What Owners Need to Know Before December 31

2025 brings meaningful federal and Washington State changes that will shape tax planning, cash-flow decisions, compensation strategy, and long-term planning for privately held businesses. This guide explains what changed, who is most affected, and the specific steps owners should take before year-end.

Key Takeaways

• The 20% QBID deduction and the 21% corporate tax rate are now permanent under OBBBA, providing a more stable planning environment.
• Washington’s expansion of sales tax on services requires billing, invoicing, and pricing updates before October 1, 2025.
• Owners should prioritize entity structure reviews, reasonable compensation studies, and documentation readiness, given increased IRS scrutiny.
• The annual gift exclusion is $19,000 per person for 2025, and the estate exemption is permanently higher under OBBBA.
• Several energy and state-level tax credits expire after 2025, creating time-sensitive opportunities.
• The IRS is shifting to electronic-only payments; ensure EFTPS access and updated bank info before deadlines.

Who Needs to Pay Closest Attention

You will benefit most from these updates if you are:

• A Washington-based service provider (IT, design, consulting, agency, repair, training).
• An owner-operated S-Corp or LLC with high margins.
• Planning equipment, vehicle, or technology purchases.
• Earning revenue in multiple states.
• A family-owned business preparing for succession.
• Eligible for clean-energy, R&D, or state incentive credits.

1. Federal Business Tax Updates

1.1 Entity Structure and Owner Compensation Review

The One Big Beautiful Bill Act (OBBBA) permanently extends key provisions of the Tax Cuts & Jobs Act, including:

• The 21% C-Corporation tax rate
• The 20% Qualified Business Income Deduction (QBID)
• Expanded investment incentives

Why this matters

• S-Corp owners must maintain documented reasonable compensation.
• High-margin owner-operators may benefit from strategic wage/distribution planning.
• C-Corps still face double taxation of dividends.

Action steps

• Review whether LLC, S-Corp, or C-Corp classification aligns with income and succession plans.
• Update reasonable compensation studies for 2025.
• Model multi-year QBID outcomes under varied salary/distribution splits.
• Review shareholder or operating agreements if distribution patterns are changing.

1.2 Investment Incentives: Expensing, Bonus Depreciation & R&D

OBBBA expands investment incentives and maintains key deductions, including full expensing for qualifying assets.

Eligible property examples

• Manufacturing and machinery equipment
• Business-use vehicles
• Technology systems
• Office equipment and furniture
• Certain software development costs

Action steps

• Consider accelerating year-end equipment or technology purchases.
• Ensure assets are placed in service by December 31, not just ordered.
• Retain invoices and placed-in-service documentation.
• Document R&D projects contemporaneously.
• Discuss recapture risks if assets may be sold early.

2. Washington State Business Tax Updates

2.1 Expanded Sales Tax on Services (Effective October 1, 2025)

Washington will tax many more services starting late 2025.

Most affected sectors

• IT services
• Creative and digital agencies
• Consultants
• Trainers
• Service and repair providers

Action steps

• Map service offerings to determine which will become taxable.
• Update invoicing, POS systems, recurring billing, and pricing.
• Review sourcing rules to avoid filing surprises.
• Conduct a short SALT nexus review for multi-state operations.

2.2 B&O Tax Rate Increases (Effective 2026)

Washington will implement higher B&O tax rates beginning in 2026, with the largest increases applying to businesses with more than $5 million in annual gross receipts. These changes will raise state tax costs for many service-based and high-revenue companies, making 2025 planning essential.

Action steps

• Model your 2026 B&O tax liability using projected gross receipts.
• Review pricing, margins, and service mix to absorb increased costs.
• Consider accelerating 2025 revenue or restructuring revenue streams.
• Revisit multi-state sourcing rules for cross-jurisdictional operations.

2.3 B&O Surcharges and Credit Phase-Outs

Several Washington State credits begin phasing out in 2026, including:

• State R&D credits
• Manufacturing credits
• Hiring incentives
• Sector-specific credits

Action steps

• Identify credits currently used by your business.
• Accelerate qualifying activities into 2025 before eligibility shifts.
• Model 2026 B&O costs to prepare for higher expenses under new surcharges.

3. Individual & Family Planning Considerations

3.1 Estate and Gift Planning

The federal estate and gift tax exemption is now permanently set at $15 million per person (indexed). The annual gift exclusion is $19,000 per recipient for 2025.

Action steps

• Consider lifetime transfers or partial ownership gifts.
• Use the annual exclusion for tax-free gifting.
• Review buy-sell and succession agreements.
• Consider shifting future growth out of the estate via trusts or restructuring.

3.2 Clean Energy Incentives Expiring After 2025

Several federal credits—including solar, EV charging, and building-efficiency incentives—expire after 2025.

Action steps

• Begin planning installations now to ensure completion by year-end.
• Retain all required documentation.
• Layer federal and state programs for stronger ROI.
• Model payback periods with and without credits.

4. IRS Electronic Payment Requirements

Beginning in 2025, the IRS will drastically limit the use of checks.

Action steps

• Ensure EFTPS enrollment and bank details are current.
• Confirm internal approval workflows.
• Transition processes now to avoid rejected payments.
• Schedule estimated payments electronically.

5. Documentation & Audit Readiness

A complete documentation review reduces IRS and state audit risk.

Year-end documentation checklist

• R&D activity logs
• Invoices and placed-in-service documentation
• Bonus depreciation and §179 substantiation
• Washington credit qualification records
• Reasonable compensation studies
• Mileage logs and accountable plan documentation
• Updated ownership, gifting, and beneficiary records
• Major contracts, leases, and financing agreements

6. Important 2025 Deadlines

Estimated Taxes

• Q4 Federal Estimated Tax Payment: January 15, 2026

Retirement Accounts

• IRA/Roth IRA contributions: April 15, 2026
• HSA contributions: April 15, 2026
• SEP IRA: Tax return due date + extensions
• Solo 401(k) employer contribution: Tax return due date + extensions

7. Year-End Owner Checklist

• Review entity structure and compensation
• Finalize equipment or software placed in service
• Update systems for Washington’s expanded service tax
• Model 2026 B&O rate increases and credit expirations
• Review gifting and succession updates
• Assess clean energy investments
• Verify EFTPS setup
• Complete documentation review

Frequently Asked Questions

1. Do I need to change my entity because of OBBBA?
Not necessarily, but 2025 is an ideal year to re-evaluate entity structure based on QBID, margins, and long-term goals.

2. Why does “placed in service” matter?
Assets must be in service—not merely purchased—to qualify for expensing.

3. Will all Washington services become taxable?
Not all, but many more than before. Mapping services is the first required step.

4. How should I approach gifting this year?
Use the $19,000 annual exclusion and consider larger structured transfers.

5. Should I still consider clean-energy upgrades?
Yes. Credits expiring after 2025 may significantly improve ROI.

6. What do I need for IRS electronic payment compliance?
EFTPS access, updated bank info, and revised internal controls.

Closing Note

A well-planned year-end positions your business for a stronger 2026. Every owner’s situation is unique. Your VSH tax advisor is here to help you interpret these changes and apply them to your long-term goals.