Top Tax Developments of 2025

(Parker Tax Publishing December 2025)

The biggest tax story of 2025 was the passage of the One Big Beautiful Bill Act (OBBBA), a massive reconciliation bill that made permanent most of the Tax Cuts and Jobs Act's temporary provisions and enacted an array of new tax breaks for individuals and businesses. The IRS provided key guidance on several high-profile OBBBA provisions, including the deductions for tips and overtime, the deduction for domestic research or experimental expenditures, and Trump accounts. In addition, federal courts released decisions on a range of important issues, including the worthless debt deduction, estate tax deductions, self-employment taxes, and the Tax Court's jurisdiction.

The following are the top federal tax developments of 2025.

The One Big Beautiful Bill Act Signed Into Law

On July 4, President Trump signed into law the One Big Beautiful Bill Act (OBBBA) (Pub. L. 119-21). In addition to making permanent most of the TCJA changes that were scheduled to sunset at the end of 2025, the OBBBA also enacted an array of new and enhanced tax breaks. The new law also repealed most of the clean energy tax credits enacted by the Inflation Reduction Act of 2022.

Practice Aid: Use Parker's CPA SAMPLE CLIENT LETTERS as a template or just sign your name at the bottom. For a comprehensive year-end planning letter for individuals, see Client Letter (Individuals). For a comprehensive year-end letter for businesses, see Client Letter (Businesses). Both letters are entirely new and emphasize the new and expanded tax breaks enacted by the One Big Beautiful Bill Act.

For a more detailed look, read Parker's 2025 Guide Year-End Tax Planning for INDIVIDUALS and Parker's 2025 Guide Year-End Tax Planning for BUSINESSES

For individual taxpayers, some of the most significant changes include the permanent extension of the TCJA tax rates and enhanced standard deduction. The bill also increased of the SALT cap from $10,000 to $40,000, effective for 2025. New temporary deductions (expiring after the 2028 tax year) for up to $25,000 of tip income, $25,000 of overtime pay, and $10,000 of car loan interest were also enacted, along with a $6,000 deduction for seniors. The deduction for mortgage insurance premiums, previously available from 2018 through 2021, was permanently restored. The OBBBA also permanently increased the child tax credit, enhanced 529 savings plans, reinstated and increased the charitable contribution deduction for non-itemizers, and created Trump accounts beginning in 2026.

For businesses, the key provisions of the OBBBA include a permanent extension of the additional first-year depreciation deduction and an increase of Code Sec. 179 expensing to $2.5 million, reduced by the amount by which the cost of qualifying property exceeds $4 million. The immediate deduction for domestic research or experimental expenditures was restored, effective for 2025, with the option for small business taxpayers to apply the change retroactively to tax years beginning after 2021. Importantly, the OBBBA also applied these changes to software development expenses. In addition, the OBBBA permanently extended the Code Sec. 199 qualified business income deduction, made qualified production property (generally, real property used for manufacturing) eligible for 100-percent first year depreciation, and restored the EBITDA limitation for determining the deductibility of business interest expense.

The OBBBA repealed many clean energy credits. The clean vehicle credit, previously owned clean vehicle credit, and qualified commercial clean vehicle credits were all terminated as of September 30, 2025. The energy efficient home improvement credit and the residential clean energy credit were terminated effective December 31, 2025, while the energy efficient commercial buildings deduction was terminated for property the construction of which begins after June 30, 2026. The OBBBA also accelerated the termination of, and placed new restrictions on, the clean electricity production and investment credits, the advanced manufacturing production credit, and the advanced energy project credit.

IRS Waives Reporting Requirements for Qualified Tip and Overtime Deductions for 2025; Provides Alternatives for Workers to Determine Deductions

The OBBBA added various new reporting requirements for employers and other payors that generally require tips and overtime to be separately stated on Form W-2, Wage and Tax Statement, Form 1099-NEC, Nonemployee Compensation, Form 1099-MISC, Miscellaneous Information.

