Business Provisions Tax Summary
The law increases the base standard deduction amounts beginning in tax year 2025.
For married taxpayers filing jointly (MFJ), the new base deduction is $31,500, representing an increase over the inflation-adjusted TCJA amount of
The new base amount for single filers is $15,750, exceeding the prior 2025 inflation-adjusted amount of $15,000.
These amounts are subject to future inflation adjustments using the chained Consumer Price Index (CPI) methodology.
Beginning in tax year 2025, and continuing through 2028, individuals age 65 or older by year-end may claim a new deduction of $6,000. On a joint return, each spouse may qualify, allowing for up to $12,000 in total deductions if both meet the age requirement.
The deduction is subject to a 6% phaseout based on a modified adjusted gross income (MAGI) exceeding $75,000 for single filers and $150,000 for joint filers.
In addition, married individuals must file a joint return to be eligible; married filing separately is not permitted for this deduction.
Effective for tax year 2025, the maximum credit per qualifying child increases from $2,000 to $2,200. Beginning in 2026, this amount is subject to annual inflation adjustments. The refundable portion of the credit remains capped at $1,400 per child but will also be indexed for inflation beginning in 2025.
Effective for tax years beginning after Dec. 31, 2025, the child and dependent tax credit is enhanced in two key ways.
First, the maximum applicable percentage increases from 35% to 50%. This change provides a larger credit for lower-income taxpayers with qualifying child and dependent care expenses.
Second, the phase-out structure is revised to include two tiers based on adjusted gross income
(AGI).
Prior law provided a maximum credit rate of 35%, with a single-phase reduction down to 20% based on AGI. The new two-tier system preserves more credit for taxpayers with moderate incomes while continuing to limit the benefits at higher income levels.
Effective date: Applicable to tax years beginning after Dec. 31, 2025.
Beginning in tax year 2026, §129(a)(2)(A) increases the annual contribution limits for employer- provided dependent care assistance programs (DCAPs), commonly referred to as dependent care flexible spending arrangements (FSAs). The new limits are $7,500 per year ($3,750 for married individuals filing separately), up from the current $5,000 ($2,500 MFS).
DCAPs allow employees to set aside pre-tax income for qualifying dependent care expenses, such as day care, preschool and certain adult care. Contributions are excluded from gross income, reducing federal income, Social Security and Medicare taxes.
Effective date: Applicable to tax years beginning after Dec. 31, 2025.
the SALT deduction cap increases to $40,000 for tax year 2025. The limit rises slightly to $40,400 for 2026, and for years 2027 through 2029, it will be adjusted annually to 101% of the prior year’s cap. Despite these increases, the deduction limit will revert to the original $10,000 cap beginning in 2030 and for all subsequent years.
Importantly, eligibility to claim the enhanced SALT deduction from 2025-2029 is subject to a MAGI threshold. For 2025, taxpayers with MAGI exceeding $500,000 ($250,000 MFS) are ineligible for the increased cap. These thresholds will adjust to $505,000 ($252,500 MFS) in 2026 and continue to increase by 1% annually through 2029. The deduction will not fall below the original $10,000 ($5,000 MFS), even for those exceeding the MAGI limits.
This provision (§224) allows individuals to deduct certain cash tips from their taxable income. The
deduction is available for tax years beginning after Dec. 31, 2024, and before Jan. 1, 2029.
This applies to individuals who receive cash tips in an occupation that customarily and regularly received tips on or before Dec. 31, 2024 (to be determined and published by the IRS). Both employees and self-employed individuals may be eligible, but the deduction is limited for self- employed taxpayers if business expenses exceed income. Married taxpayers must file jointly to claim the deduction.
The tips must be reported on IRS-approved forms, such as Form 4137, Social Security and Medicare Tax on Unreported Tip Income, or employer-furnished wage statements (e.g., Forms W-2, Wage and Tax Statement, Form 1099-NEC, Nonemployee Compensation, Form 1099-K,
Payment Card and Third Party Network Transactions, or other applicable statements). Additionally, the taxpayer must provide a valid SSN on their Form 1040.
