Important Tax Updates for You from SK Financial CPA

Note: While extensions provide additional time to file your tax return, any taxes owed are still due by the original deadline to avoid penalties and interest. If you require an extension, please inform your SK Financial CPA preparer promptly to ensure proper filing.

Republicans are negotiating a tax package that includes extending the 20% Qualified Business Income (QBI) deduction, which benefits self-employed individuals, contractors, landlords, and small business owners. Originally introduced in 2017, this deduction is set to expire after 2025, but lawmakers want to make it permanent despite its high cost. Additionally, lawmakers aim to restore three major business tax breaks:

• Bonus Depreciation: Businesses could once deduct 100% of new equipment costs, but this has dropped to 40% in 2024 and will fall to 20% in 2025 unless reversed.
• R&D Expenses: Previously, companies could deduct research and development costs in the same year, but now, these deductions are spread over five years (or 15 years for overseas research). Lawmakers want to return to the old system.
• Interest Deductions: Since 2022, stricter rules have limited how much interest big companies can deduct. Lawmakers want to loosen these restrictions.

2025 Tax Breaks for Business Vehicles

Business owners can benefit from substantial tax deductions on vehicles in 2025. The first-year depreciation cap for standard cars is $20,200 with bonus depreciation, followed by $19,600 in the second year, $11,800 in the third, and $7,060 for subsequent years. Without bonus depreciation, the first-year cap drops to $12,200.

Heavy vehicles (over 6,000 lbs) receive even larger deductions. SUVs can cost up to $31,300, with 40% of the remaining cost eligible for bonus depreciation and the rest depreciable over five years. Pickup trucks with a six-foot cargo bed may qualify for full expensing based on business use. Business owners should note that total expensing cannot exceed taxable business income, but bonus depreciation remains an option without this restriction, making it a valuable tax strategy.

Businesses leasing a vehicle worth over $62,000 in 2025 must account for an often-overlooked tax rule. The IRS requires lessees to report additional taxable income each year of the lease, as outlined in IRS tables (Rev. Proc. 2025-16). This rule offsets the tax advantage of leasing by mimicking the depreciation cap on purchased vehicles. Instead of reporting the income separately, businesses must reduce the deductible lease payments accordingly.

Businesses can deduct up to $5,000 in start-up costs in their first year, with the remaining costs amortized over 180 months. Expenses incurred before the business starts must be capitalized. A House GOP bill proposes increasing this deduction to $20,000, but it remains uncertain if this provision will be included in the final tax package.

Despite some Republican lawmakers and former President Trump advocating for replacing federal income tax with a consumption-based tax, eliminating income tax is not being considered in current tax discussions. The primary focus is on extending expiring tax breaks rather than abolishing income taxes, which have existed since 1913.

The IRS has issued new guidance on the tax treatment of state-mandated paid family and medical leave programs, which are currently required in 13 states and Washington, D.C. Employers can deduct their contributions as excise tax payments, while employee contributions are considered taxable wages. However, employer contributions are not included in employees' federal taxable income. Employees may deduct their contributions as state income taxes on Schedule A if they itemize, but they must stay within the $10,000 state and local tax deduction limit. Additionally, family leave benefits received from the state are taxable and must be reported on Form 1099. The tax treatment of medical leave benefits is more complex, as outlined in IRS Rev. Rul. 2025-4.

Starting in 2026, high earners will face new rules for 401(k) catch-up contributions. While employees aged 50+ can currently contribute to traditional or Roth 401(k)s, those earning over $145,000 will be required to put all catch-up contributions into Roth 401(k)s, removing immediate tax savings. The IRS has provided guidance to employers on implementing these changes. Additionally, the SECURE 2.0 Act will expand ABLE accounts by increasing the age limit for eligibility from 26 to 46 and allow penalty-free 401(k) withdrawals of up to $2,500 per year for long-term care insurance premiums. These changes will affect retirement savings and tax planning strategies for many workers.

In 2025, the annual gift tax exclusion increases to $19,000 per recipient, allowing individuals to give this amount to as many people as they want without incurring a gift tax or filing a gift tax return. Couples can jointly give up to $38,000 per recipient by electing gift splitting, which requires filing Form 709 but does not trigger tax. Gifts exceeding $19,000 per recipient must also be reported on Form 709, though the gift tax only applies if the $13.99 million lifetime exemption has been exhausted. For estate planning, leveraging tax-free gifts now can help maximize wealth transfers.

