The One, Big, Beautiful Bill (OBBB) was signed into law on July 4, 2025, and introduced significant tax changes with direct implications for the restaurant industry. From tip and overtime income exclusions to expanded deductions and credits, restaurant owners, operators, and investors should take note of several key provisions.
No tax on tips up to $25,000
The concept of excluding tip income from taxation was a prominent subject during the 2024 election cycle. The OBBB carried through on that promise in the form of a new deduction for tip income, with numerous strings attached. Starting in 2025 restaurant workers, including both employees and independent contractors, can deduct up to $25,000 in qualified tip income from their taxable income.
Qualified tips must be:
- Cash tips received from customers, but this includes those paid in cash, charged, or paid under a tip-sharing arrangement.
- Paid voluntarily and determined by the payor.
- Received by an individual in an occupation that “customarily and regularly” received tips before 2025.
- Relate to a trade or business that’s not a specified service trade or business (e.g., accounting, law, medicine, consulting).
This deduction will be available to individual taxpayers from 2025 through 2028, regardless of whether they itemize deductions on their tax returns. Married couples with tip income must file jointly to claim the deduction. Taxpayers must also include their Social Security number on their return. Finally, qualified tips must be reported to the individual recipients via Forms W-2 or 1099.
While the maximum deduction is $25,000 per year, this amount is subject to an income-based phase out. Specifically, that amount phases out by 10% of income exceeding $150,000 of modified AGI (or $300,000 for joint filers). The deduction is then fully phased out at $400,000 of modified AGI (or $550,000 for joint filers). The campaign trail commentary might have suggested a higher maximum exclusion was possible, but the legislative process ultimately restrained the benefit. That said, the maximum deduction will pair with the enhanced standard deduction to exclude the first $40,750 in income for a single individual from taxation in 2025 ($15,750 standard deduction for a single individual in 2025).
Restaurant employees have been curious about how this will impact their future paychecks since the enactment of the OBBB. Specific guidance from the Treasury Department and IRS will be required to implement the no tax on tip policy. That will include a list of qualifying occupations — due within 90 days of the OBBB enactment date — and further definitional clarifications. It’ll also include details about the mechanics of income tax withholding for restaurant payroll. Unfortunately, the IRS confirmed on August 7 that no adjustments will be made to withholding tables for 2025. This means that federal income tax withholding, Social Security, Medicare, and state taxes will still apply to all tips through 2025. Taxpayers qualifying for the tip deduction will then recognize the cash benefit of this change when they file their 2025 tax returns in 2026. Although the IRS announcement did confirm that guidance is being developed for 2026, so the situation may be different in future years.
No tax on overtime pay, up to $12,500 per person
The OBBB also followed campaign promises related to overtime pay by providing a new deduction beginning in 2025. This deduction largely operates in the same way as the tip deduction, but there’s also a coordination provision excluding tips from qualifying overtime. The maximum deduction is equal to $12,500 per year for individuals ($25,000 for joint filers) for qualified overtime compensation — the extra 50% pay for hours worked beyond 40 per week. More specifically, qualifying amounts must be required by Section 7 of the Fair Labor Standards Act.
To qualify for the deduction:
- Overtime must be reported separately on the employee’s W-2.
- Married couples with overtime income must file jointly to claim the deduction.
- Taxpayers must include their Social Security number on their return.
Like the tip deduction, the current version of the overtime deduction will be available to individual taxpayers from 2025 through 2028, regardless of whether they itemize deductions on their tax returns. The overtime deduction also phases out by 10% of income beginning at $150,000 of modified AGI (or $300,000 for joint filers). Thus, it’s fully phased out at $275,000 of modified AGI ($425,000 for joint filers).
Also, similar to the treatment of tipped income, withholding taxes will continue to apply through 2025 since the August 7 announcement of no change to withholding tables for 2025 also applies to the overtime pay deduction.
