The deadline is fast approaching for partnerships and S corporations reporting on a calendar year to file their 2025 federal income tax returns. This year, because of the One Big Beautiful Tax Act (OBBBA), there are several tax elections that can be made to favorably impact taxes due. Some of these elections are made at the entity level, and some are made at the owner level. Confusing? Hope the following is helpful.
Certain tax elections explained
First-year expensing
For 2025, the cost of equipment, machinery, and other eligible property can be deducted in the year it’s placed in service. There’s a dollar limit–$2.5 million—for 2025, which is reduced dollar for dollar if total purchases for the year exceed $4 million. This deduction is not automatic; it must be elected. But state income tax rules may have different treatment for this expensing, which can affect a decision about an election.
Who makes the election:
The entity makes the decision to elect this deduction. It is a separately stated item; it’s not factor into net income or loss. The deduction passes through to owners who then can use them on their returns, subject to an income limit applied at the owner level.
Bonus depreciation
For equipment, machinery, or other eligible property placed in service after January 19, 2025, 100% of the cost is deductible in the year it’s placed in service. This deduction is automatic unless an election is made not to use it. But again, state income tax rules may have different treatment for bonus depreciation, which can affect a decision about an election.
Who makes the election:
The entity decides whether to opt out of bonus depreciation. If it does not, then deduction is factored into net income or loss of the business, which is passed through to owners.
Research & experimentation expensing
The cost of research and experimentation expenditures can be deducted in full. Previous legislation had required costs in 2022 and beyond to be amortized (deducted ratably) over 5 years, but OBBBA retroactively restored expensing. This law also provided 2 ways to handle costs in 2022, 2023, and/or 2024:
- Small businesses can amend returns for these years
- All businesses can opt to deduct unamortized costs in full for 2025 or half in 2025 and the other half in 2026.
Who makes the election:
The entity. For the small business option, the entity must file the amended return and issue to owners an amended Schedule K-1. Then owners can file their own amended return to claim the refund. With the option to handle unamortized costs, again it’s up to the entity to decide.
Sale of farmland
Gain on the sale of farmland can be spread equally over 4 years, starting with the year of the sale, if certain conditions are met.
Who makes the election:
The owner decides whether to use the 4-year spread for reporting his/her share of the gain. The election must be made on a timely filed return, including extensions. It doesn’t appear to be an option on an amended return.
Installment sales
While OBBBA didn’t change any of the rules here, if the business sells property on an installment basis, gain (other than amounts related to depreciation recapture) can be spread over the years in which payments are received. This reporting is automatic. But an election can be made to not use the installment method for reporting gain. This may be desirable if there are losses that can be offset, or for other reasons.
Who makes the election:
The entity decides whether to opt out of installment reporting. It makes this election simply by reporting the entire gain on the entity’s return for the year of the sale.
Final thought
There are other tax rules that leave decisions to owners, rather than entities. For example, in several states the pass-through entity tax (PTET) rules require owner elections. Small business owners should work with a knowledgeable tax professional to get good advice about these and other elections. There are a lot of tax dollars at stake and potential tax savings can certainly justify the cost of professional fees.
Find more information concerning partnerships, LLCs, and S corporations in this list of blogs.