In August, the IRS announced in a press release (IR-2025-82) that no changes are being made to the 2025 Form W-2 or Forms 1099 to account for the new reporting requirements under the OBBBA. As a result, employers and other payors will not be required to separately account for cash tips or qualified overtime compensation on those forms on the written statements (copies of the forms) furnished to individuals for 2025. In addition, in Notice 2025-62 the IRS provided penalty relief for 2025 from the new information reporting requirements for cash tips and qualified overtime compensation to employers and other payors for not filing correct information returns and not providing correct payee statements to employees and other payees.

In Notice 2025-69, the IRS issued guidance for workers eligible to claim the deduction for tips under Code Sec. 224 and for overtime compensation under Code Sec. 225 for tax year 2025. The notice clarifies for workers how to determine the amount of their deduction without receiving a separate accounting from their employer for cash tips or qualified overtime.

Notice 2025-69 also provides a transition rule for determining whether an employer's trade or business is a specified services trade or business (SSTB) under Code Sec. 199A(d)(2). Specifically, until final regulations are issued, the IRS will treat an employee as having received tips in the course of a trade or business that is not an SSTB if the employee's occupation is one that customarily and regularly received tips on or before December 31, 2024.

Practice Aid: For SAMPLE CLIENT LETTERS explaining the new deductions for Qualified Tips and Qualified Overtime Pay. For an in-depth article explaining options for calculating the deductions in situations where an employer doesn't provide a separate accounting, see Our article "IRS Guidance for Recipients of Qualified Tips or Overtime Pay 2025".

IRS Provides Procedures for Making Retroactive Elections for R&E Expenditures

The OBBBA added Code Sec. 174A to restore the deduction for domestic research or experimental (R&E) expenditures, including software development costs, effective for amounts paid or incurred in tax years beginning after December 31, 2024. Previously, R&E expenditures had to be capitalized and amortized ratably over 5 years under Code Sec. 174 as enacted by the Tax Cuts and Jobs Act (TCJA).

A transition rule in the OBBBA gives taxpayers two options to accelerate recovery of domestic R&E expenditures capitalized under TCJA:

(1) a small business taxpayer with annual gross receipts of $31 million or less in its first tax year beginning after December 31, 2024 can elect to apply the Code Sec. 174A expensing rules retroactively to tax years beginning after December 31, 2021; or

(2) any taxpayer (no gross receipts test) can write off unamortized domestic R&E expenditures that were capitalized under TCJA ratably over a one- or a two-year period beginning with the taxpayer's first tax year beginning after December 31, 2024.

In Rev. Proc. 2025-28, the IRS provided procedures for making these elections, including the procedures for making the required changes of accounting method. The election to retroactively apply Code Sec. 174A may be made on a timely filed (including extensions) original federal income tax return for any tax year beginning after December 31, 2021, and ending before January 1, 2025, or on an administrative adjustment request (AAR) or amended federal income tax return, as applicable, for an applicable tax year, by attaching a statement to the AAR or return for each applicable tax year that complies with the requirements set forth in Section 3.03(2) of Rev. Proc. 2025-28. Once the election is made, the small business taxpayer must carry out the election for all applicable tax years in which the taxpayer paid or incurred domestic R&E expenditures.

Section 7.02 of Rev. Proc. 2025-28 modifies Rev. Proc. 2025-23 to provide the manner of making an automatic change in method of accounting for amortizing the remaining unamortized amount previously capitalized under TCJA Code Sec. 174. The requirement to file a Form 3115, Application for Change in Accounting Method, is waived, and a statement in lieu of a Form 3115 is authorized. The statement must include (1) the taxpayer's name and taxpayer identification number, (2) the designated automatic accounting method change number for the change, and (3) a declaration regarding whether the applicant is changing to either the amortize the remaining unamortized amount in the full first tax year beginning after December 31, 2024, or ratably over the 2-year period beginning with the first tax year beginning after December 31, 2024.

IRS Previews Guidance for Trump Accounts

In Notice 2025-68, the IRS announced that it will issue proposed regulations on Trump accounts under Code Sec. 530A which will be available beginning in 2026. The notice provides initial guidance on various issues including the establishment of a Trump account, the $1,000 pilot program contribution under Code Sec. 6434, and employer contributions under Code Sec. 128.

