There is a lot of talk that this tax season will produce abnormally large refunds compared to previous tax years. Much of that has to do with the One Big Beautiful Bill Act (OBBBA) signed into law last July. Given the volume of recent tax changes, even some accountants and CPAs are struggling to keep up. When all the dust settles, Kentucky owners and families (and Americans more broadly) may see a smaller tax liability for tax year 2025.
Key Takeaways
- Understand why refunds may be larger in 2025 and how recent tax changes could lower your taxes. Large refunds could indicate missed cash-flow opportunities, where money could have stayed in the business instead of sitting with the IRS.
- Key changes under the One Big Beautiful Bill, including SALT deductions and bonus depreciation, create new planning opportunities that owners should understand.
- Kentucky’s new 3.5% income tax rate directly affects estimates, PTET payments, and how much cash businesses send in throughout the year.
- Proactive tax planning helps owners align withholdings, estimates, and income timing so tax season can be more predictable and strategic.
Refunds vs. Cash Flow
While much of the typical tax season procedures from year-to-year will stay the same, the general hope is that taxes come in less than expected. K-1s will still be due, W-2s, 1099s, and all the ancillary forms will still be required to file. However, just because 2025 may have been a similar year to previous years, it does not mean your taxes are going to be the same. There have been many changes in the tax landscape, so using your refund from year to year to gauge how well you did tax-wise may not be a good strategy this time.
This may be a biased opinion, but in theory, you should not want a large refund. Tax refunds are determined by the amount of withholdings and estimates you (or your business) send to the IRS throughout the year. So, by definition, if you get a refund, then you over-withheld and overestimated how much your taxes would be. Sending the IRS too much, as opposed to not enough, is definitely preferable. But I would argue the degree to which you overestimate and get surprised by a larger refund would also indicate that you guessed wrong. Guessing wrong is a lack of understanding or awareness.
Now, many accountants would push back on that as idealistic and not realistic, but the point remains. If we can better understand what is changing with the taxes that could apply to us, we can make better decisions as owners as to where our cash flow should go. One of the most popular economic arguments for reducing taxes is to encourage businesses to invest and grow, so what does that mean for a specific business? The sooner we can figure out how much less tax we will pay, the sooner we can put that money to work. A refund that jumps from $1,000 to $3,000 is not going to change much, but a refund from $10,000 to $30,000 could mean an extra $20,000 that you could have had last year.
The One Big Beautiful Bill of 2025
Arguably, one of the biggest changes that could lead to larger refunds is the increased cap on the SALT deduction. State and Local Taxes (SALT), since the TCJA of 2017, have been capped at a $10,000 deduction each year. So, regardless of whether you paid $10,000 or $30,000 in state and local taxes, the maximum deduction you could claim was $10,000, assuming you itemized deductions. Thanks to OBBBA, the SALT cap has risen for most people to $40,000 for the next few years. Meaning, you could claim an extra $30,000 deduction if you had to pay at least $40,000 in state and local taxes in 2025. That could easily translate into thousands less in federal tax, depending on your tax rate.
OBBBA also reintroduced 100% bonus depreciation for certain business purchases. Over the last few years, the full deduction for bonus depreciation has been decreasing. Down to what was expected to be 40% for 2025, the tax bill made permanent the ability to deduct the entire cost of certain new purchases. Getting renewed access to write off your entire purchase of new equipment, vehicles, etc., would hopefully increase your total deductions. While this technically would reduce your taxes, it is always good to remember that your purchase is still more expensive than the taxes you saved. It is not worth buying new stuff only to get a deduction for it, since most times you will still be cash flow negative.
Lastly, the OBBBA made a number of smaller tax code changes that could flow down to save people on taxes this year. The most popular was probably no tax on overtime or tips, to a certain degree. The bill also raised the Child Tax Credit by $200, created a Senior Deduction for $6,000 for everyone over 65, and a new auto loan interest deduction up to $10,000. While most people will not utilize all these changes, the total is expected to reduce most people’s taxes for the tax year 2025. According to the Tax Foundation, the average tax refund for Americans in both 2023 and 2024 was about $3,000. Now, for 2025, the estimate is closer to $3,800. Said another way, they expect Americans to save $129 billion in taxes due to all these changes.
Looking Forward
Will we continue to get large refunds each year? That will partly depend on the business and how proactive you are. Each year, you should recalibrate your level of estimated payments based on the tax season. Your accountant, after filing your tax returns for the year, can give you an updated estimate of how much to pay each quarter. Assuming your business stays the same for much of 2026, it may be worth lowering your quarterly estimates. Which means technically your refund should be less next year. But there are some other changes in 2026 to understand as well.
The largest change, for those living in Kentucky, is the new Income Tax Rate. For 2026, the Income Tax Rate in Kentucky has been reduced to a 3.5% flat rate, down from 4% last year and from 5% only a few years ago. That means that less tax is required for individuals and businesses who are making tax payments. Especially businesses that are pass-through entities, who are making PTET payments, those checks should have been getting lower over the last few years and should be lower this year as well (assuming income is the same this year).
Finally, understanding the changes with OBBBA can help you strategically work on the business. This could include using the 100% bonus depreciation to buy new equipment. It could also mean revisiting how income is paid out to you for the year. For those paying themselves a salary, revisiting the amount and withholdings can impact their refunds for the coming years. Even bonuses and distributions could be timed for smoother cash flow throughout the business.
Ongoing Tax Planning
Tax planning is a revolving door to conquer. Especially when there are major changes with a tax bill, working with your accountant and your advisor to plan for the year ahead is crucial. The more proactive you can be towards your tax bill or refund, the more you can focus on growing the business. Not overpaying the IRS is a great goal, and understanding the major changes and deductions can help you get close to that goal. A large refund doesn’t necessarily indicate something is wrong. In fact, it means you will have more money coming back to you and your business. The question then is, what are you going to do with it?
TC Falkner 