As the year-end approaches, small businesses and startups face a crucial moment to ensure tax compliance, maximize deductions, and protect their financial integrity. With the 2025 passage of the One Big Beautiful Bill Act (OBBBA), several important business tax provisions have changed, making this year’s year-end tax planning and reporting especially critical. Here’s a guide to the practical steps, documentation, and best practices to help you navigate this process with confidence.
1. Why Year-End Compliance & Due Diligence Matter
- Financial Integrity & Credibility: Accurate tax reporting builds trust with investors, board members, and future acquirers. Errors can spook due diligence teams or trigger audits.
- Cash Flow Optimization: By planning now, you can strategically time expenses (e.g., asset purchases, R&D) to maximize tax benefits.
- Regulatory Exposure: Missteps in reporting or missing elections can lead to IRS penalties or a lack of tax benefits, especially under new laws.
- The One Big Beautiful Bill Act (OBBBA), signed into law in mid-2025, represents the most comprehensive overhaul of the business tax code since the Tax Cuts and Jobs Act (TCJA). Some of the changes apply retroactively; others are set to become effective in 2026. This gives businesses limited time to prepare and become familiar with the changes. The 2025 year-end presents an opportunity to optimize under the current rules and start planning for changes taking effect in 2026.
2. Key Information-Reporting Requirements & OBBBA Updates
Here are the core reporting forms to pay attention to, and how the OBBBA affects them or their thresholds.
2.1. Form 1099 (1099-K, 1099-NEC / MISC)
- 1099-K (Payment Card / Third-Party Network)
- OBBBA Change: The law reinstates the pre-2021 reporting threshold for Form 1099-K — meaning TPSOs (third-party settlement organizations) must report only if both total payments exceed $20,000 and there are more than 200 transactions.
- 1099-NEC and 1099-MISC (Nonemployee Compensation and Other Payments)
- OBBBA Change: Starting after December 31, 2025, the threshold for reporting nonemployee compensation (NEC) or other relevant payments (MISC) increases from $600 to $2,000, with future inflation adjustments. This means that for payments made in 2026 and later, small businesses paying contractors or service providers will need to evaluate whether the new $2,000 threshold applies.
2.2. Form W-2 (Wage Reporting, Tips, Overtime)
- For tax year 2025, the IRS has announced no changes to Form W-2 or to withholding tables related to OBBBA.
- However, OBBBA does introduce new statutory reporting requirements for cash tips (reporting amount and occupation) and qualified overtime compensation.
- Penalty Relief for 2025: The IRS and Treasury are providing transition penalty relief under Notice 2025-62. For calendar year 2025:
- Employers or payors will not be penalized for failing to separately account for cash tips or report occupational codes when filing W-2s or 1099s, as long as they file complete and correct returns otherwise.
- Employers are encouraged, but not required, to provide a separate accounting of cash tips and overtime (e.g., via payee statements, online portals, or on W-2 in Box 14).
- Looking Ahead: The IRS is working on updating Forms W-2 for tax year 2026 to capture these new fields (tips, overtime, occupation).
2.3. Form 3921 / Stock-Option Reporting
- While OBBBA’s primary information-reporting changes are focused on wages, tips, overtime, and 1099 thresholds, there is no widely reported change (as of current IRS guidance) specific to Form 3921 (ISO transfer) under OBBBA. Year-end diligence for startups should always include verifying the accuracy of all option-related reporting, specifically Form 3921 for incentive stock option exercises and Form 3922 for employee stock purchase plan transactions. This review should confirm that all grant, exercise, and disposition data are complete, accurate, and properly reported.
3. Other Key OBBBA Changes That Small Businesses Should Understand
3.1. 100% Bonus Depreciation Restored
- The Act makes permanent 100% bonus (first-year) depreciation on eligible property acquired and placed in service on or after January 19, 2025. This includes machinery, equipment, and certain tangible personal property with a recovery period of 20 years or less.
- For “Qualified Production Property” (QPP)—nonresidential real property used in manufacturing—there is also a first-year 100% deduction under certain timing and construction conditions.
3.2. Section 179 Expensing Increased
- The Sec. 179 deduction limit is raised to $2.5 million, with a phase-out threshold at $4 million under the new law. This helps small businesses more aggressively expense equipment, software, and qualifying property.