Other OBBB tax changes that may affect restaurants
While the new deductions for tip income and overtime will clearly affect almost every restaurant that pays taxes in the United States, several other provisions that relate to expensing assets, deductions for certain types of businesses, and limitations on interest deductions could also affect restaurant ownership groups and their individual owners. These provisions include but aren’t limited to:
- Qualified business income deduction (QBID). This deduction will continue to allow many pass-through business owners, including restaurant owners, to deduct up to 20% of their qualified business income from their taxable income. The OBBB makes QBID a permanent part of the Internal Revenue Code and extends the range of income over which the phaseouts occur. It also creates a minimum deduction of $400 for certain taxpayers with active business income.
- FICA tip credit. The FICA tip credit permits employers to claim a federal income tax credit for the employer’s share of FICA taxes (Social Security and Medicare) paid on tips received by employees. The OBBB expanded the tip credit to include a variety of new businesses (barbering and hair care, nail care, esthetics, and body and spa treatments) but otherwise didn’t make substantive changes impacting restaurants.
- Immediate expensing options for fixed assets.
- Bonus depreciation. Bonus depreciation, as enacted by the TCJA, had been dropping by 20% each year since 2023. The OBBB will return this benefit to its initial TCJA level of 100% for property acquired after Jan. 19, 2025, and make the 100% bonus depreciation deduction permanent (absent any potential future changes by Congress). Examples include, but aren’t limited to, dining room tables and chairs, kitchen appliances, leasehold improvements, outdoor signage, etc.
- Section 179 expensing. The OBBB doubled the Section 179 deduction limit for the immediate expensing of qualified assets from $1,250,000 to $2,500,000 per year, and it increased the asset acquisition limit from the current $3,130,000 to $4,000,000. The acquisition limit increase means that the OBBB has raised the point at which the full deduction will phase out from $4,380,000 of annual asset purchases to $6,500,000 of annual asset purchases. These increases take effect for property placed in service in tax years beginning after Dec. 31, 2024.
- No state pass-through entity tax (PTET) changes. The OBBB increased the maximum state and local tax deduction to $40,000 for 2025 (subject to phase down) but otherwise excluded any further limitation on state PTETs, which shift the state tax burden from individuals to their pass-through entities. This maintains the current status quo from a federal perspective. However, states may be required to take legislative action to perfect their PTETs.
- Interest expense limitation under Section 163(j). The OBBB restores the original calculation of the business interest expense limitation. Beginning in 2022, that limitation was calculated after deductions for depreciation, amortization, and depletion, which ultimately reduced the amount of available deductions. Effective for 2025, the OBBB will reestablish the addbacks for depreciation, amortization, and depletion on a permanent basis. That change in calculation will expand the capacity for businesses to deduct their annual interest expense.
- Employee retention credit (ERC) termination and enforcement. The OBBB disallows any ERC refund claims for Q3 and Q4 of 2021 that weren’t filed by Jan. 31, 2024. Additionally, the statute of limitations for claims has been extended to six years and additional enforcement tools were provided to the IRS.
The matter of state conformity
The state income tax impact of the OBBB depends on each taxpayer’s state of residency and their sources of income. Some states will conform to the federal tax rules on a rolling basis, while others may take legislative action to conform to the OBBB. However, the situation may be complicated by recent changes to federal funding for various state-run programs. States facing budgetary changes may seek new tax revenue by decoupling from aspects of the federal tax rules. This is expected to be an evolving story over the coming months, so taxpayers should consult with their tax advisors for the latest on state and local tax changes.
The impact may vary based on individual circumstances
The OBBB provides many types of tax relief to individuals and businesses through the permanent extension of previously existing rules and the creation of new rules. However, additional guidance will be necessary in many situations to clarify how to fully report and implement the OBBB. For example, the changes to the taxing of tips and overtime pay sound relatively straightforward, but the administrative mechanics of implementing them could result in significant changes to restaurant payroll processes. In the short term, there will be no change to withholding tables published by the IRS for the 2025 tax year. However, additional guidance applicable to 2026 will be provided at a future date. Executives in these businesses will need to pay close attention and watch for additional information on developments as it becomes available.
As always, the most important tax analysis is close examination of the law changes on each taxpayer’s specific facts and circumstances. If you think your business could be impacted by any of these changes related to the OBBB, or if you have questions about any future guidance, we have a team of experts focused on this program. Please contact us to learn more about how we could help your business.
