lease to retail customers (and secured by the inventory that is acquired).⁶For tax years beginning in 2025 and beyond, the definition of "motor vehicle" for floor plan financing purposes in the business interest context was modified to include any trailer or camper which is designed to provide temporary living quarters for recreational, camping, or seasonal use and is designed to be towed by, or affixed to, a motor vehicle.⁷</p><p> As a result of these rules, business interest income and floor plan financing interest are fully deductible, with the limitation applying to 30 percent of the business' adjusted taxable income. </p><p> Unused interest expense deductions may be carried forward indefinitely.⁸</p><p><strong>CARES Act Elections</strong></p><p><b> </b>The CARES Act increased the 30&nbsp;percent limit to 50&nbsp;percent for tax years beginning in 2019 and 2020.⁹ All entities (corporations and pass-throughs) could elect to use 2019 ATI instead of 2020 ATI in determining the 2020 business interest expense deduction, which often increased the business interest deduction for businesses who experienced reduced income levels in 2020.¹⁰ See heading below for information about making and revoking the election.</p><p> The IRS gave businesses substantial flexibility in making and revoking elections related to business interest expense deduction under the CARES Act. A taxpayer could elect under Section 163(j)(10)(A)(iii) not to apply the 50 percent ATI limitation for a 2019 or 2020 taxable year (2020 only for partnerships). </p><p> A taxpayer permitted to make the election could elect not to apply the 50 percent ATI limitation by timely filing a federal income tax return or Form 1065 (or amendments) using the 30 percent ATI limitation. No formal statement was required to make the election. The taxpayer could then later revoke that election by filing an amended return or form using the 30 percent limit. Similarly, to use 2019 ATI for 2020, the taxpayer merely filed using 2019 ATI (and could then later revoke that election by filing a timely amended return or form). </p><p> Partnerships elected out of the 50 percent EBIE rule by not applying the CARES Act rule on their return, and could later revoke that election on an amended return or form.¹¹</p><p><hr align="left" size="1" width="33%"></hr></p><p> 1. IRC § 163(j). </p><p> 2. IRC § 163(j)(1). </p><p> 3. IRC §§ 163(j)(2), 448(c). </p><p> 4. IRC § 163(j)(8).</p><p> 5. IRC § 163(j)(8). &nbsp;&nbsp;&nbsp;</p><p> 6. OCC Memo 20213007. </p><p> 7. IRC § 163(j)(9). </p><p> 8. IRC §&nbsp;163(j)(2).</p><p> 9. IRC § 163(j)(10)(A)(i).</p><p>10. IRC § 163(j)(10)(B).</p><p>11. Rev. Proc. 2020-22. </p>

<p> Several refundable tax credits, such as the earned income credit and the refundable portion of the child tax credit, are allowed as an offset against AMT liability. Other personal nonrefundable credits also allowed as an offset include: <br><ul><br><li>Adoption tax credit</li><br><li>Child and dependent care credit</li><br><li>Nonrefundable portion of the child tax credit</li><br><li>Certain learning credits</li><br><li>Tax credit for IRAs and retirement plans</li><br><li>Energy saving credits<a href="#_ftn1">¹</a></li><br></ul></p><p><hr align="left" size="1" width="33%"></p><p><a href="#_ftnref1">[1]</a>. IRC § 26(a)(2). </p>

<p><b>Editor's Note:</b> The 2017 tax reform legislation roughly doubled the standard deduction to $24,000 per married couple and $12,000 per individual. For heads of households, the standard deduction was increased to $18,000. For married taxpayers filing separate returns, the standard deduction was $12,000 ($15,000 for 2025).&nbsp;These amounts are indexed for inflation for tax years beginning after December&nbsp;31, 2018 and were set to expire for tax years beginning after December&nbsp;31, 2025.<a href="#_ftn1">¹</a> The 2025 OBBB made the expansion permanent and further enhanced the standard deduction. For 2025, the amounts are $15,750 for single filers, $23,625 for heads of household and $31,500 for joint filers. These amounts are permanent and will be adjusted for inflation in future years. For 2026, the amounts are $16,100 for single filers and married taxpayers filing separate returns, $32,200 for married taxpayers filing jointly and $24,150 for heads of households.</p><p>The standard deduction is one of two "below-the-line" deduction options available to taxpayers. In other words, once a taxpayer determines adjusted gross income (gross income minus above the line deductions), the taxpayer may also deduct the sum of their exemptions and the greater of 1) the standard deduction; or 2) the sum of their itemized deductions (<i>see</i> Q <a href="javascript:void(0)">8524</a>).<a href="#_ftn2">²</a></p><p><b>Planning Point:</b> Because of the increased standard deduction and the elimination of many itemized deductions, more taxpayers now choose the standard deduction under the 2017 tax reform law. Those taxpayers who wish to take advantage of the remaining itemized deductions (for example, the deduction for charitable contributions) can benefit from planning to "bunch" those deductions into a single tax year in order to ensure that itemized deductions exceed the expanded standard deduction. </p><p>Taxpayers who do not itemize and who are age 65 or older or blind are entitled to increase their standard deduction. In 2026, taxpayers who are married or are surviving spouses are each entitled to an additional deduction of $1,650 if age 65 or older, as well as an additional $1,650 deduction if blind.&nbsp;The additional standard deduction is $2,050 for 2026 for unmarried taxpayers age 65 or older as well as $2,050 for 2026 for unmarried blind taxpayers.</p><p>In 2025, taxpayers who are married or are surviving spouses are each entitled to an additional deduction of $1,600 if age 65 or older, as well as an additional $1,600 deduction if blind. The additional standard deduction is $2,000 for 2025 for unmarried taxpayers age 65 or older as well as $2,000 for 2025 for unmarried blind taxpayers.<a href="#_ftn3">³</a> The additional amounts for elderly and blind taxpayers are indexed for inflation.<a href="#_ftn4">⁴</a></p><p><hr align="left" size="1" width="33%"></hr></p><p> <a href="#_ftnref1">1</a>. IRC § 63(c)(7). </p><p> <a href="#_ftnref2">2</a>. IRC § 63. </p><p> <a href="#_ftnref3">3</a>. IRC § 63(f). </p><p> <a href="#_ftnref4">4</a>. IRC § 63(c)(4). </p>