How the One Big Beautiful Bill Act Changes Tax Deductions for Small Business Owners

Tax laws are constantly evolving, and the passage of the One Big Beautiful Bill Act (OBBBA) has introduced several new deductions that can directly benefit small businesses. Among the most notable are deductions for employee tips, overtime payments, and interest on loans for US-assembled vehicles. For most business owners, these provisions represent not only immediate savings but also long-term opportunities to refine tax planning.

Key Takeaways

• The OBBBA reshapes tax deductions with direct implications for small business owners.
• Lawmakers designed OBBBA to simplify the tax code while encouraging accurate reporting and domestic investment.
• Business owners should update tax strategies, review entity structures, and anticipate future policy shifts when applying the OBBBA changes.

What Is the One Big Beautiful Bill Act?

The One Big Beautiful Bill Act (OBBBA) was passed with the stated goal of simplifying the tax code and ensuring that small businesses and not just large corporations receive meaningful benefits. While it introduces a variety of provisions, three stand out for business owners: deductions tied to tips, overtime wages, and interest on loans for US-assembled vehicles.

For business owners, the OBBBA signals a policy shift toward rewarding accurate labor reporting, easing financing burdens, and incentivizing investment in domestic operations. This means the Act isn’t just about immediate tax relief. It’s about setting the tone for how small businesses will handle taxes and compliance in the years ahead.

The Overtime Pay Deduction

What It Means for Owners

Overtime wages have been challenging for small businesses, particularly those facing seasonal fluctuations or unpredictable demand. The OBBBA introduces a deduction for employer-paid overtime, applicable to both hourly and salaried workers eligible under federal or state laws.

Strategic Application by Entity Type

• LLC Deduction applies directly on Schedule C. Seasonal businesses (restaurants, retail) gain flexibility in expanding hours during peak times without eroding profits.
• S Corp: Strong opportunity if owners pay themselves a “reasonable salary” and manage teams that frequently work overtime. Payroll systems must be airtight, since misclassification risks are higher.
• C Corp: Larger employers can leverage the deduction across multiple departments, but compliance audits will be stricter.
• Sole Proprietor (non-LLC): Offers a straightforward deduction, but has fewer options for splitting wages versus distributions compared to S Corps.

Considerations

Eligibility depends on correct employee classification. Misclassified workers could trigger IRS scrutiny, creating risk if businesses treat the deduction too casually.

Scenario Example

A landscaping company structured as an S Corp faces spikes in demand every spring. With the OBBBA deduction, it can increase staff hours in peak months, deduct the overtime wages, and redirect savings into new equipment purchases. For a sole proprietor landscaper, the impact is simpler: lower taxable income, but less flexibility in salary/distribution planning.

Forward-Looking Insight

Expect the IRS to focus on employee classification. Those relying on contractors may lose out if regulators tighten definitions to force reclassification. Now is the time to audit payroll categories.

The Vehicle Loan Interest Deduction

What It Means for Owners

Under OBBBA, businesses can deduct interest on loans used to purchase US-assembled vehicles, including light-duty trucks, vans, sedans, and certain commercial-use vehicles.

Strategic Application by Entity Type

• LLC (contractors, delivery firms): Offers a strong benefit when financing trucks or vans. Deduction stacks with Section 179 expensing.
• S Corp: Allows owners to strategically balance salary, distributions, and deductible business vehicle use. Must separate personal vs. business mileage with precision.
• C Corp: Best positioned for larger fleets; can combine deductions with depreciation across multiple vehicles.
• Sole Proprietor: Offers simplified deductions, but there is a risk of denied claims if vehicle use isn’t well-documented.

Considerations

Leased vehicles are excluded, and not all cars marketed by US brands qualify. Owners must carefully verify eligibility to avoid denied deductions.

Scenario Example

A food delivery business structured as an LLC finances three US-assembled vans. OBBBA allows the owner to deduct loan interest, combine it with accelerated depreciation, and reinvest savings into expanding delivery zones. An S Corp contractor purchasing one truck may realize less immediate savings, but the deduction offsets payroll costs tied to field staff.

Forward-Looking Insight

Lawmakers are using the tax code to steer capital toward domestic manufacturing. Expect future deductions tied to US-sourced equipment, not just vehicles. Owners should weigh long-term investment in “Made in America” assets.

Why Lawmakers Passed These Provisions

The OBBBA reflects broader tax policy priorities:

• Leveling the Playing Field: Small businesses often lack access to the sophisticated tax strategies used by large corporations. These targeted deductions give smaller firms more straightforward relief.
• Encouraging Compliance: By linking deductions to accurate reporting (tips, overtime), the Act incentivizes transparency.
• Supporting Domestic Growth: The vehicle loan interest deduction aligns with ongoing efforts to strengthen US-based manufacturing.

