How the One Big Beautiful Bill Act affects your small business taxes in 2026

Published Wednesday 19 August 2026

Table of contents

• What is the One Big Beautiful Bill Act?
• How the OBBBA affects small business taxes
• QBI deduction: Permanent at 20%
• Section 179 expensing: doubled to $2.5 million
• Bonus depreciation: 100% is back for good
• R&D expenses: immediate deduction restored
• 1099 reporting thresholds: Simpler rules for contractors
• Employee benefits: New tax breaks for small employers
• How much could your small business save?
• What to do now to take advantage of these tax breaks
• Simplify your small business tax planning with Xero
• FAQs on the One Big Beautiful Bill Act and small business taxes

Key takeaways

• The One Big Beautiful Bill Act makes the qualified business income (QBI) deduction permanent, saving an estimated $4,600 per year on average for more than eight million entrepreneurs.
• Section 179 expensing doubles to $2.5 million and bonus depreciation returns to 100%, letting you write off equipment and assets immediately.
• New 1099 reporting thresholds reduce paperwork: you only need to report contractor payments of $2,000 or more starting in 2026.
• Most provisions took effect on January 1, 2026, so now is the time to review your tax strategy with your accountant.

What is the One Big Beautiful Bill Act?

The One Big Beautiful Bill Act (OBBBA) is the most significant tax law passed since the 2017 Tax Cuts and Jobs Act (TCJA). Signed into law on July 4, 2025, as Public Law 119-21, it makes permanent many TCJA provisions that were set to expire at the end of 2025. It also introduces new tax breaks and expands existing ones for individuals, families, and businesses.

For small business owners, this law is a big deal. More than 33 million small businesses across the country are affected by these changes. If you're a sole proprietor, freelancer, or LLC owner, there are specific provisions designed to put more money back in your pocket.

Why it matters for small businesses

Nine out of 10 small businesses are structured as pass-through entities, including sole proprietorships, partnerships, S-corps, and limited liability companies (LLCs). That means business income flows directly to your personal tax return, and the individual tax rates you pay have a direct impact on your bottom line.

Without the OBBBA, the top tax rate for approximately 26 million small businesses could have nearly doubled to 43% when TCJA provisions expired. Instead, the law locks in lower rates and adds new deductions.

The U.S. Small Business Administration (SBA) estimates approximately $4,600 per year in average tax relief for more than eight million entrepreneurs. Treasury Department data cited by the SBA projects an average $7,000 reduction for more than 12 million small business owners. Those savings can go toward hiring, equipment, marketing, or simply building a stronger financial cushion.

How the OBBBA affects small business taxes

The One Big Beautiful Bill Act touches nearly every part of the tax code that matters to small businesses. Here are the seven most important changes you should know about, from expanded deductions and faster write-offs to simpler reporting rules and new employee benefit credits. Each of these provisions works differently, so it's worth understanding which ones apply to your situation.

QBI deduction: permanent at 20%

The qualified business income (QBI) deduction under Section 199A is one of the most valuable tax breaks available to small businesses. The OBBBA makes this 20% deduction permanent. Without the new law, this deduction was scheduled to expire on December 31, 2025, which would have meant a significant tax increase for pass-through businesses.

This matters because 25.9 million small businesses claimed this deduction in 2021 alone. If you're a pass-through business owner, you can continue deducting 20% of your qualified business income from your taxable income, keeping your tax bill lower.

The law also expands the phase-out range for higher earners. If you're married filing jointly, the phase-out range increases by an additional $150,000, running from $394,600 to $544,600. That means more business owners can claim the full deduction before it starts to phase out.

There's also a new minimum deduction: if you have at least $1,000 in qualified business income, you're guaranteed a minimum deduction of $400. Both the minimum income threshold and the deduction floor are indexed for inflation after 2026.

Who qualifies for the QBI deduction?

The QBI deduction is available to owners of pass-through businesses who report business income on their personal tax returns. That includes sole proprietors, partners, S-corp shareholders, and most LLC members.