The deduction is capped at $25,000 per year and phases out if the taxpayer’s MAGI exceeds:
The deduction is reduced by $100 for every $1,000 over the threshold. MAGI means the taxpayer’s AGI for the taxable year increased by any amount excluded by §§911, 931 or 933
Tips include cash, card-based payments and amounts distributed through tip-sharing arrangements. To qualify as a tip, the payment must be made voluntarily by the customer, not subject to negotiation and determined solely at the customer’s discretion. However, tips received in a specified service trade or business (SSTB) as defined under §199A are excluded unless the recipient is an employee of an employer not classified as an SSTB
Taxpayers may deduct the amount of overtime compensation received during the taxable year, provided the compensation is reported on either Form W-2 or on an information return per §6041(d)(4). Only overtime that qualifies under Section 7 of the Fair Labor Standards Act of 1938 is eligible; that is, pay for hours worked in excess of the standard workweek, calculated at a rate above the individual’s regular hourly rate.
The deduction is subject to two primary limitations: a dollar cap and an income-based phaseout.
First, the maximum deduction is $12,500 for single filers and $25,000 for MFJ.
Second, the deduction is gradually reduced for higher-income taxpayers. For every $1,000 that a taxpayer’s MAGI exceeds $150,000 ($300,000 MFJ), the deduction is reduced by $100.
For this purpose, MAGI includes AGI increased by any amounts excluded under §§911, 931 or 933.
For taxable years beginning after Dec. 31, 2024, and before Jan. 1, 2029, a deduction is permitted only when the taxpayer includes the recipient’s SSN on the return. Additionally, in the case of married individuals as defined under §7703, the deduction is available solely if the taxpayer and spouse file a joint return.
Additional notes
For tax years 2025 through 2028, interest paid on a loan to purchase a qualifying passenger vehicle for personal use may be deducted under a temporary provision in §163(h)(4). To qualify, the loan must be incurred after Dec. 31, 2024, and secured by a first lien on the vehicle. The interest
is only deductible if the taxpayer includes the vehicle’s identification number (VIN) on their return. Refinancing of such loans is also eligible for the deduction, but only to the extent the refinanced amount does not exceed the original loan principal.
However, the deduction is subject to several exclusions. Interest on loans for fleet sales, commercial-use vehicles, leased vehicles, salvage-title vehicles or vehicles intended for scrap or parts is not deductible. Additionally, loans from related parties, defined under §267(b) or §707(b)(1), are excluded from eligibility.
The deduction is capped at $10,000 of interest per taxable year. It is also phased out for higher- income taxpayers. The phaseout begins when a taxpayer’s MAGI exceeds $100,000 ($200,000 for joint filers). The allowable deduction is reduced by $200 for every $1,000 (or part thereof) of MAGI above the applicable threshold.
To qualify, the vehicle must be intended for the taxpayer’s original use and primarily manufactured for use on public roads. Eligible vehicles include cars, minivans, vans, SUVs, pickup trucks and motorcycles, as long as they have at least two wheels and a gross vehicle weight rating (GVWR) under 14,000 pounds. The vehicle must also be classified as a motor vehicle under the Clean Air Act and assembled in the United States.
Importantly, this deduction is available to both itemizers and non-itemizers. Under §63(b)(7), taxpayers who do not itemize may claim this deduction as an above-the-line adjustment to income.
Effective dates: Applies to tax years beginning after Dec. 31, 2024, and before Jan. 1, 2029.
Under current law, the deduction for qualified residence interest is limited to acquisition debt of up to $1 million ($500,000 if MFS) for loans incurred on or before Dec. 15, 2017. The limit for loans incurred after that date is $750,000 ($375,000 if MFS). These limitations, enacted under the TCJA, were set to expire after 2025.
