New Tax Law Changes for 1099 Reporting QBI and Business Deductions Impact Small Businesses

Dec 8

As the tax landscape continues its rapid evolution, independent contractors and small business owners often find themselves navigating a maze of new regulations and expiring provisions. For those operating under the 1099 umbrella, understanding these changes is not just about compliance, but about maximizing your bottom line and ensuring financial stability.

The good news? A significant piece of legislation, commonly referred to as the "One Big Beautiful Bill Act" (OBBBA) or "Working Families Tax Cut Act," signed into law on July 4, 2025, has introduced crucial updates for the 2025 tax year and beyond. This act addresses many uncertainties surrounding the expiring provisions of the 2017 Tax Cuts and Jobs Act (TCJA), particularly regarding 1099 reporting, the Qualified Business Income (QBI) deduction, and various business deductions.

This comprehensive guide from The 1099 CPA will break down the most impactful new tax law changes, offering professional, actionable, and empathetic insights to help you prepare.

Sweeping Changes to 1099 Reporting: What Freelancers Need to Know

For many freelancers and small businesses, Form 1099 is a familiar document. However, the rules governing their issuance have been a source of considerable confusion in recent years. The OBBBA aims to clarify much of this, particularly for Form 1099-K.

The 1099-K Rollercoaster: Back to $20,000 and 200 Transactions

The reporting threshold for Form 1099-K, which tracks payments received through third-party payment networks like PayPal, Venmo, Etsy, and eBay, has been a hot topic. Previous legislative efforts and IRS guidance had proposed lowering this threshold dramatically, causing concern among many gig workers and online sellers.

However, the "One Big Beautiful Bill Act" retroactively reinstated the prior, higher reporting threshold. For the 2025 tax year and all subsequent years, third-party payment organizations (TPSOs) are required to issue a Form 1099-K only if you receive more than $20,000 in gross payments AND engage in more than 200 transactions in a calendar year.

This change effectively reverses the previously scheduled lower thresholds of $5,000 for 2024 and a planned $2,500 for 2025, and the much-debated $600 threshold initially introduced by the American Rescue Plan. While this change is retroactive to 2022 in principle, its practical impact primarily stabilizes the reporting for 2025 and future years. For those who may have already filed 2024 taxes under different expectations, this adjustment chiefly ensures they won't be caught off guard by lower thresholds in upcoming years, and could potentially protect them in case of future audits related to 2024, though a direct amendment for 2024 based on this particular retroactive change might not be necessary or beneficial for most. It's crucial to remember that all taxable income must still be reported on your tax return, regardless of whether you receive a 1099-K. Keeping meticulous records of all business income remains paramount.

1099-NEC & 1099-MISC: A $2,000 Threshold Looms for 2026

For nonemployee compensation (Form 1099-NEC) and miscellaneous income (Form 1099-MISC), the reporting threshold for the 2025 tax year remains at $600. However, the OBBBA introduces a future change: starting in 2026, the reporting threshold for these forms will increase to $2,000, with annual adjustments for inflation thereafter. This change aims to reduce administrative burdens for both payers and recipients of smaller payments.

The Lowered E-Filing Threshold: Go Digital or Face Penalties

Another significant change affecting 1099 reporting is the lowered electronic filing threshold. For returns required to be filed on or after January 1, 2024 (meaning for the 2023 tax year and onward), the IRS reduced the mandatory e-filing threshold for most information returns, including Forms 1099, from 250 to just 10. This means if you issue 10 or more information returns of any type in a calendar year, all of them must be filed electronically, unless you receive an approved waiver for undue hardship. This change impacts many small businesses and sole proprietors who historically filed paper forms.

QBI Deduction (Section 199A) Gets a Permanent Home

The Qualified Business Income (QBI) deduction, also known as the Section 199A deduction, has been a significant tax benefit for eligible self-employed individuals and owners of pass-through entities (sole proprietorships, partnerships, and S corporations) since its inception in 2018. It allows these taxpayers to deduct up to 20% of their QBI. Initially set to expire at the end of 2025, its future was uncertain.

Permanence and Enhanced Benefits

Fortunately, the "One Big Beautiful Bill Act" has made the 20% QBI deduction permanent, removing a major point of anxiety for many small business owners. This stability allows for better long-term tax planning and provides continued relief for non-corporate businesses.

Beyond permanence, the OBBBA also introduced several enhancements:

Enhanced Phase-In Thresholds: The income ranges at which the QBI deduction begins to phase out or is limited have been expanded. For single filers, the range above base thresholds increased to $75,000, and for joint filers, it increased to $150,000. These new ranges will be adjusted for inflation starting in 2026, allowing more taxpayers to qualify for the full deduction. For 2025, the QBI deduction generally starts to phase out for Specified Service Trades or Businesses (SSTBs) when taxable income (Married Filing Jointly) exceeds $394,600, with no deduction allowed above $544,600. For all other filers, these thresholds for 2025 are $197,300 and $272,300, respectively (due to the expanded $75,000 phase-in range for single filers).
New Minimum Deduction: Starting in 2026, if you have at least $1,000 in Qualified Business Income from an active trade or business (where you materially participate), you are guaranteed a minimum deduction of $400. This is a significant win for smaller businesses, ensuring some tax relief even if other limitations might otherwise reduce or eliminate the deduction. This minimum deduction will also be indexed for inflation beginning in 2027.

Remember, the deduction is available regardless of whether you itemize or take the standard deduction. However, limitations still apply based on taxable income and whether your business is a "Specified Service Trade or Business" (SSTB).