Under the guidance, an election to have a Trump account established for the benefit of an eligible individual will be made by filing Form 4547, Trump Account Election(s), or through an online tool or application on trumpaccounts.gov. A Trump account may be established at the same time as an election is made to receive a pilot program contribution under Code Sec. 6434 or at any other time before January 1 of the calendar year in which the beneficiary attains the age of 18. For calendar year 2026, the election to open an initial Trump account may be made on IRS Form 4547 (once it is released) at any time, including at the same time that the 2025 income tax return is filed or through the online tool or application. The online tool or application for making the elections is expected to be available on trumpaccounts.gov in the middle of 2026.

Regarding the Code Sec. 6434 pilot program, under which $1,000 will be paid by the Treasury Secretary to the Trump account of an eligible child, the notice states that for 2026, the election to receive a pilot program contribution can be made on Form 4547 at any time, including at the same time the 2025 income tax return is file, or through the online tool or application. The online tool or application is expected to be available in the middle of 2026. A pilot program contribution will be deposited into the Trump account of an eligible child no earlier than July 4, 2026. The Treasury Department will make the pilot program contribution as soon as practicable after the election is made and the Treasury Department can confirm with the initial Trump account trustee that the account has been opened.

Under Code Sec. 128, employees can exclude up to $2,500 (adjusted for inflation after 2027) of employer contributions to Trump accounts. The notice clarifies that the annual limit is per employee, not per dependent. Thus, for example, if an employee has two or more children that have Trump accounts, an employer with a Trump account contribution program may only contribute up to $2,500 in the aggregate for 2026 to those Trump accounts. When making the contribution, the employer must affirmatively indicate that the contribution is a Code Sec. 128 employer contribution excludible from gross income of the employee. The guidance also states that Trump account contributions can be offered via salary reduction under a Code Sec. 125 cafeteria plan, but only if the contribution is made to the Trump account of the employee's dependent. If the contribution is made to the employee's own Trump account, the contribution would be considered deferred compensation because the employee would have a vested right to compensation that may be payable in a later year. The IRS said that it intends to address rules related to the coordination of Trump account contribution programs and Code Sec. 125 cafeteria plans in proposed regulations.

IRS Repeals Basis Shifting Transaction Regs and Relaxes Reporting for Hot Assets

In January, the IRS issued final regulations in T.D. 10028 that identified certain partnership related-party basis shifting transactions as transactions of interest that are required to be reported on Form 8886, Reportable Transaction Disclosure Statement. In February, President Trump issued Executive Order 14219 directing agencies to initiate a review process to identify and remove "overbearing and burdensome" regulations and other guidance. Pursuant to Executive Order 14219, the IRS announced in Notice 2025-23 that it will remove the regulations issued in T.D. 10028. The IRS also provided immediate penalty relief for failing to disclose basis shifting transactions and withdrew Notice 2024-54, which described proposed regulations that the IRS previously intended issue addressing partnership related-party basis shifting transactions.

In August, the IRS issued proposed regulations in REG-108822-25 that would modify the information reporting obligations with respect to sales or exchanges of interests in partnerships owning inventory or unrealized receivables (i.e., Code Sec. 751(a) assets). Specifically, the proposed regulations would eliminate the requirement that partnerships furnish the information required in Part IV of Form 8308, Report of a Sale or Exchange of Certain Partnership Interests, by January 31 of the year following the year in which a Section 751(a) exchange occurred. Partnerships may rely on the proposed regulations with respect to Section 751(a) exchanges occurring on or after January 1, 2025, and before the date the regulations are finalized.

Final Regulations Implement SECURE 2.0 Act Changes to Catch-Up Contributions

In T.D. 10033, the IRS issued final regulations that provide guidance that reflects changes to the rules for catch-up contributions to retirement plans made by the SECURE 2.0 Act of 2022.

