Individual Tax briefs
Investing in qualified small business stock now offers expanded tax benefits
By purchasing stock in certain small businesses, you can diversify your investment portfolio. You also may enjoy preferential tax treatment, some of which is getting even better under the One Big Beautiful Bill Act (OBBBA) that was signed into law in July: Qualified small business (QSB) stock now offers more tax-saving opportunities.
QSB defined
A QSB generally is a U.S. C corporation that meets two requirements, one of which has been eased by the OBBBA to allow more businesses to qualify:
1. It must be engaged in an active trade or business. A qualified active business is generally any trade or business other than:
- Service businesses in the following fields: health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services and brokerage services,
- Banking, insurance, financing, leasing, investing and similar businesses,
- Farming businesses,
- Certain oil, gas and mining businesses, and
- Operators of hotels, motels, restaurants and similar businesses.
Additionally, the company must use at least 80% of its assets (by value) to conduct one or more qualified active businesses. And no more than 10% of its assets can consist of nonbusiness real estate.
2. It must have assets below a certain ceiling. Before the OBBBA, the business’s aggregate gross assets generally couldn’t exceed $50 million. The OBBBA increases the asset ceiling to $75 million (adjusted for inflation after 2026) for stock issued after July 4, 2025.
If the issuer owns more than 50% of another corporation’s stock, the subsidiary’s assets are included for purposes of the gross asset test. A corporation isn’t disqualified if its assets grow beyond the threshold after issuing the stock.
A valuable gain exclusion
When QSB stock tax breaks were initially introduced, you could exclude 50% of your capital gain from the sale of QSB stock if you’d held it at least five years. Subsequently, Congress enhanced the exclusion. If you acquired QSB stock after February 17, 2009, and before September 28, 2010, 75% of the gain is excludible after the five-year holding period. If you acquired it on or after September 28, 2010, the exclusion is 100% after five years.
Now the OBBBA provides new, but smaller exclusions for QSB stock held for shorter periods. Specifically, it provides a 75% exclusion for QSB stock held for four years and a 50% exclusion for QSB stock held for three years. These exclusions go into effect for QSB stock acquired after July 4, 2025.
If the QSB stock is received by gift or inheritance, the transferor’s holding period is added to the recipient’s.
Additional rules
To qualify for the gain exclusion, generally you must acquire the stock as part of an original issuance. In other words, you must acquire it directly from the corporation (or through an underwriter) — not from an existing shareholder — in exchange for money or property (other than stock) or as compensation for services. This requirement has some exceptions, including for stock received by gift or inheritance.
There is also a limit on the size of the exclusion. The amount of QSB gain on a particular issuer’s stock that you may exclude each year is limited to the greater of $10 million or 10 times your aggregate adjusted tax basis in stock sold during the tax year.
Finally, be aware that some states don’t offer QSB gain exclusions. So state-level taxes may still apply.
One more opportunity
If within 60 days of selling QSB stock you buy other QSB stock with the proceeds, you can defer any tax on your gain until you dispose of the new stock. The rolled-over gain reduces your basis in the new stock. For determining long-term capital gains treatment, the new stock’s holding period includes the holding period of the stock you sold.
Similar rules apply if QSB stock is converted into a different stock of the same corporation. The original stock’s holding period is added to the new stock’s holding period.
Consider carefully
QSB stock offers some significant tax benefits. But, as when contemplating any investment, you must think about more than just taxes. You should also consider factors such as your investment goals, time horizon and risk tolerance. Contact us to discuss the tax implications in more detail.
The next estimated tax payment deadline is coming up soon
If you make quarterly estimated tax payments, the amount you owe may be affected by the One Big Beautiful Bill Act (OBBBA). The law, which was enacted on July 4, 2025, introduces new deductions, credits and tax provisions that could shift your income tax liability this year.
Tax basics
Federal estimated tax payments are designed to ensure that certain individuals pay their fair share of taxes throughout the year.
If you don’t have enough federal tax withheld from your paychecks and other payments, you may have to make estimated tax payments. This is the case if you receive interest, dividends, self-employment income, capital gains, a pension or other income that’s not covered by withholding.
Individuals generally must pay 25% of a “required annual payment” by April 15, June 15, September 15, and January 15 of the following year, to avoid an underpayment penalty. If one of those dates falls on a weekend or holiday, the payment is due on the next business day.
The third installment for 2025 is due on Monday, September 15. Payments are made using Form 1040-ES.
Amount to be paid
The required annual payment for most individuals is the lower of 90% of the tax shown on the current year’s return or 100% of the tax shown on the return for the previous year. However, if the adjusted gross income on your previous year’s return was more than $150,000 ($75,000 if you’re married filing separately), you must pay the lower of 90% of the tax shown on the current year’s return or 110% of the tax shown on the return for the previous year.
