Massive Budget Law Includes Numerous Business Tax Provisions

The new One, Big, Beautiful Bill Act (OBBBA) is packed with tax provisions that will affect U.S. and foreign businesses, making permanent, or at least extending, many provisions that were scheduled to expire at the end of the year. Here's an overview of the key business provisions to help you optimize your mid-year tax planning efforts.

QBI Deduction

The OBBBA makes permanent the Section 199A deduction for qualified business income (QBI) for owners of pass-through entities (such as partnerships, limited liability companies and S corporations) and sole proprietorships.

Under the Tax Cuts and Jobs Act (TCJA), the deduction had been scheduled to expire after 2025. The OBBBA holds the deduction at 20% of QBI, but it increases the threshold amounts for the income-based limits on the deduction. The law also introduces an inflation-adjusted minimum QBI deduction of $400 for taxpayers with at least $1,000 of QBI from one or more active businesses in which they materially participate.

First-Year Depreciation Tax Breaks

Under the TCJA, the first-year bonus depreciation percentage rate began dropping by 20% every year since 2023 and was scheduled to zero out in 2027. Before the OBBBA, 40% first-year bonus depreciation could be claimed for qualified assets that were placed in service in calendar year 2025.

The OBBBA retroactively and permanently increases the bonus depreciation percentage to 100% for the cost of qualified new and used assets acquired and placed in service after January 19, 2025. Examples of assets that may qualify for bonus depreciation are:

• Computer systems and software,
• Office furniture,
• Certain vehicles, and
• Qualified improvement property.

In addition, the OBBBA creates a 100% deduction for the cost of "qualified production property" placed in service after the date of enactment and before 2031.

The new law also increases the Section 179 expensing limit — for the purchase price of new and used eligible assets in the year they're placed in service — to $2.5 million for 2025. The Sec. 179 expensing phaseout threshold was raised to $4.0 million for 2025. Both amounts will be adjusted annually for inflation after 2025.

Deduction for R&E Expenses

Under the TCJA, businesses were required to amortize Section 174 Research and Experimentation (R&E) costs over five years if incurred in the United States or 15 years if incurred outside the country. This provision applied a mid-year convention that stretched deductions over six years.

The OBBBA permanently allows the immediate deduction of domestic R&E expenses, beginning with the 2025 tax year. However, foreign R&E expenses still must be amortized over 15 years.

The OBBBA permits "small businesses" with average annual gross receipts of $31 million or less to claim R&E deductions retroactive to 2022. All businesses that incurred domestic R&E expenses in 2022 through 2024 can elect to accelerate the remaining deductions for those expenditures over a one- or two-year period.

Limits on Business Interest Deductions

The TCJA generally limited business interest deductions to 30% of the taxpayer's adjusted taxable income (ATI) for the year. After 2021, ATI refers to taxable income adjusted for the following:

• Any item of income, gain, deduction or loss that isn't allocable to a business,
• Any business interest income or business interest expense,
• Any net operating loss deduction, and
• The QBI deduction for up to 20% of qualified business income from a pass-through business entity.

For tax years beginning after December 31, 2024, the OBBBA increases the cap on the business interest deduction by excluding depreciation, amortization and depletion when calculating ATI. This favorable change generally increases ATI, allowing taxpayers to deduct more business interest expense.

Fraudulent ERTC Claims

The OBBBA prohibits the IRS from issuing refunds for Employee Retention Tax Credit (ERTC) claims filed after January 31, 2024 (generally, claims for the second half of 2021). The law also gives the IRS up to six years from the filing date to challenge these claims.

Clean Energy Tax Incentives

The OBBBA eliminates numerous clean energy tax incentives for businesses under the Inflation Reduction Act. Repealed green tax breaks include:

• The qualified commercial clean vehicle credit,
• The alternative fuel refueling property credit, and
• Section 179D deductions for energy-efficient commercial buildings.

The expiration dates vary but generally apply after 2026. Facilities-related credits phase out based on the construction commencement date.

Expanded Breaks for Investing in QOZs

The TCJA created the Qualified Opportunity Zone (QOZ) program. It generally allows taxpayers to defer, reduce or exclude unrealized capital gains reinvested in qualified opportunity funds (QOFs) that in turn invest in designated distressed communities across the United States.

The OBBBA establishes a permanent QOZ policy that builds off the original program. In addition to the benefits provided under the TCJA, investors will receive incremental reductions in gain starting on the first anniversary of their investment. In the seventh year, they'll be required to realize their initial gains reduced by any stepped-up basis, the amount of which depends on how long the investment is held. The law also establishes a new type of QOF for rural areas. Investments in these funds will receive a triple step-up in basis. The first round of QOZs available under the permanent policy will begin on January 1, 2027.

International Taxes

The TCJA included numerous international tax provisions, including deductions for foreign-derived intangible income (FDII) and global intangible low-tax income (GILTI). It also established the Base Erosion and Anti-Abuse Tax (BEAT) on U.S. corporations that have:

• Average annual gross receipts exceeding $500 million, and
• Made deductible payments to related non-U.S. parties that exceed 3% of all deductible payments.

The OBBBA makes permanent the FDII and GILTI deductions and changes the effective tax rates for FDII and GILTI to 14%. It also makes permanent the minimum BEAT, raising the tax rate to 10.5%. These changes take effect in 2026.

Important: The proposed "revenge tax" on certain taxpayers associated with countries that impose "unfair taxes" on U.S. persons didn't make it into the final bill.

Time to Reassess

The OBBBA helps resolve tax planning uncertainty for business owners, but this article summarizes only a few key changes. (See "Other Key OBBBA Provisions to Consider" below.)

Contact your tax advisor to discuss the full range of tax provisions covered by the sweeping new law. He or she can help you optimize any extended or new provisions that are relevant to your situation and reduce your tax obligations for 2025 and beyond.