Key business-related tax provisions in the Senate-approved bill

The Senate bill would permanently revive and extend immediate 100% expensing of the cost of qualified property acquired on or after Jan. 20, 2025. The House bill would have extended the provision only through 2029.

Qualified property is tangible personal property with a recovery period of 20 years or less, which includes qualified improvement property (QIP) for real estate purposes.

• Consider: If enacted, this could significantly improve the benefits of cost segregation studies for real estate.

For purposes of determining the acquisition date, property is not considered to be acquired after the date on which a written binding contract has been entered into to acquire the property.

Assets placed in service before Jan. 20, 2025, would only be eligible for 40% bonus depreciation.

• Consider: The ability to utilize this provision may be constrained at the individual level by the expansion of the section 461(l) limitation for excess business losses.

The bill adds section 168(n), which would allow taxpayers to immediately deduct 100% of the cost of certain new factories, certain improvements to existing factories and certain other structures. Specifically, this provision allows taxpayers to deduct 100% of the adjusted basis of qualified production property in the year such property is placed in service.

“Qualified production property” is defined as the portion of any nonresidential real property that meets the following requirements (among others):

1. The property must be used by the taxpayer as an integral part of a qualified production activity.
2. The property must be placed in service in the U.S. or a U.S. territory.
3. The original use of the property must begin with the taxpayer.
4. The construction of the property must begin after Jan. 19, 2025 (Jan. 19, 2025 in House bill) and before Jan. 1, 2029 (2029 in House bill).
5. The property must be placed in service before Jan. 1, 2031 (2031 in House bill).
6. The taxpayer must have elected to claim an immediate deduction with respect to such portion of the property .

A “qualified production activity” generally means the manufacturing, production or refining of tangible personal property. The bill defines “production” to mean agricultural production and chemical production. An activity generally does not count as a qualified production activity unless it results in a substantial transformation of the property comprising a product.

Critical items to note:

• Any portion of a property that is used for offices, administrative services, lodging, parking, sales activities, research activities, software engineering activities or certain other functions is ineligible for this benefit.
• Treasury is directed to issue regulations outlining what constitutes “substantial transformation.”
• The deduction is also allowed for alternative minimum tax (AMT) purposes.

The Senate bill increases the maximum amount a taxpayer may expense under section 179 to $2.5 million and increases the phase-out threshold amount to $4 million. The $2.5 million limitation is reduced (but not below zero) by the amount by which the cost of qualifying property placed in service during the taxable year exceeds $4 million. The proposal applies to property placed in service in taxable years beginning after Dec. 31, 2024.

• Consider: Many states may opt out of this provision for state tax purposes.

The bill would restore a more generous interest deduction limit under section 163(j) that was originally in place for the first few years of the provision from 2018 through 2021. Initially, the interest deduction limitation was based on earnings before interest, taxes, depreciation and amortization (EBITDA). Beginning in 2022, depreciation and amortization are no longer added back, resulting in greater limitations for many businesses.

If enacted, the Senate bill would permanently base the limitation on EBITDA for deductions beginning in 2025. By comparison, the House would only extend this provision through 2029.

The Senate bill also includes a new provision that would treat any capitalized interest (other than interest capitalized under sections 263(g) and 263A(f)) as interest subject to the limitation for taxable years after Dec. 31, 2025.

Many taxpayers subject to substantial section 163(j) limitations have considered capitalizing interest under either sections 263(a) or 266 in order to obtain a timelier deduction. Depending on a taxpayer’s circumstance, the change back to EBITDA may eliminate the need for costly, and in some cases controversial, studies to pursue the capitalization strategy.

If the Senate version is enacted, it would effectively eliminate these planning strategies under both sections 263(a) and 266 effective for tax years beginning after Dec. 31, 2025.

QBI deduction made permanent: Under Tax Cuts and Jobs Act (TCJA), the QBI deduction would sunset after the 2025 taxable year. Under the Senate bill, the QBI deduction becomes permanent.