Most people who receive the bulk of their income in the form of wages satisfy these payment requirements through the tax withheld from their paychecks by their employers. Those who make estimated tax payments generally do so in four installments. After determining the required annual payment, divide that number by four and make four equal payments by the due dates.
But you may be able to use the annualized income method to make smaller payments. This method is useful to people whose income flow isn’t uniform over the year, perhaps because of a seasonal business. For example, if your income comes exclusively from a business operated in a resort area during June, July and August, no estimated payment is required before September 15.
The underpayment penalty
If you don’t make the required payments, you may be subject to an underpayment penalty. The penalty equals the product of the interest rate charged by the IRS on deficiencies times the amount of the underpayment for the period of the underpayment.
However, the underpayment penalty doesn’t apply to you if:
- The total tax shown on your return is less than $1,000 after subtracting withholding tax paid;
- You had no tax liability for the preceding year, you were a U.S. citizen or resident for that entire year, and that period was 12 months;
- For the fourth (January 15) installment, you file your return by that January 31 and pay your tax in full; or
- You’re a farmer or fisherman and pay your entire estimated tax by January 15 or pay your entire tax and file your tax return by March 2, 2026.
In addition, the IRS may waive the penalty if the failure was due to casualty, disaster or other unusual circumstances, and it would be inequitable to impose the penalty. The penalty can also be waived for reasonable cause during the first two years after you retire (and reach age 62) or become disabled.
OBBBA highlights
Several provisions of the OBBBA could directly affect quarterly estimated tax payments because they change how much tax some individuals will ultimately owe for the year. For example, the law introduces a temporary (2025 through 2028) additional $6,000 deduction for seniors, which can lower taxable income. It creates new deductions for overtime pay, tips and auto loan interest — available even if you don’t itemize — which can meaningfully reduce estimated liabilities. The bill also increases the state and local tax deduction cap for certain taxpayers and temporarily enhances the Child Tax Credit. Because these deductions and credits apply during the tax year rather than after, they can reduce your quarterly payment obligations mid-year, making it important to recalculate estimates to avoid overpayment or underpayment penalties.
Seek guidance now
Contact us if you need help figuring out your estimated tax payments or have other questions about how the rules apply to you.
The next estimated tax payment deadline is coming up soon
If you make quarterly estimated tax payments, the amount you owe may be affected by the One Big Beautiful Bill Act (OBBBA). The law, which was enacted on July 4, 2025, introduces new deductions, credits and tax provisions that could shift your income tax liability this year.
Tax basics
Federal estimated tax payments are designed to ensure that certain individuals pay their fair share of taxes throughout the year.
If you don’t have enough federal tax withheld from your paychecks and other payments, you may have to make estimated tax payments. This is the case if you receive interest, dividends, self-employment income, capital gains, a pension or other income that’s not covered by withholding.
Individuals generally must pay 25% of a “required annual payment” by April 15, June 15, September 15, and January 15 of the following year, to avoid an underpayment penalty. If one of those dates falls on a weekend or holiday, the payment is due on the next business day.
The third installment for 2025 is due on Monday, September 15. Payments are made using Form 1040-ES.
Amount to be paid
The required annual payment for most individuals is the lower of 90% of the tax shown on the current year’s return or 100% of the tax shown on the return for the previous year. However, if the adjusted gross income on your previous year’s return was more than $150,000 ($75,000 if you’re married filing separately), you must pay the lower of 90% of the tax shown on the current year’s return or 110% of the tax shown on the return for the previous year.
Most people who receive the bulk of their income in the form of wages satisfy these payment requirements through the tax withheld from their paychecks by their employers. Those who make estimated tax payments generally do so in four installments. After determining the required annual payment, divide that number by four and make four equal payments by the due dates.
But you may be able to use the annualized income method to make smaller payments. This method is useful to people whose income flow isn’t uniform over the year, perhaps because of a seasonal business. For example, if your income comes exclusively from a business operated in a resort area during June, July and August, no estimated payment is required before September 15.
The underpayment penalty
If you don’t make the required payments, you may be subject to an underpayment penalty. The penalty equals the product of the interest rate charged by the IRS on deficiencies times the amount of the underpayment for the period of the underpayment.
However, the underpayment penalty doesn’t apply to you if:
- The total tax shown on your return is less than $1,000 after subtracting withholding tax paid;
- You had no tax liability for the preceding year, you were a U.S. citizen or resident for that entire year, and that period was 12 months;
- For the fourth (January 15) installment, you file your return by that January 31 and pay your tax in full; or
- You’re a farmer or fisherman and pay your entire estimated tax by January 15 or pay your entire tax and file your tax return by March 2, 2026.