The OBBB makes the TCJA limitations permanent by removing the scheduled sunset date. As a result, the $750,000 acquisition debt cap remains in effect indefinitely for post-2017 mortgages.
The new law also reinstates the deduction for mortgage insurance premiums (PMI), treating them as qualified residence interest. The prior provision, which applied only through 2025, is amended to allow deductibility for years beginning after 2017, without a sunset.
Effective date: Applies for tax years beginning after Dec. 31, 2025.
This amendment applies a 0.5% floor against the sum of charitable contributions that a taxpayer(s) makes. Only the amount of charitable contributions above this floor can be deducted. Specifically, amended §170(b)(1) states that individual taxpayers may only deduct charitable contributions to the extent that the aggregate of their contributions exceeds 0.5% of their contribution base (generally their AGI for the year).
This means taxpayers will not receive a tax benefit for the first 0.5% of their contribution base donated to charity. Only amounts contributed beyond this threshold are eligible for a deduction, subject to other existing percentage limitations for charitable deductions.
Effective date: Applicable tax years after Dec. 31, 2025.
Section 170(b)(1)(G) was updated to clarify the 60-percent AGI limit for cash contributions to public charities. The maximum deduction for cash contributions remains capped at 60 percent of the taxpayer’s contribution base. Contributions under subparagraphs (A) and (G) are now coordinated explicitly to avoid exceeding combined deduction limits, ensuring consistency in applying the percentage of ceilings across different categories of charitable gifts.
Effective date: Applicable tax years after Dec. 31, 2025.
This permanent charitable contribution deduction is available for taxpayers who do not itemize. Specifically, the provision amends §170(p) to reinstate and increase the above-the-line deduction limit for charitable contributions made by non-itemizing individuals:
Effective date: Applicable tax years after Dec. 31, 2025.
TCJA temporarily suspended miscellaneous itemized deductions subject to the 2% adjusted gross income (AGI) threshold through 2025. These deductions included unreimbursed employee expenses, tax preparation fees, investment expenses and other similar items.
This suspension becomes permanent by removing the sunset provision in §67(g). As a result, taxpayers still cannot deduct a broad range of previously eligible expenses. Specifically, deductions will be disallowed for unreimbursed employee costs, investment advisory fees, union dues, tax prep fees, hobby expenses and safe deposit box fees.
Educator expenses have been added to the definition of what is not a miscellaneous itemized deduction subject to the 2% of AGI floor. Section 62(a)(2)(D) was not repealed. As such, educators are presumably still allowed the $300 above-the-line deduction. Any excess could be deductible
if the taxpayer itemizes. Clarification is needed in this area. The scope of who qualifies has also expanded to include not just classroom teachers, but also interscholastic sports coaches and administrators.
The types of deductible expenses have been broadened. Supplies and materials not related to athletics but used in instructional activities are now explicitly included. Moreover, expenses incurred outside the traditional classroom, such as those associated with extracurricular programs or alternative instructional environments, can qualify as long as they are directly tied to educational activities.
Effective date: Applicable tax years after Dec. 31, 2025.
A new class of long-term savings vehicles, referred to as Trump Accounts, has been established to promote financial education, retirement readiness and asset accumulation for individuals under age 18. These accounts are structured as modified traditional IRAs under §408(a), incorporating unique eligibility, contribution and distribution rules tailored to minors.
A one-time $1,000 deposit will be made into accounts opened for qualifying children born after Dec. 31, 2024, and before Jan. 1, 2029. Eligibility is restricted to individuals under age 18 (but only those individuals born between the years mentioned above will receive a $1,000 deposit), and contributions may only be made during the years before the beneficiary reaches that age. Distributions are prohibited until the calendar year in which the beneficiary turns 18. Additionally, contributions must be explicitly designated as Trump Account contributions at account creation. Following the legislation’s enactment, a mandatory 12-month waiting period applies before contributions may begin.