At the same time, these provisions suggest that future tax reforms will continue to target compliance-driven incentives rather than blanket credits. Business owners should prepare for a tax environment where deductions slowly rely on documentation and operational transparency.

Overview of Strategic Adjustments for Different Entities

S Corps

• Reevaluate reasonable compensation vs. staff overtime budgets.
• Tighten payroll systems. IRS will be watching classification closely.
• Layer vehicle deductions with existing depreciation rules for fleet-heavy industries.

LLCs

• Separate member draws from staff wages to protect deductions.
• Utilize digital systems for tips and overtime to ensure consistent reporting.
• Document mixed-use vehicle activity meticulously.

Sole Proprietors

• Prioritize formal payroll and tip tracking, even if you have a small staff.
• Keep mileage logs for vehicle deductions. Handwritten records are now insufficient.
• Consider whether an S Corp election enhances compliance and savings under OBBBA.

Potential Challenges and Compliance Risks

While the OBBBA offers opportunities, it also raises risks if not managed carefully.

Risks to Watch

• Employee Misclassification: Deducting overtime requires the right worker classification under labor law.
• Incomplete Tip Reporting: Insufficient documentation can nullify deductions and lead to audits.
• Vehicle Eligibility Confusion: Misunderstanding what counts as “US-assembled” may result in denied deductions.

Mitigation Strategies

• Conduct regular internal payroll audits.
• Retain detailed documentation for tips, timesheets, and vehicle purchases.
• Invest in integrated accounting and payroll systems to reduce manual errors.

Long-Term Implications of the OBBBA

The Act does more than cut taxes in the short term; it also shapes the way small businesses approach compliance and investment:

• Greater Incentive for Transparency: Tax savings are tied directly to accurate reporting.
• Policy Alignment with Domestic Growth: Encourages businesses to buy American-assembled vehicles and reinvest tax savings.
• Competitive Edge for Proactive Owners: Businesses that adapt quickly can free up cash flow and enhance their market positioning.

However, owners must weigh the cost of compliance tools, software, or advisors against the benefits of deductions. The administrative burden may even outweigh the tax savings for some.

Frequently Asked Questions

What is the OBBBA?

It is legislation that introduces new tax deductions to support small businesses. Its provisions include deductions for tips, overtime pay, and loan interest on US-assembled vehicles.

Who can claim the tip deduction?

Any service-based business with employees who earn tips can claim it. To qualify, all tips must be accurately reported to the IRS.

Can all businesses deduct overtime pay?

Yes, but only if employees are properly classified under federal or state labor laws. Businesses must keep clear records of hours worked and overtime wages paid.

Do leased vehicles qualify for the new interest deduction?

No, the deduction applies only to financed purchases of US-assembled vehicles. Lease payments do not meet the eligibility requirement.

How do I confirm a vehicle is US-assembled?

You can verify assembly location through the vehicle identification number (VIN). Manufacturer certification documents also confirm where the car was built.

Can these deductions be combined with existing credits?

Yes, the OBBBA deductions are new and can be layered with existing tax credits. Combining them may significantly increase overall savings.

What records are needed for overtime deductions?

Businesses must maintain accurate timesheets and payroll reports. Worker classification documents are also necessary for compliance.

Is there a cap on the tip deduction?

There is no set dollar cap on the deduction. However, the claimed amount must align with reported income and actual tip totals.

Do sole proprietors qualify for OBBBA deductions?

Yes, sole proprietors, LLCs, S Corps, and C Corps can all claim the new deductions. Eligibility depends on meeting the reporting and recordkeeping standards.

Can these deductions be applied retroactively?

No, they apply only to tax years beginning after the OBBBA was enacted. Prior filings cannot be amended to include them.

Expert Tips from NCH

• Automate Record-Keeping: Utilize payroll and accounting software to streamline compliance and safeguard deductions.
• Bundle Benefits: Pair vehicle interest deductions with Section 179 depreciation to maximize tax efficiency.
• Plan Around Seasonality: Anticipate busy periods and align overtime budgets with deductible opportunities.
• Reevaluate Your Entity Structure: Different structures may benefit more from certain OBBBA deductions.
• Seek Professional Guidance: Work with advisors to integrate deductions into a long-term tax strategy.

Final Thoughts

The OBBBA offers meaningful opportunities for small business owners, but also new compliance responsibilities. Its provisions reward businesses that maintain accurate payroll systems, invest in US-assembled vehicles, and approach tax planning strategically. The real value lies in how the Act signals the direction of future tax policy: more targeted, compliance-based incentives designed to level the playing field.

Our team at NCH can help small business owners adapt their tax strategies to make the most of the OBBBA while minimizing risks. By aligning compliance, entity structuring, and financial planning, you can turn these policy changes into lasting advantages.

DISCLAIMER: The above material has been prepared for informational purposes only, containing opinions of the provider and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Please consider consulting tax, legal, and accounting advisors before engaging in any transaction.