Service-based businesses, such as consultants, lawyers, and accountants, previously faced tighter income limits before the deduction phased out. The expanded phase-out thresholds give these business owners more room to claim the full deduction.

In plain terms, if you run your own business and your income passes through to your personal return, you're likely eligible. The size of your deduction depends on your taxable income, business type, and whether you pay wages or own depreciable property.

Section 179 expensing: doubled to $2.5 million

If you buy equipment, vehicles, software, or other qualifying assets for your business, Section 179 lets you deduct the full purchase price in the year you buy it, rather than spreading the deduction over several years. The OBBBA doubles the maximum deduction from $1.25 million to $2.5 million.

The phase-out threshold also increases. Your deduction begins to phase out when you place more than $4 million in property in service during the year, up from the previous $3.16 million limit. This change is effective for property placed in service after December 31, 2024.

For most small businesses, this means you can write off major purchases immediately. Whether you're buying a delivery van, upgrading your computer systems, or investing in new manufacturing equipment, you don't have to wait years to see the tax benefit.

Bonus depreciation: 100% is back for good

Before the OBBBA, bonus depreciation was being phased down gradually. It dropped from 100% in 2022 to 80% in 2023, 60% in 2024, and was heading to 0% by 2027. The new law permanently restores 100% bonus depreciation, so you can deduct the full cost of qualifying assets in the year you place them in service.

This applies to both new and used property, which is good news if you're buying secondhand equipment to save money. The provision is effective for property placed in service after January 19, 2025.

Bonus depreciation and Section 179 work together but serve different purposes. Section 179 has a dollar cap and requires your business to be profitable to use. Bonus depreciation has no dollar limit and can create a net operating loss that you carry forward to future years.

R&D expenses: immediate deduction restored

Starting in 2022, a change in the tax code required businesses to spread their domestic research and development (R&D) costs over five years instead of deducting them immediately. That created a cash flow crunch for small businesses investing in new products, processes, or technologies.

The OBBBA reverses this rule. Domestic R&D expenses can once again be deducted in the year you spend them. If you have average annual gross receipts under $31 million, the change is retroactive, meaning you can go back and amend returns as far as 2022 to claim immediate deductions you missed.

Foreign R&D expenses are still amortized over 15 years, but if your research and development happens in the United States, you get immediate relief. This is particularly useful if you're a small tech company, manufacturer, or any business that regularly invests in innovation.

1099 reporting thresholds: simpler rules for contractors

If you work with freelancers, independent contractors, or gig workers, you know the paperwork can pile up. The OBBBA raises the reporting threshold for 1099-NEC and 1099-MISC forms from $600 to $2,000, effective for tax year 2026.

That means you only need to file a 1099 form for contractors you pay $2,000 or more during the year. If you pay a freelance designer $1,500 for a one-time project, you no longer need to file a 1099 for that payment.

The law also sets the 1099-K threshold at $20,000 and 200 transactions, applied retroactively. This provides clarity for platforms and businesses that process third-party payments.

These changes don't affect how much tax contractors owe on their income. They simply reduce the administrative burden on your business when it comes to filing information returns.

Employee benefits: new tax breaks for small employers

The OBBBA creates and expands several tax credits and exclusions that make it more affordable to offer benefits to your team. If you've been looking for ways to attract and retain employees, these provisions are worth a close look.

Here are the key changes for small employers:

• Employer-provided childcare credit: The credit increases from 25% to 40% of costs, with the cap raised to $500,000. Small businesses can claim up to 50% of costs, with a maximum credit of $600,000.
• Student loan assistance: You can provide up to $5,250 per year in tax-free student loan repayment assistance to employees. This benefit is now permanent.
• Dependent care flexible spending account (FSA): The employee contribution limit increases to $7,500 in 2026, giving working parents more pre-tax dollars to cover childcare costs.
• Paid family leave tax credit: The credit for employers who offer paid family and medical leave has been permanently extended.
• Qualified small business stock (QSBS): The gain exclusion cap rises from $10 million to $15 million, and the asset ceiling increases from $50 million to $75 million. If you're building a startup, this could mean a larger tax-free gain when you eventually sell.