3.3. Research & Experimental (R&E) Expenditures (Section 174)
- OBBBA introduces a new Section 174A, which allows immediate expense of domestic R&D / R&E expenditures paid or incurred after December 31, 2024.
3.4. Business Interest Limitation (Section 163(j))
- The law restores the EBITDA-based limitation for business interest deductibility. Capitalized interest (e.g., interest that is required to be capitalized under certain rules) may now be subject to this limitation.
3.5. Qualified Business Income (QBI) Deduction (Section 199A)
- The 20% QBI deduction for pass-through entities is now permanent under OBBBA.
- The bill also introduces more flexible thresholds and a minimum deduction of $400 for materially participating taxpayers with at least $1,000 of QBI
3.6. Excess Business Loss Limitation
- The Act makes permanent the limitation on excess business losses for non-corporate taxpayers (i.e., S Corps, partnerships). The losses above certain thresholds are disallowed and carried forward as net operating losses (NOLs).
3.7. Qualified Small Business Stock (QSBS)
- The One Big Beautiful Bill Act (OBBBA) raises the per-issuer exemption cap on gain exclusion to $15 million for QSBS. It also raises the asset test for issuers: small-business companies can now have up to $75 million in aggregate assets.
- Additionally, the new OBBBA introduces a meaningful change to the Qualified Small Business Stock (QSBS) regime for stock acquired on or after July 5, 2025. Historically, QSBS offered an all-or-nothing benefit: taxpayers needed to hold eligible stock for five full years to qualify for the 100% gain exclusion. Selling even one day early meant losing the benefit entirely.
- OBBBA replaces this rigid structure with a tiered exclusion system, allowing investors to unlock partial tax benefits sooner—an important shift for founders, early employees, and seed-stage investors.
Key QSBS Changes for Stock Acquired After July 4, 2025
- 3-Year Holding Period (≥ 3 years but < 4 years)
Gain exclusion of 50%, providing meaningful tax relief for earlier exits. - 4-Year Holding Period (≥ 4 years but < 5 years)
Gain exclusion increases to 75%, rewarding longer—but still earlier—holding periods. - 5-Year Holding Period (≥ 5 years)
The traditional 100% exclusion remains intact for investors who meet the full QSBS holding requirement.
Why This Matters for Startups and Investors
- Earlier Liquidity Options
Founders, employees, and early investors can now sell or participate in secondary transactions before the traditional five-year mark and still receive substantial tax benefits. - Greater Flexibility and Reduced Risk
By eliminating the historic cliff effect—where selling even a day before the five-year anniversary resulted in zero exclusion—the new tiered structure aligns better with the realities of startup fundraising, acquisitions, and employee mobility.
Important Scope Reminder
These new tiered QSBS rules apply only to stock acquired on or after July 5, 2025.
QSBS acquired before that date continues to follow the pre-OBBBA 5-year, all-or-nothing framework.
4. Best Practices & Due Diligence Recommendations for Year-End
- Review tax strategies and accelerate or defer Income and/or expenses
Businesses should assess how increased deductions and R&D expensing impact current-year tax liabilities. Small businesses with prior R&D expenses should explore retroactive refund opportunities and understand the limitation rules.
- Plan Capital Investments
Consider utilizing bonus depreciation and other incentives to accelerate capital investments; consider completing significant fixed-asset purchases before year-end
- Review Entity Structure and Compensation Strategy
Evaluate current business structure and determine which one is right for your goals (i.e., S-Corp, C-Corp, Partnership, or LLC)
- Manage Business Interest Deductions
Review debt structures to ensure interest expenses align with more favorable adjusted taxable income calculations.
- Use Professional Advice
For a small business and startup, working with a professional accountant and a CPA or tax attorney who understands OBBBA is often highly cost-effective: the incremental tax savings and reduced risk often outweigh advisory fees.
- Maintain a Clean Audit Trail
Keep detailed backup for every tax-related position: invoices, board resolutions, internal memos, election forms, and meeting minutes. This is critical for both IRS audits and investor due diligence.
- Don’t Ignore Key Domestic Information reporting compliance and International Payment Risks
If you’re paying contractors, employees, or subsidiaries and vendors abroad, especially in tech or biotech, ensure your accounting practices meet withholding rules, maintain proper documentation (W9 or W8 forms), and file the correct forms (1099s, W2s, 3921s, etc.) by the appropriate deadlines.