For tax years after 2024, the SECURE 2.0 Act amended Code Sec. 414(v)(2) to increase the catch-up limit for participants who attain age 60, 61, 62, or 63 during the tax year to 150 percent of the otherwise applicable catch-up limit, adjusted for inflation after 2025. The SECURE 2.0 Act also increased the catch-up limit for SIMPLE plans, for tax years beginning after 2023, to 110 percent of the otherwise applicable catch-up limit, adjusted for inflation after 2024. Finally, the SECURE 2.0 Act added Code Sec. 414(v)(7), which requires that catch-up contributions made by participants whose wages exceed $145,000 for the preceding calendar year to be designated Roth contributions. The Roth catch-up requirement applies to tax years beginning after 2025.

The final regulations in T.D. 10033 provide that the Roth catch-up requirement applies only if the employee has FICA wages (i.e., wages on which taxes are imposed by ode Secs. 3101(a) and 3111(a)), not exceeding the applicable threshold from the employer sponsoring the plan for the preceding calendar year. Accordingly, an individual who did not have FICA wages from the employer sponsoring the plan for the preceding year (for example, a partner who had only self-employment income) would not be subject to the Roth catch-up requirement under the plan in the current year. Similarly, an individual who received cash compensation from the employer sponsoring the plan in the preceding calendar year but nevertheless did not have any FICA wages from the employer for that year (for example, because the compensation was taxed in an earlier year under Code Sec. 3121(v)(2)) would not be subject to the Roth catch-up requirement under the plan in the current year.

The final regulations also clarify that the 10 percent increase to the catch-up limit for SIMPLE plan participants applies only to participants who are not permitted to make the increased catch-up contributions as a result of being age 60, 61, 62, or 63. In addition, the final regulations address issues regarding plan amendments that are required to reflect the changes to the catch-up contribution rules under the SECURE 2.0 Act.

Tax Court Holds Limited Partners Liable for Self-Employment Taxes

In Soroban Capital Partners LP v. Comm'r, T.C. Memo. 2025-52, the Tax Court held that ordinary income allocated to an investment firm's limited partners was net earnings from self-employment.

Code Sec. 1401 imposes a tax on the self-employment income of every individual. Under Code Sec. 1402(b), an individual's self-employment income is the net earnings from self-employment derived by the individual during the tax year. Code Sec. 1402(a) defines net earnings from self-employment as the gross income derived from any trade or business carried on by the individual, less deductions, plus the individual's distributive share of income or loss from a partnership. However, an exception to this rule excludes distributions received by limited partners in a partnership. Specifically, Code Sec. 1402(a)(13) excludes the distributive share of any time of income or loss of "a limited partner, as such," other than guaranteed payments.

In Soroban, an investment firm organized as a limited partnership with a general partner and three limited partners excluded the limited partners' shares of partnership income when calculating net earnings from self-employment. Soroban took the position that the limited partners' income was excludible under Code Sec. 1402(a)(13), but the IRS disagreed and recharacterized the ordinary income allocated to the limited partners as net earnings from self-employment. This reallocation increased Soroban's net earnings from self-employment by over $77 million for one of the two years at issue and by over $63 million for the other.

The Tax Court agreed with the IRS and held that Soroban's limited partners were not limited partners within the meaning of Code Sec. 1402(a)(13). The court applied the "functional analysis" set forth in Soroban Capital Partners LP v. Comm'r, 161 T.C. 310 (2023), a test designed to determine whether the limited partners' economic relationship is generally one of passive investment. The court concluded that Soroban's limited partners were not akin to passive investors given that they (1) oversaw and substantially participated in the investment process; (2) were publicly held out as essential to the operation of the business; (3) made decisions relating to the hiring, firing, promoting, and evaluating employees; and (4) their expertise was a selling point for potential investors.

Ninth Circuit: Discharge of Debt Does Not Presumptively Render It Worthless

In Kelly v. Comm'r, 2025 PTC 207 (9th Cir. 2025), a panel of the Ninth Circuit held that a taxpayer who canceled millions of dollars of purported loans between business entities he owned, and reported cancellation of debt income to the debtor entities, was not presumptively allowed to claim a corresponding worthless debt deduction by the creditor entities.

