Why OBBB Changed the Game for Small Businesses and Gig Workers
The One, Big, Beautiful Bill (OBBB), signed into law on July 4, 2025, introduced sweeping deductions aimed at leveling the playing field for gig workers, tipped employees, and small businesses. Understanding how to properly structure entities and claim deductions is now key for maximizing tax efficiency.
Key Deductions & Who Qualifies
| Deduction | Eligibility | Maximum Benefits |
|---|---|---|
| No Tax on Tips | Workers in qualifying tip occupations (list includes bartenders, florists, gas-pump attendants, etc.) who receive tips reported on W-2, 1099-NEC, MISC, or K | Up to $25,000 per return for single or joint filers. (irs.gov) |
| No Tax on Overtime Compensation | Overtime paid under the Fair Labor Standards Act; must be “qualified overtime compensation” | Up to $12,500 ($25,000 if married filing jointly); phases out above certain MAGI thresholds. (irs.gov) |
| Car Loan Interest Deduction | Applies to “qualified passenger vehicle loan interest” for personal use; certain definitions apply | Amount subject to new definitions; available even if taking standard deduction or itemizing. (irs.gov) |
| Senior Enhanced Deduction | Taxpayers born before January 2, 1961; valid SSNs required | $6,000 per person; $12,000 married joint; with phase-outs based on MAGI. (irs.gov) |
Forms & Instructions: How to Claim Deductions
- OBBB created Schedule 1-A (added to Form 1040 instructions) to claim no tax on tips, overtime, car loans, and seniors’ deductions. (irs.gov)
- Tips must be reported via proper forms (W-2, 1099-MISC, NEC, K, or Form 4137). Occupational codes define whether occupation qualifies. The final regulations provide definitions and lists of occupations. (irs.gov)
- Over-Magi phase-outs: Single filers—$150,000; Joint—$300,000. (irs.gov)
Choosing the Right Entity Structure
- Sole proprietorship/LLC (disregarded entity) allows most individual deductions - simpler until income is high.
- S Corporation may help reduce self-employment tax but has stricter rules and requires payroll. Combining OBBB deductions with entity election can magnify savings for high income earners.
- Partnerships or Multiple Members need clear accounting on tip income and deductions, as all are subject to same rules.
Mileage & Vehicles Under OBBB
The standard business mileage rate for 2026 is 72.5 cents per mile, up by 2.5 cents from 2025. Medical/purposes rates decreased slightly. (irs.gov)
Using this rate can simplify deductions for entity use of vehicles over calculating actual expenses. But if vehicle is for mixed personal/business use, tracking percentage allocations still matters.
Entity Setup Example
Consider Jane, a tipped solo artist who earns $80K in tips plus $40K selling digital art. She forms an LLC taxed as an S-Corp, pays herself a reasonable salary, and receives tip income reported on 1099-K and MISC.
- She claims no tax on tips deduction (max $25,000).
- She tracks and deducts car loan interest if her vehicle qualifies.
- She uses business mileage for client visits, use 72.5 cents/mile rate.
- As owner of S-Corp, she limits self-employment tax on profit beyond salary.
Action Steps to Set Up Correctly
- Verify if your occupation is on List of Occupations that Receive Tips via published final regs.
- Choose structure (LLC, S-Corp, etc.) considering income level and administrative costs.
- Keep detailed records: tip income, overtime pay, car loans. Include proper paperwork.
- Use new Schedule 1-A to claim deductions even if taking standard deduction.
- Consult with a tax professional to adapt to MAGI thresholds and limitations.
Category: Entity Setup TaxHome: US Author: NomadicTax Research Team ReadTime: 5-8 min Published: true