As a small business owner, tax deductions can significantly lower your taxable income and increase your bottom line. In 2025, key tax-saving opportunities include Section 179 deductions, bonus depreciation, and the Research and Development (R&D) tax credit. Understanding these deductions and recent updates can help you make strategic financial decisions.

Section 179 Deduction for 2025

Section 179 allows businesses to immediately deduct the cost of qualifying equipment and property rather than depreciating it over several years. This deduction is particularly valuable for small businesses that invest in equipment, vehicles, and software.

Section 179 Deduction Limits for 2025

For the tax year 2025, the Section 179 limit is expected to remain at $1.25 million, with a phaseout threshold of $3.13 million in total equipment purchases. This means if your business spends more than $3.13 million on qualifying property, the deduction begins to phase out dollar for dollar.

What Qualifies for Section 179?

Eligible assets include:

• Equipment and machinery used for business purposes
• Business vehicles exceeding 6,000 lbs. in gross vehicle weight
• Office furniture and computers
• Software and technology solutions
• Improvements to non-residential real estate (such as HVAC, security systems, and roofing)

How to Elect the Section 179 Deduction

To claim the Section 179 deduction, businesses must:

1. Purchase and place the asset in service by December 31, 2025.
2. Elect the deduction on IRS Form 4562 when filing their tax return. Businesses should be prepared to list a description of the property, its cost, and the amount of Section 179 they’re claiming.

Bonus Depreciation: Decreasing in 2026

Bonus depreciation has been a significant tax incentive for businesses since the Tax Cuts and Jobs Act of 2017, which temporarily increased it to 100%. However, it is gradually phasing out as planned after 2025. The rate in 2025 is 80%. It will be 60% in 2026, 40% in 2027, 20% in 2028, and fully phased out in 2029.

Unlike Section 179, bonus depreciation is not limited by a spending cap and can create a net operating loss (NOL) that may be carried forward. It applies to:

• New and used equipment
• Computer software
• Leasehold improvements
• Certain vehicles

Given the upcoming reduction, businesses planning major capital expenditures should consider purchasing assets in 2025 to take advantage of the 80% deduction before it drops further next year.

R&D Tax Credit: 2025 Changes to IRS Form 6765

The IRS’s updated Form 6765 introduces expanded reporting requirements that will impact how businesses document and claim the R&D tax credit in 2025. These changes aim to improve transparency but require businesses to adjust their reporting processes to remain compliant.

Expanded Reporting Requirements

Businesses must now provide more qualitative and quantitative details about their R&D activities. This includes identifying and describing specific business components and projects tied to the credit rather than aggregating expenses under broad categories.

More Specific Wage Tracking

The new requirements mandate a more precise classification of R&D-related wages. Businesses must separate:

• Direct R&D labor costs (employees directly performing research and development activities).
• Supervisory wages (managers overseeing R&D projects).
• Support wages (employees assisting but not directly engaged in R&D).

Companies without a clear wage-tracking system may need to implement new payroll and documentation processes to meet these requirements.

Assessing Compliance Risk

With the phased implementation of these new rules, businesses should use this transition period to evaluate their documentation processes. Failing to meet the latest standards could expose companies to compliance risks or IRS audits. An internal audit can help identify gaps in recordkeeping and allow time for adjustments before the rules fully take effect.

With these new reporting, tracking, and compliance changes, businesses should take proactive steps to align with the IRS’s evolving requirements. Consulting a tax professional and updating internal systems can help maximize R&D tax credit benefits while avoiding potential compliance pitfalls.