The taxpayer in Kelly reported $145 million of cancellation of debt (COD) income for 2010, but he excluded it due to his personal insolvency. For the same year, he also reported a short-term capital loss of nearly $87 million as a "bad debt write off." The taxpayer reasoned that a canceled debt automatically becomes worthless, creating COD income and a worthless-debt deduction simultaneously. The IRS disagreed, and the taxpayer took his case to the Tax Court. In T.C. Memo. 2021-76, the Tax Court ruled that the taxpayer had to prove the worthlessness of his discharged debts and declined to presume worthlessness because COD income arose from their discharge. The taxpayer appealed to the Ninth Circuit, arguing that the Tax Court should have construed "worthless" debt under Code Sec. 166 the same as "discharged" debt under Code Sec. 61(a)(11). According to the taxpayer, a cancelled debt becomes "undeniably worthless and beyond any hope of recovery."

The Ninth Circuit panel affirmed the Tax Court and held that "worthless" and "discharge" are not synonymous. The court reasoned that, although a debt obligation might lack value at the time of discharge, determining lack of value requires examining objective facts. The debt discharge does not, as a matter of law, eliminate the debt's prior objective value and render it worthless. The court added that without objective evidence demonstrating worthlessness, any monetary transfer could be categorized as a loan and later cancelled to produce an illegitimate tax benefit to the putative creditor. Moreover, the court said that neither Code Sec. 61 nor Code Sec. 108(a)(1)(B), both of which address COD income, have any relation to Code Sec. 166 and the worthlessness determination. Both of the COD provisions adopt the freeing-of-assets theory, whereby discharged bet creates a potential gain which has neither a relation to worthlessness nor any reciprocal effect on the creditor. In contrast, the court found that the Code Sec. 166 worthless-debt deduction is closer to a casualty loss. Allowing a discharging creditor to claim a worthless-debt deduction, in the court's view, would be like allowing an insurance payout to someone who intentionally burned down his own house.

Supreme Court Holds Refund Dispute Was Mooted When IRS Canceled Levy

In Comm'r v. Zuch, 2025 PTC 214 (S. Ct. 2025), the Supreme Court reversed the Third Circuit and held that the Tax Court lost jurisdiction over a taxpayer's appeal of a collection due process hearing once the IRS was no longer pursuing a levy on the taxpayer. While the case was pending before the Tax Court, the taxpayer made overpayments which the IRS applied to her alleged tax liability, thereby eliminating any justification for the levy. But the taxpayer wanted the appeal to continue because she still disputed the debt that prompted the levy, and she hoped that a victory in the Tax Court would force the IRS to refund her overpayments. The Tax Court dismissed the case as moot, finding that it no longer had any jurisdiction under Code Sec. 6330(d) once the levy was off the table. The Third Circuit vacated the dismissal and held that the IRS's decision not to pursue the levy did not moot the Tax Court proceedings.

In an 8-1 decision, the Supreme Court reversed the Third Circuit and held that the Tax Court lacks jurisdiction under Code Sec. 6330 to resolve disputes between a taxpayer and the IRS when the IRS is no longer pursuing a levy. The Court found that Code Sec. 6330(d)(1) grants the Tax Court jurisdiction to review an appeals officer's "determination" in a collection due process hearing and "determination" refers to the binary decision whether a levy may proceed. The taxpayer's dispute regarding her underlying tax liability was, in the Court's view, an input into the appeals officer's "determination" that the proposed levy on the taxpayer's property could go forward. Once the IRS used the overpayments to zero out the taxpayer's balance, there was no longer any basis for a levy and thus no relevant "determination" for the Tax Court to review.

A dissenting opinion was filed by Justice Gorsuch who wrote that, given the majority's opinion, Code Sec. 6330 proceedings are essentially risk-free for the IRS because the IRS may pursue a levy and argue its case to the Tax Court and then, if the Tax Court seems likely to side with the taxpayer, the IRS can drop the levy and avoid an unfavorable ruling on the taxpayer's underlying tax liability. Doing so, he said, will often prove only a small setback for the IRS because it remains free to pursue other collection methods - including keeping, rather than refunding, a taxpayer's later overpayments. And, he observed, the taxpayer will often find him or herself without any way to challenge the IRS's error or prevent the agency from keeping more of a taxpayer's money than it is lawfully due.

