What Small Businesses Need to Know About Upcoming IRS Changes in 2025

Introduction:

As 2025 approaches, the IRS has released important updates and changes that will impact small businesses across the United States. From adjustments in tax brackets and deductions to new compliance and e-filing requirements, these updates will influence financial planning, tax strategy, and filing processes. Staying informed of these changes is key for small business owners to stay compliant, minimize tax liabilities, and take advantage of available credits. This guide outlines the most significant IRS changes for 2025 and provides actionable steps for small businesses to prepare effectively.

1. 2025 Changes in Tax Brackets and Deductions

Projected Adjustments in Tax Brackets and Standard Deductions: Every year, the IRS makes inflation adjustments to tax brackets and standard deductions, which are anticipated to change for the 2025 tax year. These adjustments are typically designed to prevent “bracket creep,” where individuals are pushed into higher tax brackets solely due to inflation. Although the specific 2025 rates have not yet been finalized, the IRS typically follows trends based on inflation data from the preceding year.

For example, in recent years, standard deductions have been increased across filing statuses, and tax brackets have shifted slightly to accommodate inflation. These annual adjustments mean that many small business owners and self-employed individuals can expect some relief in taxable income as the thresholds for each bracket rise slightly. Being aware of these changes is critical for accurate tax planning, especially for small businesses whose owners report income as self-employed.

Updated Standard Deduction Estimates for 2025: The standard deduction amount is also expected to increase, which will reduce the overall taxable income for small business owners who opt not to itemize deductions. If past trends continue, small business owners filing as single or married joint filers will likely see a moderate increase, giving them more room to reduce taxable income without itemizing.

2. New Compliance Requirements for Small Businesses

Increased Reporting and Record-Keeping Obligations: Compliance continues to be a focus for the IRS, and 2025 will bring further updates to requirements on reporting and record-keeping for small businesses. While larger corporations typically face the most stringent reporting requirements, small businesses are increasingly being asked to improve transparency and accuracy in their tax filings.

In particular, small businesses can expect:

• Updates to 1099-K Reporting Requirements: For businesses that process payments through third-party networks like PayPal or credit card processors, the IRS has been lowering the reporting threshold for 1099-K forms in recent years. As of recent adjustments, businesses are required to report any aggregate payments over $600, meaning that even small transactions are now subject to reporting. This threshold could remain or decrease even further, so small businesses should track these transactions closely to ensure compliance.

• Heightened Focus on Income Reporting and Expense Classification: Ensuring all income is accurately reported and expenses are correctly categorized has never been more important. Businesses should review their accounting practices to avoid common errors in expense classification, particularly in areas like meals, travel, and entertainment expenses, which often receive closer scrutiny.

Payroll and Employee Benefits Compliance Changes: New requirements are expected for payroll tax compliance and employee benefit reporting, especially with increased attention on proper classification of employees versus contractors. Misclassification can result in significant penalties, so small businesses should review their payroll practices and worker classifications to prevent potential issues.

3. Updated Filing Processes and E-Filing Mandates

Expanded E-Filing Requirements for 2025: The IRS is moving towards mandatory e-filing for more business types. As of 2025, businesses with as few as 10 returns will be required to submit electronically, a reduction from previous thresholds. This change impacts small businesses that may have traditionally filed paper forms but now need to adapt to e-filing platforms.

Streamlined Filing for Form 1099 and 941 Filers: New e-filing options for forms frequently used by small businesses, such as Form 1099 (for independent contractors) and Form 941 (for quarterly payroll taxes), will be introduced. The IRS aims to make the process smoother for small business owners, especially those handling multiple employees or contractors. However, businesses should prepare by ensuring their accounting systems are compatible with e-filing requirements or by working with a payroll service that supports electronic submissions.

Benefits of E-Filing for Small Businesses: E-filing is beneficial for many reasons, including faster processing times, reduced risk of errors, and quicker access to refunds or credits. For businesses unfamiliar with e-filing, 2025 is the year to make the transition. Most modern accounting software offers integrated e-filing options, and business owners are encouraged to work with a tax professional to ensure all requirements are met.

4. Potential Changes to Tax Credits and Deductions

Modifications to Popular Tax Credits: Several credits that benefit small businesses may be expanded, modified, or reduced in 2025. Staying updated on these changes can help business owners capitalize on credits that reduce their tax burden. Some of the most relevant credits include:

• Research & Development (R&D) Credit: This credit, which incentivizes innovation, may see modifications to encourage broader use among small businesses in sectors like technology and manufacturing.

• Work Opportunity Tax Credit (WOTC): The WOTC provides incentives for hiring from specific groups, such as veterans or long-term unemployed individuals. Small businesses interested in workforce expansion should monitor any updates to this credit, as it can result in significant tax savings.

• Employee Retention Credit (ERC): Although primarily a pandemic-era relief measure, discussions have been ongoing about potential extensions or revisions to the ERC, possibly with narrower eligibility criteria.

Upcoming Expansions to Energy-Efficient Business Credits: In line with ongoing sustainability efforts, the IRS may expand energy-related credits, making them more accessible to small businesses. Credits like the Business Energy Investment Tax Credit (ITC) and incentives for energy-efficient commercial buildings are expected to remain, with possible expansions in eligibility for businesses investing in green technology and energy efficiency.

Adjustments to Deductions for Business Expenses: As always, businesses should keep an eye on potential changes in deductible expenses, especially for areas like meals, travel, and transportation. The deduction for business meals has fluctuated in recent years, and 2025 could bring further updates depending on IRS policy shifts. Businesses can maximize deductions by planning expenses around known deductible categories and maintaining thorough documentation.

5. Consulting a Tax Advisor to Stay Ahead of Changes

Benefits of Working with a Tax Professional: Navigating IRS changes and optimizing tax strategies requires more than just basic knowledge—it requires expertise. Consulting a tax advisor is one of the most effective ways for small business owners to stay informed and prepare for the upcoming tax season. A tax professional can help with:

• Strategic Tax Planning: A tax advisor can analyze your business’s financial health and identify strategies to minimize tax obligations, whether through deductions, credits, or optimized expense classifications.

• Compliance and Documentation: Tax professionals can help ensure your records align with the latest IRS requirements, reducing the risk of errors, penalties, or audits. They can also provide guidance on e-filing, payroll compliance, and worker classification.

• Tailored Advice on Credits and Deductions: With changing eligibility criteria for various tax credits, an advisor can help you determine which credits apply to your business and how to claim them effectively.

• Long-Term Financial Planning: Beyond the current tax year, tax advisors can help craft a financial plan that sets your business up for long-term success, taking into account changes in tax laws, credits, and deductions over time.

Next Steps to Prepare Your Business for 2025: As 2025 brings these new changes, staying informed and proactive is essential. Begin by familiarizing yourself with anticipated tax bracket adjustments and compliance requirements, and ensure your payroll and income reporting are accurate. To gain the most from your tax planning efforts, reach out to a qualified tax advisor to discuss strategies tailored to your business.

Schedule a Consultation with Bernstein Tax Group: Ensure your small business is ready for the upcoming tax year with expert guidance. Bernstein Tax Group specializes in helping small businesses navigate IRS changes and optimize their tax strategies for success. Schedule a consultation today to explore how these upcoming changes impact your business and start planning for a tax-efficient 2025. Reach out to us atBernsteinTax.com to get started.