Annual contributions are capped at $5,000 per beneficiary, exclusive of rollovers, and are indexed for inflation starting in 2028. Contributions may be made by parents, employers, charitable organizations and governmental bodies, subject to the annual cap. Employers are permitted to make non-taxable contributions on behalf of minor employees under the newly added §128.
Charitable and government entities may also make general funding contributions based on
specified eligibility criteria, such as birth year or geographic region.
Investment earnings within Trump Accounts grow tax-deferred. While the accounts mirror traditional IRA treatment, additional IRS guidance is anticipated to clarify taxation upon distribution. Permissible investments are limited to mutual funds and indexed ETFs, reinforcing the program’s long-term, education-focused savings objectives.
To encourage early adoption, §6434 establishes a contribution pilot program that provides a $1,000 tax credit to initiate a Trump Account for eligible children born between Jan. 1, 2025, and Dec. 31, 2028. $410 million has been appropriated for this purpose, available through Sept. 30, 2034.
Example: Emma is born in 2026. Her parents elect to open a Trump Account.
first-time home purchase
Impact: Emma begins adulthood with ~$70,000+ in retirement or general-purpose savings, tax-
deferred, at no cost to her.
Example: Noah, born in 2027, has a Trump Account, but:
Beyond expanding which expenses qualify, the legislation raises the cap on annual 529 plan distributions for K-12 tuition. The limit increases from the previous $10,000 per student to $20,000 per student. This higher limit provides families with substantially more flexibility to fund private or alternative schooling using their 529 savings.
Newly eligible K-12 expenses include:
Effective date: Taxable years after Dec. 1, 2025.
Expands §529 plan coverage to include expenses related to obtaining industry-recognized
postsecondary credentials, not just traditional college expenses. Newly eligible postsecondary credential expenses:
Qualifying credentials include:
Effective date: Applies to §529 distributions made after the date of OBBB enactment.
Several clean energy tax incentives available to individual taxpayers are scheduled for repeal under new legislative changes. These repeals significantly curtail federal support for energy-efficient investments in personal vehicles and residential property. Tax professionals should take note of
the key termination dates and advise clients accordingly as these provisions wind down. The table
below summarizes the credits and when they are subject to termination.
| Repeal effective date | Credit/deduction name | IRC section |
|---|---|---|
| After Sept. 30, 2025 | Clean vehicle credit | §30D |
| Previously owned clean vehicle credit | §25E | |
| Qualified commercial vehicles credit | §45W | |
| After Dec. 31, 2025 | Energy-efficient home improvement credit |
§25C |
| Residential clean energy credit | §25D | |
| After June 30, 2026 | Alternative fuel vehicle refueling property credit | §30C |
| Energy-efficient commercial
buildings deduction |
§179D | |
| New energy-efficient home credit | §45L | |
| Taxable years with leased property to third parties | Clean electricity credits for leased residential property | §§45Y, 48E |
These changes eliminate several high-profile credits that had been recently expanded or reinstated. The loss of these incentives may impact planning decisions for electric vehicle purchases, solar installations and energy-efficient home improvements.
Beginning in 2026, the tax rules for gambling losses are more restrictive. The prior rule under IRC
First, taxpayers may deduct only 90% of their yearly gambling losses. Second, those deductible losses cannot exceed total gambling winnings, maintaining a key restriction from prior law. For instance, if a taxpayer has $10,000 in losses and $12,000 in winnings, only $9,000 (90% of losses) is deductible. If winnings are just $8,000, the deduction is capped at $8,000.
The new law also broadens what counts as a wagering loss. Any expense tied to gambling activity,
such as travel, admission or lodging, falls under the same 90% and winnings-based limits.
NATP observation: Previously, only direct losses from bets were limited; now, related gambling
expenses contribute toward the 90% cap.
Effective date: Applicable to tax years beginning after Dec. 31, 2025.
