Small Business Prosperity Act of 2025: Tax Cuts for Businesses and Estates, Starting 2025

The Small Business Prosperity Act of 2025 makes some significant changes to the tax code, primarily benefiting small businesses and those inheriting estates. Here's how it breaks down:

Tax Breaks for Businesses

The bill makes permanent the Qualified Business Income (QBI) deduction, a tax break for small business owners, partners in partnerships, and shareholders of S corporations that was set to expire. Not only is it permanent, but it's also getting a boost. The maximum deduction increases to 43% of qualified business income (up from 20%), with the top tax rate on QBI capped at 21%. This means more money in the pockets of business owners. (SEC. 2)

For example, if a small business owner has $100,000 in qualified business income, they could potentially deduct $43,000, significantly reducing their taxable income. It also simplifies things by removing some complicated calculations and limitations that previously applied to the QBI deduction. (SEC. 2)

The definition of a "qualified trade or business" is also narrowed. Now, it specifically excludes "performing services as an employee." (SEC. 2(d)) This means that the deduction is clearly targeted towards business owners, not employees.

Businesses in Puerto Rico also get a specific call-out. Income that's taxable under section 1 will now be treated as qualified business income, potentially opening up the QBI deduction to more businesses on the island. (SEC. 2(f)(1))

Corporate Reorganization Simplified

If a company wants to change its corporate structure (like going from an LLC to an S-corp), it can now do so without triggering a taxable event, as long as the ownership and assets stay the same. (SEC. 3) This simplifies things for businesses looking to reorganize for strategic reasons, removing the tax headache that might have come with it before.

Estate Tax Gone, Step-Up Stays

The bill completely eliminates the estate tax for anyone dying after December 31, 2024. (SEC. 4) This is a big deal for those inheriting significant assets. However, the bill keeps the "basis step-up" rule. What does that mean? Basically, if you inherit an asset (like stock or property), its value for tax purposes is "stepped up" to its fair market value at the time of the previous owner's death. You're only taxed on gains above that stepped-up value if you later sell it. This combination—no estate tax and a stepped-up basis—can significantly reduce the tax burden on inherited wealth.

Potential Issues

While the bill offers substantial tax benefits, there are a few points to consider:

• High-Income Individuals: The increased QBI deduction could be a loophole for wealthy individuals to reclassify their income to get a bigger tax break. (SEC. 2)
• Corporate Reorganization Abuse: While intended to simplify things, the corporate reorganization exemption could potentially be used to avoid taxes on asset transfers if not carefully managed. (SEC. 3)
• Wealth Transfer Tax Avoidance: Eliminating the estate tax and keeping the basis step-up could allow for large amounts of wealth to be passed down without being taxed, potentially exacerbating wealth inequality. (SEC. 4)

Overall, the Small Business Prosperity Act of 2025 aims to boost businesses and simplify the tax code, with changes taking effect for tax years beginning after December 31, 2024.