Eleventh Circuit Rules Estate Cannot Deduct Bequest to Stepchildren

In Estate of Spizzirri v. Comm'r, 2025 PTC 180 (11th Cir. 2025), the Eleventh Circuit affirmed the Tax Court and held that an estate was not entitled to deduct a $3 million transfer to the decedent's stepchildren as a claim against the estate because the transfer was neither "contracted bona fide" nor "for an adequate and full consideration in money or money's worth" as required by Code Sec. 2053(a)(3) and Code Sec. 2053(c)(1)(A).

The case involved a decedent entered a prenuptial agreement that required his estate to transfer $6 million to his wife and $3 million to his wife's children from a previous marriage upon his death. The agreement stated that the payments were in lieu of any other rights available to the surviving spouse and children. The estate claimed a deduction for the payments under Code Sec. 2053, which the IRS disallowed. After the Tax Court upheld the disallowance of the deduction, the estate appealed to the Eleventh Circuit.

The Eleventh Circuit agreed with the Tax Court that the no deduction was allowed because the payments were essentially donative in character as required under Reg. Sec. 20.2053-1(b)(2)(i). Under Reg. Sec. 20.2053-1(b)(2)(i), the "bona fide" requirement in Code Sec. 2053(c)(1) bars a deduction for a claim "to the extent it is founded on a transfer that is essentially donative in character (a mere cloak for a gift or bequest)." The court applied the five factors set forth in Reg. Sec. 20.2053-1(b)(2)(ii) for determining whether a transfer was contracted bona fide, and found that each factor weighed against the estate. The court found that the payments did not occur in the ordinary course of business and were not free of donative intent considering that the decedent made the payments to keep his wife happy and show largesse to her children. The court said that the circumstances of this case did not suggest sort of arm's length transaction in the ordinary course of business that qualifies a claim against the estate under Code Sec. 2053(a).

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

Parker Tax Pro Library - An Affordable Professional Tax Research Solution. www.parkertaxpublishing.com

We hope you find our professional tax research articles comprehensive and informative. Parker Tax Pro Library gives you unlimited online access all of our past Biweekly Tax Bulletins, 22 volumes of expert analysis, 250 Client Letters, Bob Jennings Practice Aids, time saving election statements and our comprehensive, fully updated primary source library.

Try Our Easy, Powerful Search Engine

A Professional Tax Research Solution that gives you instant access to 22 volumes of expert analysis and 185,000 authoritative source documents. But having access won’t help if you can’t quickly and easily find the materials that answer your questions. That’s where Parker’s search engine – and it’s uncanny knack for finding the right documents – comes into play

Things that take half a dozen steps in other products take two steps in ours. Search results come up instantly and browsing them is a cinch. So is linking from Parker’s analysis to practice aids and cited primary source documents. Parker’s powerful, user-friendly search engine ensures that you quickly find what you need every time you visit Our Tax Research Library.

Dear Tax Professional,

My name is James Levey, and a few years back I founded a company named Kleinrock Publishing. I started Kleinrock out of frustration with the prohibitively high prices and difficult search engines of BNA, CCH, and RIA tax research products ... kind of reminiscent of the situation practitioners face today.

Now that Kleinrock has disappeared into CCH, prices are soaring again and ease-of-use has fallen by the wayside. The needs of smaller firms and sole practitioners are simply not being met.

To address the problem, I’ve partnered with a group of highly talented tax writers to create Parker Tax Publishing ... a company dedicated to the idea that comprehensive, authoritative tax information service can be both easy-to-use and highly affordable.

Our product, the Parker Tax Pro Library, is breathtaking in its scope. Check out the contents listing to the left to get a sense of all the valuable material you'll have access to when you subscribe.

Or better yet, take a minute to sign yourself up for a free trial, so you can experience first-hand just how easy it is to get results with the Pro Library!

Sincerely,

James Levey

Parker Tax Pro Library - An Affordable Professional Tax Research Solution. www.parkertaxpublishing.com