Motor runs pressure stays around 25psi

Pneumatic tools are rated in cfm (cubic feet per minute). Your 1 HP air compressor is rated at probably not more than 3 cfm while the 1/2 " impact driver needs at least 8 cfm, maybe 12 chm of air.
The compressor must provide more chm than tool rating needs.
It is a problem, by the time you look at five horse power air compressors and larger, a lot of electric power is needed. A circuit of 220 volts, 20, 30, or more amps would be required to run those large expensive compressors.
If you can, return the air tool and get a good electric tool instead.
Leave those high air volume air tools to shops that are so equipped to use, or invest if you must.

if shuts down at 20 psi regulator is set wrong
it runs but only builds 20 psi, compressor is probably worn out

Sounds like the compressor has failed -- probably the valve -- tear down and rebuild is probably the solution, or replace compressor, or just buy another unit. My nature would be to tear it down and see what's going on.

(1) check the air filter
(2) suction valve
(3)if there internal blowing check this also

Your motor is good and your pump is in need of being rebuilt. I would price both the rebuild and the cost of replacement all together as there are many good cheap used compressors crying for a home.

Not the motor, but probably the compressor shot. Heat from friction (due to running without oil) probably scored the cylinder walls, which allows air to escape past the piston and rings, making the compressor VERY inefficient. Some compressors have replaceable cylinders... Not sure if the very small ones do or not.

I have a Craftsman 2hp/12 gallon Air compressor that does basicly the same thing, will start, run for about 3 seconds and stop. I replaced the pressure switch but still have the problem. Any suggestions?

compressor will not build pressure

My air compressor builds up to 40 psi and just keeps running, i have a craftsman 5 GAL, 1HP, 125 PSI and pressure goes up to 40 psi and dose not go any higher and on the other hand engine keeps running and dose not stop. Please advise?
Thanks.
Kia