Business Deductions: Expanded Opportunities for Growth

The OBBBA also delivered several key changes and enhancements to business deductions, providing significant opportunities for small businesses to reduce their taxable income.

100% Bonus Depreciation: A Permanent Boost for Asset Purchases

Previously, 100% bonus depreciation was phasing down, reaching 40% for property placed in service in 2025. However, the OBBBA has permanently restored 100% bonus depreciation for qualified property acquired and placed in service after January 19, 2025. This means businesses can immediately deduct the full cost of eligible new or used assets (like machinery, equipment, and certain software) rather than depreciating them over several years. This is a powerful incentive for capital investments and can significantly boost cash flow.

State Conformity Warning: While 100% federal bonus depreciation is a significant benefit, it's crucial to remember that state tax rules may vary. Many states, such as New York and Illinois, decouple from federal bonus depreciation rules, meaning they do not allow the same immediate deduction or have their own different rules. Always check your specific state's tax laws or consult a professional to understand the state-level impact of these deductions.

Section 179 Expensing: Higher Limits for Immediate Write-Offs

The Section 179 deduction allows businesses to expense the full purchase price of qualifying equipment and software up to a certain limit. For 2025, the OBBBA has substantially increased these limits:

The maximum amount you can deduct under Section 179 has increased to $2.5 million.
The phase-out threshold, at which the deduction begins to be reduced dollar-for-dollar, has been raised to $4 million.

These figures will be adjusted annually for inflation starting in 2026. For vehicles over 6,000 pounds Gross Vehicle Weight Rating (GVWR), the Section 179 deduction cap is set at $31,300 for 2025. This expanded expensing provision encourages businesses to invest in their operations without waiting years to realize the full tax benefits.

State Conformity Warning: Similar to bonus depreciation, state rules for Section 179 expensing can differ from federal rules. Some states fully conform, others impose lower limits, and some do not allow it at all. Verify your state's specific Section 179 deduction limits.

Research & Development (R&D) Expensing: Instant Deductions are Back

A particularly challenging change from the TCJA required businesses to amortize Research and Development (R&D) expenses over five years, rather than immediately deducting them. The OBBBA reversed this provision, allowing businesses to immediately expense domestic R&D costs incurred in 2025 and later. This is a significant win for innovative small businesses. Furthermore, small businesses with average annual gross receipts of $31 million or less may even be able to apply this benefit retroactively for tax years 2022-2024 by amending prior returns, potentially leading to substantial refunds.

State Conformity Warning: States may also decouple from federal R&D expensing rules, impacting your state tax liability. Review state-specific guidance.

Other Notable Deduction and Credit Enhancements

The OBBBA also includes other provisions that could benefit small businesses:

Employer-Provided Childcare Credit: Starting in 2026, this credit is significantly enhanced, increasing to 40% of qualified expenses (50% for eligible small businesses) with a higher maximum credit of $500,000 ($600,000 for small businesses).
State and Local Tax (SALT) Deduction Cap: While primarily impacting individual taxpayers, the cap for the SALT deduction has been increased from $10,000 to $40,000 for 2025, with a phase-out beginning at $500,000 of income. This could indirectly benefit many self-employed individuals in high-tax states.
Qualified Tip Income Deduction: A temporary deduction for tips up to $25,000 is introduced for tax years 2025 through 2028, phased out for incomes above $150,000.

What This Means for You: Actionable Steps for 1099 Professionals

These new tax law changes, particularly those enacted by the OBBBA, present both opportunities and complexities. As a freelancer or small business owner, proactive planning is more critical than ever.

Maintain Meticulous Records: Even with changes to 1099 reporting thresholds, the fundamental rule remains: all income is taxable. Keep detailed records of all income and expenses, regardless of whether a 1099 is issued. This is essential for accurate tax reporting and audit readiness.
Review Your Business Structure: With the permanence of the QBI deduction, revisit whether your current business structure (sole proprietor, LLC, S-corp) is still the most tax-efficient for your situation.
Capitalize on Enhanced Deductions: If you're planning significant equipment purchases or R&D investments, understand the new 100% bonus depreciation and increased Section 179 limits to maximize your immediate write-offs. Remember to consider state tax implications, as many states decouple from these federal provisions.
Consult a Tax Professional: Tax laws are complex and constantly changing. A qualified CPA specializing in small business and freelance taxation can provide personalized advice, ensure compliance, and help you strategize to take full advantage of these new provisions. They can also help clarify the intricacies of QBI calculations and other deductions specific to your business, as well as navigating state-specific rules.
Adjust Estimated Tax Payments: With potential changes to your overall tax liability due to these new laws and deductions, review and adjust your estimated tax payments to avoid underpayment penalties.

Conclusion

The "One Big Beautiful Bill Act" marks a significant turning point in tax legislation for 1099 professionals and small businesses. By making the QBI deduction permanent, clarifying 1099-K reporting, and enhancing key business deductions, the act provides a more stable and, in many cases, more favorable tax environment. However, understanding the nuances of these changes, particularly how they interact with state tax laws, and how they apply to your unique situation is paramount. Stay informed, keep thorough records, and partner with a knowledgeable tax advisor to confidently navigate these new tax waters and position your business for continued success.

Disclaimer: Any and all information included in this article is provided for informational purposes only and is not to be relied upon as a professional opinion. All content does not constitute professional advice and is not guaranteed to be complete, accurate, reliable, current, or error-free. By consuming this content, you accept and agree that following any information or recommendations provided therein and all channels of digital content is at your own risk.

Ben Anderson