What new tax questions will Santa face in 2025?

With Christmas approaching, many tax pros start wondering what Santa's return would look like this year. Last year's blog explored his likely filing status, possible Schedule C activity and whether milk and cookies could be considered bartering income. In 2025, new tax law changes introduced by the One Big Beautiful Bill Act (OBBBA) give us even more to consider.

This year, we're asking a bigger question: If Santa were your client today, how would his activity be classified under modern tax rules, and what does OBBBA change for him?

Naughty or nice: Is Santa performing a service?

Santa maintains the world's most sophisticated behavior-tracking system. He monitors conduct, records it and uses the results to determine who receives gifts. From a tax perspective, that activity begins to resemble a service. And if he gets something in return, even milk and cookies, it raises the same bartering question we explored last year.

The real twist for 2025 is whether any of this could connect to new OBBBA deduction categories. While Santa doesn't receive overtime or tips, his elves indeed might, especially during the pre-Christmas production rush. That makes OBBBA's new overtime deduction relevant to the workshop, even if Santa himself never clocks in.

Are Santa's gifts truly gifts under tax law?

Gift tax hinges on donative intent. Santa clearly gives with generosity, not expecting anything in return. Still, a tax pro would ask:

• Are the toys Santa's personal property or produced by an entity?
• If they belong to the workshop, is the workshop technically the donor?
• Does gift tax apply if Santa isn't a U.S. person?

Since Santa doesn't appear to be a U.S. resident, he may not be subject to the federal gift tax system at all. However, the questions highlight how transfer tax rules hinge on identity, ownership and residency: all of which are fuzzy in Santa's case.

Business or hobby? OBBBA adds new wrinkles

If Santa walked into your office, a central question would be whether he operates a business, a hobby or something closer to a nonprofit mission. You’d look for key indicators such as:

• Does he keep reliable books and records?
• Has he ever aimed for profit?
• Are royalties from his image his only reliable source of income?

Those royalties, which last year’s blog noted would likely appear on Schedule E (Form 1040), still matter. But 2025 introduces a new wrinkle through the OBBBA, which changes how hobby expenses are treated.

Here’s the simplified connection:

If Santa’s workshop is a business, his expenses go on Schedule C and reduce his taxable income directly. These deductions aren’t affected by whether he claims the standard deduction or itemizes.

If the workshop is treated as a hobby, it’s a very different story.

Under the OBBBA, the suspension of miscellaneous itemized deductions becomes permanent, which means most hobby expenses are not deductible at all for tax years after 2025. And even if hobby expenses were allowed, they would be below-the-line deductions, meaning Santa would only benefit from them if he itemizes. If he takes the standard deduction, he can’t deduct any hobby expenses.

In short:

• Business = deductions allowed
• Hobby = deductions mostly gone under OBBBA
• And with the larger standard deduction, Santa is even less likely to itemize, making hobby treatment even more costly.

This is why the business-or-hobby question matters more than ever in 2025.

The sleigh and the new auto loan interest deduction

OBBBA created a new deduction for personal auto loan interest. Naturally, the question arises: could Santa claim it?

Probably not. His sleigh isn't new this year, isn’t financed, doesn't run on conventional fuel and doesn't resemble a motor vehicle under U.S. tax definitions. Still, the comparison is helpful because it highlights how new deductions require taxpayers to determine whether their assets fall within narrowly defined categories.

For practitioners, it serves as a reminder of the importance of asset classification, even when the client arrives by rooftop.

Santa's growing list of "service divisions"

Today's Santa isn't limited to toy delivery. Children call him, track him online and monitor his worldwide trip through satellite systems. If these activities generate income through advertising, licensing or sponsorships, they could create separate revenue streams, each raising issues such as nexus and sourcing.

Even without direct revenue, digital interactions with U.S.-based users may resemble those of modern service industries that operate across borders. Santa's operation may require a closer examination of whether he has a U.S. trade or business, especially if his licensing operations expand under OBBBA-era commercial opportunities.

Where does Santa pay tax?

Determining Santa's residency is the foundational question for any tax pro. If the North Pole isn't a recognized jurisdiction, Santa may technically be a nonresident alien. In that case, only U.S.-source income, such as royalties from American companies, would be subject to withholding or reporting requirements.

The OBBBA changes don't shift residency rules, but they do influence how nonresident taxpayers interact with revised deductions and expanded filing structures. Even mythological figures aren't entirely outside the reach of evolving tax law.

The last word on Santa’s 2025 tax return

From behavior-tracking "services" to gift tax theories, hobby loss rules, international taxation and new OBBBA deductions, Santa's tax story always reveals more complexity the closer we look. And while we may never prepare his return, thinking through these issues sharpens the same analytical skills we use with real clients.

At NATP, we help tax professionals stay ahead of emerging rules, from OBBBA updates to imaginative hypotheticals, so you can advise your clients with confidence all year long.