Takeaways
| Provision | Summary |
|---|---|
| New cap | Only 90% of total gambling-related losses may be deducted |
| Still capped by winnings | Deduction never exceeds winnings for the year |
| Expands scope | Now includes expenses incurred in carrying out gambling |
| Starts in 2026 | Applies to both casual and professional gamblers |
Recent changes to §36B impose new verification requirements that directly affect when an individual may be treated as having a coverage month for purposes of the premium tax credit (PTC). Under the updated rules, an individual is not considered to have a coverage month unless the Health Insurance Exchange confirms several key eligibility factors. These include verification of household income, family size, lawful presence, residency and eligibility for minimum essential coverage. The Secretary of Health and Human Services may also prescribe additional verification factors.
Importantly, if eligibility is verified after the initial enrollment, the law permits retroactive treatment of earlier months as valid coverage months. Once verification is complete, the individual can claim the PTC for those months. However, until these eligibility requirements are confirmed, no credit is available, even though individuals are not barred from enrolling in a qualified health plan.
Enrollment is still permitted; it is only the advance payment or claim of the credit that is suspended pending verification.
The system is flexible enough for special enrollment scenarios. Specifically, the IRS may waive certain verification requirements in cases involving changes to family size, such as marriage or the birth of a child.
A separate provision in §36B(c)(6) disallows the credit for any month when the exchange fails to meet federal data reporting standards. Thus, even if an individual meets all personal eligibility criteria, the failure of the exchange to properly report data may disqualify a month from PTC eligibility.
Looking ahead, a new requirement will strengthen the pre-enrollment verification process in 2028. Beginning that year, exchanges must implement a mechanism for applicants to verify eligibility prior to enrollment, with the verification window opening no later than Aug. 1 of the preceding calendar year.
Effective date: Taxable years beginning after Dec. 31, 2027.
Implication: This imposes stricter up-front controls to prevent improper PTC payments by ensuring eligibility is proven before credits are granted. It mirrors income verification rules for other federal benefits.
Individuals who gain access to a special enrollment period (SEP) solely due to income projections, without experiencing a qualifying life event, are no longer eligible for the PTC. This applies to SEPs triggered by income-based criteria rather than a concrete life change.
For example, if a taxpayer enrolls in a health plan through an SEP merely because their income is projected to fall below 150% of the federal poverty line but has not experienced a life event such as job loss, divorce or relocation, they are disqualified from claiming the PTC.
This provision intends to curb potential abuse of SEPs to obtain subsidized health coverage without a legitimate change in circumstance. By narrowing eligibility, the rule reinforces that PTCs are intended to assist individuals facing specific, verifiable life changes, not those enrolling based solely on income level.
Effective date: Applicable to tax years after Dec. 31, 2025.
Implication: It reduces the risk of SEP abuse to obtain subsidized coverage without real eligibility. It also limits PTCs to those enrolling due to specific, documentable life changes.
Beginning Dec. 31, 2026, taxpayers will no longer benefit from repayment caps on excess advance premium tax credits (APTCs). Under current law, individuals who receive more APTC than they are ultimately eligible for, often due to underestimating income, are subject to repayment limits based on their income level. These limits, designed to protect lower-income taxpayers, are codified under §36B(f)(2)(B).
The repeal of this provision eliminates the income-based caps. As a result, all taxpayers, regardless of income, must repay the full amount of any excess advance premium tax credit received.
Effective date: For tax years beginning after Dec. 31, 2026.
Implication: It strengthens taxpayers’ incentive to estimate income accurately when applying for coverage. It shifts the financial burden of overpayment from the government to the individual.
| Provision | Applies to |
|---|---|
| Verification & pre-enrollment rules (71303) | Tax years after Dec. 31, 2027 |
| Disallowed PTC for certain SEPs (71304) | Plan years after Dec. 31, 2025 |
| Unlimited repayment of APTC (71305) | Tax years after Dec. 31, 2025 |
Takeaways
Section 223(c)(2) was amended to expand the definition of a high-deductible health plan to include certain plans offered through Affordable Care Act exchanges. Specifically, individuals enrolled in Bronze or Catastrophic plans are now eligible to contribute to HSAs, provided the other HSA eligibility requirements are met.