The IRS has announced that for the 2025 tax year, the maximum Foreign Earned Income Exclusion (FEIE) is $130,000, an increase from $126,500 in 2024. Consequently, the base housing amount is set at $20,800 (16% of the FEIE), and the standard housing expense limitation is $39,000 (30% of the FEIE). These housing limits may be adjusted for specific locations with higher housing costs. Additionally, for the 2024 tax year, the IRS has added Ukraine, Iraq, Haiti, and Bangladesh to the list of waiver countries, allowing eligible individuals in these regions to claim the FEIE even if they do not meet the standard time requirements due to adverse conditions.

The Earned Income Tax Credit (EITC) is a frequent IRS audit trigger, often due to errors in claiming a qualifying child. To qualify:

• The child must be a son, daughter, stepchild, foster child, sibling, niece, nephew, or grandchild who lived with you for more than half the year and is under age 19.

• Exceptions: Full-time students qualify until age 24, and those permanently and disabled have no age limit.

• Each qualifying child must have a valid Social Security Number (SSN).

Most EITC audits occur through mail correspondence, with the IRS requesting additional documentation rather than conducting in-person audits.

The IRS is intensifying efforts to address worker misclassification, where businesses incorrectly label employees as independent contractors to avoid payroll taxes. To determine proper worker status, the IRS assesses behavioral control, financial control, and the nature of the relationship. Businesses may qualify for Section 530 relief from federal employment tax liabilities if they meet specific criteria. Recent IRS guidance, Revenue Procedure 2025-10, clarifies the application of Section 530 relief and outlines how businesses can meet the reasonable basis requirement.

U.S. citizens working abroad in 2025 can exclude up to $130,000 of foreign-earned income from U.S. taxation. Eligibility requires either full-year bona fide residency in another country or physical presence abroad for at least 330 days within a 12-month period. A foreign tax home is also necessary, except for those in combat zones. To claim this exclusion, taxpayers must file Form 2555 with their U.S. tax return. Additionally, a standard foreign housing exclusion of $18,200 is available for 2025, with potential increases for high-cost areas as specified in IRS Notice 2025-16. 

​In March 2025, the United States implemented significant tariff measures affecting key trade partners. Effective March 4, a 25% tariff was imposed on all imports from Canada and Mexico, with Canadian energy resources such as oil, natural gas, and electricity subject to a reduced 10% tariff. On March 12, a universal 25% tariff on steel and aluminum imports from all countries took effect. 

Further escalating trade tensions, on March 24, President Trump announced that starting April 2, a 25% tariff would be applied to all goods imported from countries that continue to purchase oil from Venezuela. These actions have prompted retaliatory measures from affected nations, including Canada, China, and the European Union, leading to increased global trade tensions and economic uncertainty.

​Effective April 1, 2025, the IRS has set the second quarter interest rates as follows: individuals will have a 7% rate for both overpayments and underpayments, compounded daily; corporations will have a 6% rate for overpayments, 4.5% for overpayments exceeding $10,000, 7% for underpayments, and 9% for large corporate underpayments.
 

ABLE Savings Accounts and Tax Benefits for Persons with Disabilities

​ABLE accounts are tax-advantaged savings accounts for individuals with disabilities, allowing contributions up to $19,000 in 2025 without affecting eligibility for federal assistance programs like SSI or Medicaid. Employed beneficiaries may contribute additional amounts up to the lesser of their compensation or $15,650 in the continental U.S., $19,550 in Alaska, or $17,990 in Hawaii. While contributions are not federally tax-deductible, earnings and withdrawals are tax-free when used for qualified disability expenses. Eligible contributors may also benefit from the Saver's Credit, a non-refundable tax credit of up to $1,000 ($2,000 if married filing jointly), depending on income and filing status.

Tax season is in full swing, and we want to ensure you’re fully prepared. At SK Financial CPA, we’re committed to keeping you informed about key deadlines, tax law changes, and strategies to help you maximize savings and stay compliant. Whether you're filing for yourself or your business, our expert guidance will make the process seamless and stress-free.

If you have any questions or need personalized tax assistance, don’t hesitate to reach out. Our team is always here to help! Follow us on social media for real-time updates, expert insights, and important financial news.