In addition, the IRS may waive the penalty if the failure was due to casualty, disaster or other unusual circumstances, and it would be inequitable to impose the penalty. The penalty can also be waived for reasonable cause during the first two years after you retire (and reach age 62) or become disabled.
OBBBA highlights
Several provisions of the OBBBA could directly affect quarterly estimated tax payments because they change how much tax some individuals will ultimately owe for the year. For example, the law introduces a temporary (2025 through 2028) additional $6,000 deduction for seniors, which can lower taxable income. It creates new deductions for overtime pay, tips and auto loan interest — available even if you don’t itemize — which can meaningfully reduce estimated liabilities. The bill also increases the state and local tax deduction cap for certain taxpayers and temporarily enhances the Child Tax Credit. Because these deductions and credits apply during the tax year rather than after, they can reduce your quarterly payment obligations mid-year, making it important to recalculate estimates to avoid overpayment or underpayment penalties.
Seek guidance now
Contact us if you need help figuring out your estimated tax payments or have other questions about how the rules apply to you.
No tax on car loan interest under the new law? Not exactly
Under current federal income tax rules, so-called personal interest expense generally can’t be deducted. One big exception is qualified residence interest or home mortgage interest, which can be deducted, subject to some limitations, if you itemize deductions on your tax return.
The One Big Beautiful Bill Act (OBBBA) adds another exception for eligible car loan interest. In tax law language, the new deduction is called qualified passenger vehicle loan interest. Are you eligible? Here are the rules.
“No tax” isn’t an accurate description
If you could deduct all your car loan interest, you’d be paying it with pre-tax dollars rather than with post-tax dollars — meaning after you paid your federal income tax bill. The new deduction has been called “no tax on car loan interest,” but that’s not really accurate. Here’s a more precise explanation.
The OBBBA allows eligible individuals — including those who don’t itemize — a temporary new deduction for some or all of the interest paid on some loans. The loans must be taken out to purchase a qualifying passenger vehicle.
Specifically, for 2025 through 2028, up to $10,000 of car loan interest can potentially be deducted each year. The loan must be taken out after 2024 and must be a first lien secured by the vehicle, which is used for personal purposes. Leased vehicles don’t qualify. So far, this may sound good, but not all buyers will qualify for the new deduction because of the limitations and restrictions summarized below.
Income-based phaseout rule
The deduction is phased out starting at $100,000 of modified adjusted gross income (MAGI) or $200,000 for married joint-filing couples. If your MAGI is above the applicable threshold, the amount that you can deduct (subject to the $10,000 limit) is reduced by $200 for each $1,000 of excess MAGI. So, for an unmarried individual, the deduction is completely phased out when MAGI reaches $150,000. For married joint filers, the deduction is completely phased out when MAGI reaches $250,000.
Qualifying vehicles
To qualify for the new deduction, the vehicle must be a car, minivan, van, SUV, pickup truck or motorcycle with a gross vehicle weight rating under 14,000 pounds. It must be manufactured primarily for use on public streets, roads and highways, and it must be new (meaning the original use begins with you). The “final assembly” of the vehicle must occur in the United States. You must report the vehicle identification number (VIN) on your tax return. Vehicles assembled in America have a special number in the VIN to signify that.
Meeting the requirements
In the law, the definition of final assembly is convoluted. The law states: “Final assembly means the process by which a manufacturer produces a vehicle at, or through the use of, a plant, factory, or other place from which the vehicle is delivered to a dealer with all component parts necessary for the mechanical operation of the vehicle included with the vehicle, whether or not the component parts are permanently installed in or on the vehicle.”
Another requirement is that your car loan lender must file an information return with the IRS that shows the amount of interest paid during the year on your qualified car loan.
Refinanced loans
If an original qualified car loan is refinanced, the new loan will be a qualified loan as long as: 1) the new loan is secured by a first lien on the eligible vehicle and 2) the initial balance of the new loan doesn’t exceed the ending balance of the original loan.
Ineligible loans
Interest on the following types of loans doesn’t qualify for the new deduction:
- Loans to finance fleet sales,
- Loans to buy a vehicle not used for personal purposes,
- Loans to buy a vehicle with a salvage title or a vehicle intended to be used for scrap or parts,
- Loans from certain related parties, and
- Any lease financing.
Conclusion
According to various reports, most American car buyers rely on loans to finance their purchases. So, the ability to deduct car loan interest is something that many taxpayers would be happy about. That said, many buyers won’t qualify for the new deduction. It’s off limits for high-income purchasers, used vehicle buyers and those who buy foreign imports. Contact us with any questions.