This change stems from the addition of subparagraph (H) to §223(c)(2), which explicitly includes two ACA plan types within the scope of HDHPs for HSA purposes:
Beginning with taxable years after Dec. 31, 2026, individuals participating in direct primary care (DPC) arrangements will see important changes to how these arrangements interact with tax- favored health accounts. Notably, the fee caps for DPC arrangements will be indexed for inflation starting in calendar year 2025, though these caps formally apply to months beginning after Dec. 31, 2025.
A key change is clarifying HSA eligibility. Under §223(c)(1)(E), enrollment in a DPC arrangement will no longer be considered disqualifying coverage for HSA purposes. This update enables individuals to maintain HSA eligibility while enrolled in a qualified DPC plan, aligning the tax code with consumer-directed health care models.
To qualify under these provisions, the DPC arrangement must exclusively offer primary care services as defined in §213(d), and those services must be provided by a practitioner meeting the definition under §1833(x)(2)(A) of the Social Security Act. The arrangement must be structured as a fixed periodic fee, such as a monthly or annual payment. Services falling outside the scope of
eligibility include those involving general anesthesia, most prescription drugs (except vaccinations) and laboratory services not typically performed in a primary care setting.
The monthly fee for a DPC arrangement is capped at $150 per individual or $300 if the arrangement covers more than one person. Beginning in 2027, these caps will be subject to inflation adjustments.
Significantly, DPC fees are now treated as qualified medical expenses under §223(d)(2)(C). This allows HSA funds to be used for DPC fees without adverse tax consequences. In addition, payments for DPC services can also be made through flexible spending arrangements (FSAs) or health reimbursement arrangements (HRAs), offering expanded planning opportunities for taxpayers and employers alike.
President Trump signed H.R. 1, formerly known as the One Big Beautiful Bill Act (OBBBA), into law on July 4. The law extends and expands several provisions from the 2017 Tax Cuts and Jobs Act (TCJA), aiming to spur growth and reduce compliance burdens.
Key provisions include making the 20% qualified business income (QBI) deduction permanent, restoring 100% bonus depreciation, increasing Section 179 expensing limits, reforming business interest deduction rules and enhancing the research and development (R&D) credit. These changes are intended to lower costs and encourage investment across business sectors.
The following summary highlights OBBBA’s business provisions to help tax professionals evaluate their clients’ planning.
Full expensing is a permanent feature of the tax code. Specifically, §168(k)(1)(A) has been amended to replace the previously phased-down applicable percentage with a flat 100%, thereby cementing the ability to fully expense qualified property permanently. In support of this change, references
to the former phase-down rules §168(k)(6) and §168(k)(8) have been repealed. In addition, the provision for specified plants under §168(k)(5)(A)(i) has been revised to reflect this permanent 100% expensing rate.
The amendments also simplify and consolidate definitions under §168(k)(2), eliminating outdated or redundant references and subclauses, and reorganizing them for clarity.
Eligibility for expensing certain plants has been expanded. The previous limitation in §168(k)(5)(A), which allowed expensing only if the specified plant was planted or grafted before Jan. 1, 2027, has been removed. As a result, regardless of the date, any specified plant that is planted or grafted now qualifies for expensing.
In line with these updates, a conforming amendment has been made to §460(c)(6)(B). This change clarifies that only property with a recovery period of seven years or less qualifies under the applicable long-term contract rules.
Finally, a transitional election is available for taxpayers for the first tax year ending after Jan. 19, 2025. Under this election, taxpayers may opt for reduced bonus depreciation rates:
Beginning with payments made after Dec. 31, 2025, the threshold for information reporting under IRC §6041(a) will increase from $600 to $2,000. This change means businesses will only need to file information returns, such as Forms 1099-NEC or 1099-MISC, if total payments to a recipient in a calendar year exceed $2,000.
