A variety of tax-related limits that affect businesses are indexed annually based on inflation. For 2025, many limits have increased, though the rate of increase has slowed due to cooling inflation. Understanding these changes can help businesses optimize tax strategies, reduce taxable income, and stay compliant with internal revenue regulations.

Here’s a breakdown of the most significant updates for 2025 and how they compare to 2024.

2025 Deductions Compared to 2024

Section 179 Expensing

The Section 179 deduction allows businesses to deduct the cost of qualifying equipment and property in the year they are placed in service rather than depreciating the expense over time. This deduction is especially beneficial for businesses investing in equipment, machinery, and certain heavy vehicles.

• Maximum deduction: $1.25 million (up from $1.22 million)
• Phaseout threshold: $3.13 million (up from $3.05 million)
• Deduction limit for certain heavy vehicles: $31,300 (up from $30,500)

Standard Mileage Rate for Business Driving

• New rate: 70 cents per mile (up from 67 cents per mile in 2024)

Qualified Business Income Deduction (Sec. 199A)

The Qualified Business Income (QBI) deduction allows eligible business owners to deduct up to 20% of their business income. However, the deduction phases out at certain income levels:

• Married filing jointly: $394,600 (up from $383,900)
• Single filer and other filers: $197,300 (up from $191,950)

Retirement Plan Contribution Limits: 2025 vs. 2024

401(k) Plans

• Employee contribution limit: $23,500 (up from $23,000)
• Catch-up contribution (for employees 50 and older): $7,500 (unchanged)
• New catch-up contribution for ages 60-63: $11,250 (new for 2025)

SIMPLE IRA Plans

• Employee contribution limit: $16,500 (up from $16,000)
• Catch-up contribution (for employees 50 and older): $3,500 (unchanged)
• New catch-up contribution for ages 60-63: $5,250 (new for 2025)

Defined Contribution Plans

• Total combined employer and employee contributions: $70,000 (up from $69,000)
• Maximum compensation used to determine contributions: $350,000 (up from $345,000)
• Annual benefit limit for defined benefit plans: $280,000 (up from $275,000)
• Compensation threshold for highly compensated employees: $160,000 (up from $155,000)
• Compensation defining a “key” employee: $230,000 (up from $220,000)

Social Security Tax Update

The cap on earnings subject to Social Security tax has increased:

• New limit for 2025: $176,100 (up from $168,600 in 2024)

Updates to Employee Benefits & Tax-Free Contributions

Businesses offering employee benefits should be aware of updated limits:

Qualified Transportation Fringe Benefits

• Monthly tax-free limit: $325 (up from $315 in 2024)

Health Savings Accounts (HSA)

• Individual coverage contribution limit: $4,300 (up from $4,150)
• Family coverage contribution limit: $8,550 (up from $8,300)
• Catch-up contribution for those 55 and older: $1,000 (unchanged)

Flexible Spending Accounts (FSA)

• Health care FSA contribution limit: $3,300 (up from $3,200)
• Health care FSA rollover limit (if plan permits): $660 (up from $640)
• Dependent care FSA contribution limit: $5,000 (unchanged)

Federal Income Tax Rates and Standard Deduction for 2025

The federal income tax brackets for 2025 have been adjusted for inflation. These brackets determine the tax rate applied to taxable income:

• Single filers: Taxable income over $11,600 will be taxed at 10%, and rates increase progressively up to 37% for income above $609,350.
• Married filing jointly: The 10% bracket starts at $23,200, and the highest tax rate of 37% applies to income over $731,200.

Standard Deduction

The standard deduction has also been adjusted for inflation:

• Single filer: $14,600 (up from $14,000)
• Married filing jointly: $29,200 (up from $28,000)
• Head of household: $21,900 (up from $21,000)

Capital Gains Tax Rates

The tax treatment of capital gains remains an essential factor for business owners and investors:

• 0% tax rate: Applies to taxable income up to $47,025 for single filers and $94,050 for those filing jointly.
• 15% tax rate: Applies to incomes up to $518,900 for single filers and $583,750 for joint filers.
• 20% tax rate: Applies to incomes above these thresholds.

Potential Upcoming Tax Changes in 2025

Beyond the annual inflation adjustments, significant tax policy changes may be on the horizon. With Republican leadership in the White House and Congress, several proposals have been introduced that could impact businesses and individuals:

Corporate Tax Rate Reduction

There have been discussions about lowering the corporate tax rate, which is currently 21%. If enacted, this change could impact corporate tax planning and investment strategies.

Elimination of Taxes on Overtime Pay and Tips

Proposals to eliminate taxes on overtime pay and tips have been suggested to provide financial relief to employees in service industries. If approved, these changes could alter how businesses handle payroll and reporting for tipped employees.

Changes to Social Security Taxation

Some lawmakers have proposed eliminating taxes on Social Security benefits for retirees, which could affect individuals’ tax planning strategies in the coming years.

What These Changes Mean for You

Understanding these inflation adjustments, tax limits, and income tax rate changes is crucial for tax planning and compliance. Whether you’re a business owner looking to maximize deductions or an individual evaluating your filing status, these updates could impact your taxable income and overall tax bill.

To navigate these changes effectively, consider consulting with a tax professional. At Thomas Howell Ferguson, our CPAs stay up to date with internal revenue regulations and tax law changes to help businesses and individuals optimize their tax strategies.

Need Tax Guidance? Contact Us Today

With ongoing tax policy discussions and annual updates to tax brackets, deductions, and contribution limits, staying informed is key. If you have questions about your tax year filing, deductions, or federal income tax obligations, our team is here to help. Reach out to Thomas Howell Ferguson for expert tax advice tailored to your financial situation. Contact us here.