How much could your small business save?

The actual savings depend on your business structure, income level, and which provisions apply to your situation. That said, the headline numbers are encouraging.

The SBA estimates approximately $4,600 per year in average tax relief for more than eight million entrepreneurs. Treasury Department data projects an average $7,000 reduction for more than 12 million small business owners. At the macro level, the law is expected to generate $750 billion in economic growth and create more than one million new jobs.

Here's how the savings might look for different types of businesses:

• A sole proprietor earning $80,000 in qualified business income: You keep your $16,000 QBI deduction (20%) that would have disappeared without the OBBBA. That's thousands of dollars in tax savings that were at risk of expiring.
• A small construction company purchasing $200,000 in equipment: You can deduct the full amount in 2026 under Section 179, rather than spreading it across five to seven years. That's a significant cash flow advantage.
• A small business owner working with 10 contractors: If each earns between $600 and $1,999, you no longer need to file 10 separate 1099 forms, saving hours of administrative time each year.

Your results will vary, and some provisions interact with each other. Talk to your accountant or tax advisor to get a clear picture of how these changes affect your specific situation.

What to do now to take advantage of these tax breaks

Most of these provisions are already in effect for tax year 2026. Here are the steps you can take right now to make the most of the new law:

1. Review your business structure with your accountant. If you're a sole proprietor, ask whether restructuring as an S-corp or LLC could help you maximize the QBI deduction or other provisions.
2. Plan equipment purchases. If you've been putting off buying equipment, vehicles, or software, the doubled Section 179 limit and 100% bonus depreciation make 2026 an excellent year to invest.
3. Check your QBI deduction eligibility. The expanded phase-out thresholds mean you might now qualify for the full deduction even if you didn't before. Run the numbers with your tax advisor.
4. Update your contractor payment tracking. With the new $2,000 threshold for 1099 reporting, review your systems to make sure you're tracking payments accurately and only filing forms when required.
5. Explore employee benefit programs. The enhanced childcare credit, student loan assistance exclusion, and dependent care FSA limits make it more affordable to offer competitive benefits.
6. Review R&D spending. If your business invested in domestic research and development between 2022 and 2025, ask your accountant about amending past returns to claim immediate deductions.

Simplify your small business tax planning with Xero

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FAQs on the One Big Beautiful Bill Act and small business taxes

Here are answers to common questions about the One Big Beautiful Bill Act and how it affects small business taxes.

What is the official name and law number of the One Big Beautiful Bill Act?

The One Big Beautiful Bill Act was enacted as Public Law 119-21 (H.R. 1, 119th Congress). While popularly known by that name, the official short title was removed during the Senate amendment process, so the law technically has no formal short title.

When do the OBBBA tax changes take effect?

Some provisions are retroactive. Businesses with average annual gross receipts under $31 million can amend R&D deductions back to 2022. Bonus depreciation applies to property placed in service after January 19, 2025, and Section 179 changes cover property placed in service after December 31, 2024.

Does the OBBBA apply to sole proprietors?

Yes. Sole proprietors benefit from the permanent QBI deduction at 20%, expanded Section 179 limits, 100% bonus depreciation, and the higher 1099 reporting threshold, among other provisions.

Can I amend past tax returns to benefit from the OBBBA?

If your business has average annual gross receipts under $31 million and you incurred domestic R&D expenses between 2022 and 2025, you may be able to amend those returns to claim immediate deductions instead of five-year amortization.

Where can I estimate my OBBBA tax savings?

The IRS has published a dedicated OBBBA provisions page with detailed guidance for each provision. You can also use the IRS Tax Withholding Estimator to check whether your current withholding reflects the updated rates and deductions for 2026.