Starting in calendar year 2027, the $2,000 threshold will be adjusted annually for inflation. The adjustment will be based on the cost-of-living formula under §1(f)(3), using calendar year 2025 as the base. The amount will be rounded to the nearest $100 increment.
This revised threshold also applies to §6041A(a)(2), which governs remuneration reporting for services, such as payments to independent contractors. The statutory language is updated to tie the reporting threshold to the indexed amount under §6041(a).
In parallel, §3406(b)(6), which addresses backup withholding, is amended to reflect the new threshold. Payments will only be subject to backup withholding if the total payments exceed the inflation-adjusted threshold for the calendar year.
Finally, conforming changes include updating the heading of §6041(a) from “$600 OR MORE” to “EXCEEDING THRESHOLD” and replacing references to taxable year with calendar year to align with information return reporting periods.
For gig workers, online sellers and other small businesses:
individuals who use platforms like Venmo, eBay, Etsy or PayPal are reduced.
The amendment increases the phase-in ranges for the W-2 wage and qualified property requirement limitations. For single filers, the phase-in window expands from $50,000 to $75,000; for joint filers, from $100,000 to $150,000. This adjustment means more taxpayers can take full advantage of the 20% QBI deduction before encountering any income-based restrictions.
A new provision, §199A(i), introduces a minimum QBI deduction of $400 for qualifying taxpayers. To be eligible, taxpayers must have at least $1,000 in qualified business income from an active business they materially participate in, as defined by §469(h). This minimum deduction ensures that small, actively managed businesses receive meaningful QBI relief even when the calculated 20% deduction would otherwise be negligible.
Beginning in 2027, the $400 minimum deduction and the $1,000 QBI floor will be adjusted annually for inflation, rounded to the nearest $5.
Limitations on itemized deductions do not affect the QBI deduction. This protection continues to apply to individual filers and patrons of agricultural and horticultural cooperatives.
Effective date: Applicable to tax years beginning after Dec. 31, 2025.
Employers now have greater flexibility in how they claim the PFML tax credit. They can choose between two distinct methods. The first option allows employers to claim a credit equal to a specified percentage of wages paid to qualifying employees during periods of family or medical leave. Alternatively, employers may claim a credit based on the percentage of premiums paid for a qualifying PFML insurance policy, regardless of whether the employee takes leave. This second approach accommodates employers who fund paid leave through third-party insurance arrangements.
The credit calculation is tied to the rate established in the insurance policy for those opting to use the insurance-based credit method. This means employers may receive a credit simply for making the benefit available, even if no employee takes leave under the policy. This provision reinforces that the credit is based on the availability of coverage rather than utilization.
Generally, businesses that are related under §414(b) or (c) are treated as a single employer to meet PFML policy requirements. However, an exception applies when an employer can demonstrate a “substantial and legitimate” reason for not aggregating, such as organizing employees based on their legal employer. Standard business practices such as grouping by job type, compensation level or local jurisdictional laws do not justify opting out of aggregation.
Employers must include benefits provided under state or local PFML laws when determining the amount of leave offered to employees. However, these benefits are excluded from the calculation of the tax credit. Only the portion of leave funded directly by the employer is eligible for the credit, ensuring that the tax benefit reflects employer contributions alone.
Employees must meet certain criteria to qualify for employer-provided PFML benefits. Generally, an employee must have been employed for at least one year, but employers may reduce this requirement to six months. Additionally, the employee must customarily work at least 20 hours per week (with prorated standards for part-time staff) and earn no more than 60% of the highly compensated employee threshold, consistent with prior rules.
No double benefit permitted
Finally, employers are not allowed to deduct amounts used to calculate the credit for insurance premiums. This prevents a double benefit scenario in which the same expense generates both a credit and a deduction.
Effective date: Applicable to tax years beginning after Dec. 31, 2025.
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