A Valensi Rose Client Alert

The ‘One Big Beautiful Bill Act’ (OBBBA) narrowly passed by the Senate and House just ahead of the July 4 holiday included a broad range of tax and spending measures aimed at supporting President Trump’s second-term agenda. A fierce, often partisan debate over the bill’s economic and political impacts erupted when it was first proposed, which has not abated.

But setting aside the controversy, you may be wondering how this legislation will affect California taxpayers and business owners.

Major changes made by the 887-page bill include: an increase in the estate and gift tax lifetime exemption; a substantial increase in the federal deduction for state and local taxes on income and property, known as SALT; a reduction in taxes for filers 65 and older on any income, including Social Security benefits; and a number of enhancements to depreciation and other benefits for businesses.

The legislation slightly increases the maximum lifetime exclusion (commonly known as the lifetime exemption) that can be used to shelter gifted or bequeathed assets from federal gift or estate taxes. OBBBA raises the exclusion, now $13.99 million for an individual and $27.98 million for a married couple, to $15 million and $30 million for 2025, adjusted annually for inflation. This increase is permanent; the exclusion had been scheduled to drop to $7.2 million per person on Jan. 1, 2026.

The SALT deduction was unlimited until President Trump’s 2017 revision to the tax code imposed a $10,000 cap through 2025. This had the effect of increasing the federal tax bill for residents of relatively affluent (and Democratic-leaning) high-tax states such as California, New York, New Jersey, and Massachusetts.

OBBBA increased the ceiling on SALT deductions to $40,000. This higher limit is effective beginning with income earned in 2025.

However, the benefit of this change phases down for high-earning taxpayers. The $40,000 maximum deduction is reduced by 30% of the amount by which the taxpayer’s modified adjusted gross income (MAGI) exceeds $500,000. 

Thus, for a taxpayer with a $600,000 MAGI, the maximum SALT deduction would be only $10,000 ($40,000 minus 30% of the $100,000 by which the salary exceeds the $500,000 threshold, or $30,000). The phase-down stops at that point; the SALT deduction cannot be reduced below $10,000. 

The deduction limit and the salary threshold will increase by 1% per year through 2029, but in 2030 the cap will revert to $10,000.

Many high-income taxpayers in this state can take advantage of California’s Pass-Through Entity Tax, which allows them to pay their state and local taxes through their firms and fully deduct them as business expenses.

This essentially eliminates the cap on SALT deductions for taxpayers who operate certain pass-through businesses (also known as flow-through entities), such as partnerships, limited liability companies, and S corporations. Similar pass-through laws are in effect in three dozen states.

Early drafts of OBBBA would have eliminated this benefit, but it was maintained in the version passed by Congress.

OBBA also increased and extended the standard deduction, to $31,500 for joint filers and $15,750 for single filers for tax years beginning in 2026. For many taxpayers, this makes the standard deduction a better option than itemizing deductions.

According to the Senate Finance Committee, OBBBA will cut 2026 taxes by an average of about $2,900. But because of the bill’s treatment of SALT deductions, along with its preservation of 2017 tax cuts that had been due to expire, a large share of the total savings will benefit higher-income households. 

Also included in OBBBA is a substantial change in the taxation of Social Security benefits and other income for seniors. Taxpayers 65 and older will get an increased, income-based bonus deduction on their federal income taxes for the next four years.

The new deduction added by OBBA is $6,000 for an individual senior with an income of $75,000 or less, and $12,000 for a married couple who are both 65 or older with a MAGI of $150,000 or less. The deduction phases out for incomes above these limits, with no deduction at $175,000 for individuals and $250,000 for couples.

This is in addition to the extra standard deduction already available for those 65 and older, of  $2,000 for an individual or head of household, and $1,600 per person for married qualifying individuals. For blind individuals over 65, the extra standard deduction amounts are doubled.

Contrary to announcements by the Social Security Administration and the White House that the bill “eliminates” these taxes for 90% of seniors, for most recipients the effect will be a significant reduction rather than zeroing out their tax bill.

OBBBA includes a number of changes that benefit businesses, many of which include detailed and complex provisions.

Examples include more flexible treatment of the costs of domestic research and development, with immediate deduction or new amortization of these expenses; expansions to qualified small business stock benefits; immediate expensing for up to $2.5 million of certain business property installed in 2025 or after; a 100% depreciation election for nonresidential real property used for producing tangible personal property (e.g. “qualified production property”) used for manufacturing and put in service in 2025 through 2029; additional first-year “bonus” depreciation for qualified property acquired after Jan. 19, 2025 at 100%, rather than being phased down; and a long list of other revisions to rules affecting a wide range of businesses from farming to spaceports.

This summary only touches on the changes brought about by this landmark legislation. Business owners and others would be wise to consult their professional advisors to understand how these changes may affect them.