Minimum deduction for active QBI: With respect to taxpayers whose aggregate QBI from qualified businesses in which the taxpayer materially participates is at least $1,000, the taxpayer is allowed a minimum QBI deduction of $400 (subject to inflation adjustment).

Change in limitation phase-in for taxpayers whose taxable income exceeds the threshold amount: Under existing law, the QBI deduction is limited to 50% W-2 of wages with respect to the qualified trade or business, or 25% of W-2 wages plus 2.5% of unadjusted basis in qualified property immediately after acquisition (UBIA). These limitations phase in once taxable income exceeds the threshold amount and are fully in effect when taxable income is $50,000 ($100,000 for joint filers) greater than the threshold amount (specified income amount). Under the Senate bill, these limitations will phase in as taxable income is $75,000 ($150,000 for joint filers) greater than the threshold amount.

Effective date: The bill’s changes to the QBI deduction apply to taxable years beginning on or after Dec. 31, 2025.

Domestic research expenditures: Consistent with the House version, the Senate bill favorably suspends capitalization under section 174 for domestic research expenditures only and adds new section 174A to permit optional expensing or, alternatively, elective capitalization and recovery of domestic research expenses over not less than 60 months or over 10 years under section 59(e).

Significantly:

• Software development expenses continue to be treated as research expenditures subject to sections 174 and 174A as appropriate.
• The proposed amendments are permanent and in certain cases retroactive. The modifications generally apply to tax years beginning after Dec. 31, 2024. Small business taxpayers (other than a tax shelter) with average annual gross receipts of $31 million or less may elect to apply the change retroactively to taxable years beginning after Dec. 31, 2021. Furthermore, all taxpayers that capitalized domestic research or experimental expenditures after Dec. 31, 2021, and before Jan. 1, 2025, may elect to accelerate deductions for the unamortized expenditures over either a one-year period or a two-year period.

In contrast, the House expensing provisions were temporary (2025-2029 generally) and prospective only (domestic research expenses paid or incurred in 2022 through 2024 remained subject to capitalization and recovery over five years under the TCJA).

• Taxpayers considering an election to capitalize domestic research costs to prevent loss of international benefits (e.g., under corporate alternative minimum tax (CAMT), base erosion and anti-abuse tax (BEAT), foreign tax credit (FTC), global intangible low-tax income (GILTI), foreign-derived intangible income (FDII)) should be aware that, compared to the House version, the Senate proposal might significantly delay recovery of capitalized costs for taxpayers with a lengthy development process (e.g., pharmaceutical industry). Under the Senate bill, amortization does not begin until the month the taxpayer first realizes benefits from the costs. In contrast, the House version provided that amortization starts at the midpoint of the tax year the expenses were paid or incurred.

Implementation: As under the House version, the Senate amendments are generally treated as an automatic accounting method change made on a cutoff basis (without a section 481(a) catchup adjustment). Additional transition rules under the Senate proposal are summarized as follows, with procedural guidance to be issued by the Treasury secretary.

• Short tax year: A taxpayer with a short year beginning after Dec. 31, 2024, and ending before the date the legislation is enacted implements the change with a modified section 481(a) adjustment that takes into account only domestic research expenses paid or incurred but not allowed as a deduction in that short year.
• Small taxpayers: A small taxpayer (defined above) that elects to retroactively apply the domestic research expensing provision to taxable years beginning after Dec. 31, 2021, has the option to make the change by filing either amended returns or a change in method of accounting. The election must be made within one year of the date the legislation is enacted.

Late or revoked section 280C election: A small taxpayer making the election to apply the provision retroactively may also either make a late election or revoke a prior election under section 280C to reduce the research credit on an amended return. The election must be made within one year of the date the legislation is enacted.

