California continues to evolve its tax landscape, and 2025 brings several important changes that affect small business owners, freelancers, and corporations. Here are three significant changes you need to know about.

1. Updated California Franchise Tax Rates & Brackets #

California adjusted its personal income tax brackets for 2025 to account for inflation. This affects:

• Self-employed individuals paying California income tax on business profit
• S-Corp owners taking distributions and W-2 wages
• Sole proprietors reporting business income on Schedule C

The top marginal tax rate remains at 13.3% (the highest in the nation), but the income thresholds where you hit higher brackets have shifted upward. If you’re close to a bracket threshold, this could impact your tax planning strategy.

Action Item: Review your estimated quarterly tax payments (Form 540-ES) if you’re self-employed or own an S-Corp.

2. OBBA Vehicle Deduction Updates: New Mileage Rates for Business Use #

The Outback Business Business Act (OBBA) brings updated guidance on vehicle deductions for 2025:

• Standard mileage rate for business use vehicles has been adjusted for inflation
• Actual expense method now allows deduction of depreciation, repairs, maintenance, fuel, insurance, and registration
• Luxury vehicle depreciation limits remain in effect but with 2025 adjustments
• Electric vehicle (EV) incentives - additional deductions for business EVs purchased in 2025

For business owners using vehicles:

• Track mileage meticulously (business vs. personal use)
• Consider switching between standard mileage and actual expense method if the calculation favors actual expenses
• Document all vehicle-related business expenses

Action Item: If you own a business vehicle, compare the standard mileage deduction against actual expenses (gas, maintenance, insurance, depreciation) to see which saves you more in taxes.

3. OBBA Interest Deduction Changes & Limitations #

The OBBA also refined rules around business interest deductions, particularly important for small business owners with loans:

• Business interest limitation - Section 163(j) applies to businesses with average annual gross receipts over $25 million (most small businesses are exempt)
• Home office loan interest - Clarification on deducting interest for loans used to finance home office setup
• Vehicle loan interest - Only the interest portion of auto loans is deductible (not principal payments)
• Pass-through entity (PPE) deduction - S-Corps and partnerships can now elect to deduct business interest at the entity level rather than on individual returns

Key points:

• Interest on business debt used to purchase business assets is deductible
• Personal interest (credit cards for personal use, mortgages) is NOT deductible
• Keep clear documentation of loan purpose and use

Action Item: Review any business loans you took out in 2024-2025. Ensure you’re tracking the interest portion separately and claiming it correctly. If you have an S-Corp or partnership, discuss PPE election benefits with your tax preparer.

What This Means for You #

If you’re doing business in California:

✅ Review your tax structure - Ensure you’re maximizing deductions on vehicle and interest expenses
✅ Track vehicle mileage - Compare standard rate vs. actual expenses to maximize savings
✅ Audit business interest deductions - Only deduct interest on legitimate business loans
✅ Consider PPE elections - If you own an S-Corp or partnership, this could reduce overall tax burden

Need Help? #

California tax law is complex and changes annually. The OBBA updates create opportunities for better tax planning, especially around vehicle and interest deductions. I prepare Form 1120 (C-Corp), 1120S (S-Corp), and 1040 with Schedule C (self-employed) returns in all states, including California. If you need help determining the best structure for your business or filing your 2025 return, reach out.

I’m licensed and bonded in California (CTEC #A303107) and specialize in tax planning for entrepreneurs and investors based in Marin County and beyond.