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OBBBA-The One Big Beautiful Bill Act (2025-2028)

Child & Dependent Care Credit (2026)

  • Old: 20-35 % credit; max $3 000 for one, $6 000 for two+
  • New: 50 % credit when AGI ≤ $15 000 → 20 % when AGI > $103 000 ($206 000 MFJ)
  • Expense caps ($3 000 / $6 000) unchanged
  • Effective 1 Jan 2026

No-Tax Deduction for Tips (2025-2028)

  • Deduct up to $25 000 of qualified tips reported on Form W-2
  • Below-the-line deduction; no itemizing required
  • Phase-out starts at MAGI $150 000 / $300 000 MFJ (-$100 per $1 000)
  • Not available if filing MFS; income-tax only (SS & Medicare still due)

No-Tax Deduction for Overtime (2025-2028)

  • Deduct up to $12 500 per year ($25 000 MFJ) of qualified overtime
  • Same phase-out & MFS rules as the tip deduction
  • SSN must appear on the return

No-Tax Deduction for Car-Loan Interest (2025-2028)

  • Deduct up to $10 000 of interest on a new passenger vehicle (≤ 14 000 lbs, U.S. final assembly)
  • Phase-out starts MAGI $100 000 / $200 000 MFJ (-$200 per $1 000)
  • Must be first-lien loan; VIN required on return

Child Tax Credit made permanent

  • 2025 credit rises to $2 200; refundable portion $1 700
  • Indexed for inflation thereafter
  • SSNs required for taxpayer & child; phase-out limits unchanged

Tax Rates cemented (TCJA becomes permanent)

  • Individual brackets stay at 10, 12, 22, 24, 32, 35, 37 %
  • Capital-gains rates remain 0, 15, 20 %
  • Expanded bracket widths continue with annual inflation adjustments

SSN Requirement tightened for Education Credits (2026)

  • Return must show both taxpayer SSN and student SSN for AOTC or LLC
  • ITIN no longer acceptable for the student
  • School’s EIN also required for AOTC

Business Basics

Hobby vs. Business & Sole Proprietorship — Quick Summary

Hobby vs. Business (How to Tell)

Signs you’re running a business rather than a hobby:

  • You keep books/records and operate in a businesslike way.
  • Time and effort show a clear intent to make a profit.
  • You rely on the income for your livelihood.
  • Losses stem from factors beyond your control.
  • You adjust operations to improve profitability.
  • You (or your advisors) have the needed expertise.
  • Past success in similar ventures.
  • There’s a profit history or realistic profit potential (including asset appreciation).
How taxes differ at a glance

Hobby: report all hobby income on Schedule 1 (Form 1040) “Other income.” Expenses aren’t deductible for 2018–2025. No Schedule C and no self-employment tax.

Business: report income and deduct ordinary/necessary expenses on Schedule C (or F). Losses may be allowed (subject to other rules). Self-employment tax generally applies to net earnings.

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Sole Proprietorship (Overview)

  • Single owner, not incorporated — simplest way to operate.
  • May need a DBA (fictitious name) and local business licenses.
  • Main downside: unlimited personal liability (consider insurance).
Advantages
  • Easy and inexpensive to set up/run.
  • Taxed once on the personal return (no double taxation).
  • Losses can offset personal income (subject to limits).
  • May be eligible for the Qualified Business Income (QBI) deduction.
Disadvantages
  • Personal liability for debts and lawsuits.
  • All net earnings generally subject to self-employment tax.
  • Some employee-type fringe benefits aren’t available.

Educational info by Ultimate Tax Preparation, LLC. Not legal/tax advice; individual circumstances vary. Contact: [email protected].