• Unamortized domestic research costs: A taxpayer that capitalized domestic research for tax years beginning after Dec. 31, 2021, and prior to Jan. 1, 2024, under the TCJA may elect to deduct unamortized amounts either in the first tax year beginning after Dec. 31, 2024, or ratably over the two taxable year period beginning with the first tax year beginning after Dec. 31, 2024

Foreign research costs: Must continue to be capitalized and recovered over 15 years under the TCJA, consistent with the House proposal and existing law under the TCJA. Additionally:

• Section 174(d) is modified to provide that no recovery is permitted for capitalized foreign research costs either as a deduction or as a reduction to the amount realized for any property disposed, abandoned or retired after May 12, 2025. Consequently, the addition of the latter condition (which also appears in the House version) means that these costs must continue to be amortized even if the amount realized from a disposition would otherwise be reduced by such costs.
• Section 59(e) is amended under the Senate bill to exclude foreign research expenditures from the election to capitalize and recover research or experimental expenditures over 10 years.

Coordination with R&D credit rules: The Senate bill would modify section 280C to require that research expenditures deducted or capitalized pursuant to section 174A be reduced by the amount of the research credit.

Implications: The more favorable Senate proposal to permanently restore full expensing for domestic research expenditures provides welcome certainty enabling research intensive businesses to plan for these costs long term. Additionally, taxpayers will appreciate the favorable changes to section 174(d) for domestic research costs and the flexibility to optionally elect to accelerate the deduction of unamortized domestic research costs capitalized under the TCJA, and for small taxpayers to retroactively deduct domestic research costs. However, if enacted in its current form, taxpayers will need to act quickly to take advantage of time-sensitive elections (if eligible) and also be aware that other tax areas may be adversely impacted by increased research deductions, such as the section 163(j) interest deduction limit and foreign tax liabilities under the FDII and BEAT regimes. Therefore, taxpayers should act now to assess the potential implications and tradeoffs of the numerous Senate proposals on their tax position and to also be ready to update tax projections for potential amendments that might be made by the House prior to enactment.

The Senate bill would make the section 461(l) limitation permanent but does not include the House bill’s changing of the characterization of losses. The Senate bill would retain the treatment of disallowed excess business losses under current law by characterizing such losses as net operating losses (NOLs) in subsequent tax years.

Consider: The House bill’s change would be very unfavorable for the taxpayer, turning section 461(l) from essentially a one-year loss deferral to a significant limitation on a taxpayer’s ability to deduct business losses against non-business income.

The Senate bill introduces several changes to section 1202 that broaden the availability of QSBS benefits for both individuals and corporations. The five key provisions include:

1. Reduction of holding period with graduated benefits under current law: QSBS must be held for more than five years to qualify for gain exclusion. The Senate bill reduces this requirement to three years but introduces a tiered benefit structure:

• Three years: 50% exclusion
• Four years: 75% exclusion
• Five or more years: 100% exclusion

Two new terms are introduced to support this change: The “applicable date” (the date of enactment) and the “applicable percentage” (linked to the holding periods referenced above). The reduced exclusion rates for three- and four-year holding periods apply only to stock acquired after the applicable date.

Example: Partial gain exclusion for four and a half year holding.

Taxpayer purchases QSBS on March 1, 2026, after the applicable date (i.e., after the enactment of the new rules). Taxpayer sells the stock on Sept. 1, 2030 (holding it for four and a half years) for a total gain on the sale of $10 million. The taxpayer has not previously used any QSBS exclusion with this issuer. Since the stock was held more than four but less than five years, the applicable percentage will be 75%, or $7.5 million (75% × $10 million). Additionally, since the stock was acquired after the applicable date, the gain exclusion cap is increased to $15 million (from $10 million, see below) and the full 75% exclusion is allowed.

2. Increase in gain exclusion cap: The per-issuer gain exclusion cap increases from $10 million to $15 million for stock acquired after the applicable date. Starting in 2027, the $15 million cap will be adjusted annually for inflation.

3. Clarification for married individuals filing separately: For taxpayers filing separately, the per-issuer cap is halved. Specifically:

• The $10 million cap becomes $5 million.
• The $15 million cap becomes one-half of the adjusted limit in effect for the tax year.

4. Increase in gross asset test threshold: The ceiling for a corporation’s aggregate gross assets to qualify as a “qualified small business” is raised from $50 million to $75 million, effective for stock issued after the applicable date. This amount will also be inflation-adjusted starting in 2027.

5. Recognition of foreign research expenditures: The active business requirement is broadened to include not only domestic but also foreign research and experimental expenditures. Specifically, qualifying activities now include those treated as foreign research or experimental expenditures under section 174, or domestic research or experimental expenditures under section 174A.

1. Permanent extension, rolling 10-year zones: New zones will be determined on July 1, 2026, and will take effect on Jan 1, 2027. This same process will take place every 10 years using updated census data. The House bill would have extended only through 2033.

2. 10-year hold period remains unchanged: There are no changes to the gain exemption at year 10, i.e.: all gains are wiped out after the ten-year hold period is met.

3. 30-year gain exemption limitation: Gain exemption is available for 30 years after the date of investment. Essentially, Congress had to limit the time period for which gains can be exempt from tax.

• Note: It appears that the sale can be made to a related party as long as it is fair market value (FMV).
• Note: Under the existing OZ rules, the gain exemption expires in 2047.

4. Five-year deferral: Gains invested in a qualified opportunity fund (QOF) are deferred for five years (assuming no sales prior to year five).

• Note: This contrasts the existing statute, which defers all gains to Dec. 31, 2026. For example, under the existing OZ program, a capital gain invested into a QOF today would be deferred for only 18 months.

5. 10% basis step-up: Gains invested into a QOF will receive a 10% basis step-up at year five.

• Note: This contrasts the existing statute, which provided 15% and 10% gain exemptions for investments with a seven- and five-year hold period, respectively, prior to Dec. 31, 2026. In effect, QOF investors had to invest prior to Dec. 31, 2021, to receive a 10% basis step-up on eligible gains invested into a QOF. No basis step-up is available today.

6. Rural benefit, 30% basis increase: Investors in so-called “qualified rural opportunity funds” receive a 30% basis increase at year five. Qualified rural opportunity funds mean that substantially all of a business’s tangible property is located in a rural area.

7. Rural benefit, 50% substantial improvement standard: A QOF or qualified opportunity zone business (QOZB) must generally double its cost basis (100% spend) in an existing structure for that structure to qualify as qualified opportunity zone business property (QOZBP). For rural areas, the standard is lowered to a 50% cost basis increase.

8. Increased reporting requirements: A new internal revenue code section creates increased reporting requirements for QOFs and QOZBs, e.g., reporting North American Industry Classification System (NAICS) codes and information about full-time employees. Penalties will be assessed for failure to comply.

Retroactive ERC end dates: If the bill is enacted, no claims submitted after Jan. 31, 2024, will be processed.

Claw backs: It is unclear what is going to happen to claims filed after Jan. 31, 2024, that have already been paid, but the ERC is an employment tax credit and employment taxes are immediately assessable, which means the IRS may seek to claw back many of these previously paid claims.

Extends statute of limitations for IRS to audit ERC claims: Currently, the IRS could audit 2020 claims through April 15, 2024, Q1/Q2 2021 through April 15, 2025 and Q3 2021 through April 15, 2027. If enacted, the new statute of limitations for auditing ERC claims would be six years.

Six-year statute begins when an amended return claim was filed: An ERC claim filed in 2023 may have an open statute of limitations in 2029.

Contains significant promotor penalties: The penalties are based upon the fees earned for preparing improper ERC claims. The bill would also require that firms that meet the definition of a promotor maintain their client list for an extended period of time. This may play into the extended statute of limitations for exams.