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LLC & Partnership — Quick Summary

Limited Liability Company (LLC)

  • State-law entity with liability protection and fewer formalities than a corporation.
  • Owners are “members.” Single-member (SMLLC) or multi-member (MMLLC).
  • LLC is a legal structure, not a specific tax return.
  • Default tax: SMLLC is disregarded for income tax (reports on owner’s Form 1040, e.g., Schedule C/E/F); MMLLC is taxed as a partnership (files Form 1065).
  • Can elect S-corp or C-corp taxation if eligible and beneficial.
  • Pros: liability protection, flexible tax options, fewer ongoing formalities than a corporation.
  • Cons: potential state fees, some benefits limited/taxable compared to C-corps, outside capital can be trickier.
Default tax treatment (plain-English)
  • SMLLC: income/expenses go on the owner’s personal return; net earnings may be subject to self-employment tax.
  • MMLLC: files Form 1065 and issues K-1s; partners report their share on personal returns. Ordinary trade/business income may be subject to SE tax for general partners.
  • QBI: Many LLCs taxed as sole prop/partnership may qualify for the Qualified Business Income deduction (subject to limits).
Considering an S-corp election (optional)
  • Potential payroll/self-employment tax advantages for established, profitable businesses.
  • Requires paying owners “reasonable compensation” via payroll and filing extra payroll forms.
  • Election timing matters (generally by 2 months and 15 days after the start of the tax year; late relief may be available).
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Partnership

  • Two or more owners operating together; not incorporated.
  • Formation can occur by agreement (some states don’t require a formal state filing to exist), but you may still need a DBA/trade name registration, local licenses, and tax registrations.
  • Best practice: have a written partnership agreement (capital, profit splits, buy-sell, dispute resolution).
  • Pros: simple to set up; pass-through taxation (profits/losses reported on partners’ returns).
  • Cons: partners generally have joint and several personal liability; disputes more likely without clear terms.
  • Tax basics: files Form 1065 and issues K-1s; partners may owe self-employment tax on their share of ordinary business income.
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Educational resource by Ultimate Tax Preparation, LLC. Not legal or tax advice. For personalized help, contact [email protected].

S-Corp & C-Corp — Quick Summary

S Corporation (S-Corp)

  • Elects pass-through taxation (files Form 1120-S); profit/loss passes to owners via Schedule K-1.
  • Owners generally pay personal tax on their share whether or not cash is distributed.
  • Distributions (not wages) aren’t subject to self-employment tax, but owners must take reasonable W-2 compensation subject to payroll taxes.

Pros

  • Liability protection (corporate shield).
  • Avoids C-corp “double tax” on operating profits.
  • Losses may offset other income (subject to basis, at-risk, passive, and excess business loss limits).
  • Potential QBI deduction (limits/phaseouts apply).

Cons

  • Eligibility limits: ≤100 shareholders, only one class of stock, eligible owners only.
  • Payroll/admin burden for reasonable compensation.
  • Personal guarantees don’t create basis unless you actually pay the debt or lend funds directly to the S-corp.
  • Some fringe benefits taxable to >2% owner-employees.
Key requirements & election timing
  • Domestic corp, one class of stock, only eligible shareholders (individuals/estates/certain trusts; no partnerships, corporations, or nonresident aliens).
  • Election on Form 2553 generally due within 2 months 15 days of the tax-year start (late relief may be available).
  • Owners working in the business must be on payroll at reasonable compensation levels.
Shareholder basis (why it matters)
  • Basis starts with stock cost and increases with income and direct shareholder loans to the company.
  • Bank loans guaranteed by an owner don’t add to basis until the owner makes an economic outlay (e.g., pays the debt).
  • Loss deductions and tax-free distributions are limited to basis.

C Corporation (C-Corp)

  • Separate taxable entity (files Form 1120); profits taxed at the corporate rate (currently 21%).
  • Dividends (if paid) are taxed again to shareholders (double taxation).
  • Unlimited shareholders and multiple classes of stock permitted.

Pros

  • Liability protection; familiar structure for investors.
  • Often easier to raise capital; multiple stock classes allowed.
  • Broader, tax-favored fringe benefits for employee-owners than S-corps.
  • Potential QSBS (§1202) exclusion on qualified stock (strict rules; 5-year hold).

Cons

  • Double taxation on dividends (and potentially on certain exits).
  • Higher admin/compliance burden (board minutes, filings, payroll, etc.).
  • NOLs don’t pass through to owners; carryforward rules/limits apply.
  • No QBI deduction.
  • Potential accumulated earnings tax if profits are retained without a business need.

Educational resource by Ultimate Tax Preparation, LLC. Not legal or tax advice. For personalized guidance, contact [email protected].

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