One Big Beautiful Bill Act: Key business tax provisions

Bonus depreciation: The House-approved bill would allow taxpayers to immediately expense 100% of the cost of qualified property acquired on or after Jan. 20, 2025, and before Jan. 1, 2030.

• 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
• 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
• 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 would add 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):

• The property must be used by the taxpayer as an integral part of a qualified production activity;
• The property must be placed in service in the U.S. or a U.S. territory;
• The original use of the property must begin with the taxpayer;
• The construction of the property must begin after Dec. 31, 2024, and before Jan. 1, 2030;
• The property must be placed in service before Jan. 1, 2034; and
• 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 bill would increase 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.

Note. Many states may not conform to these provisions for state tax purposes.

Domestic research expenditures: the House proposal 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 no less than 60 months or over 10 years under section 59(e), consistent with the law prior to the enactment of the Tax Cuts and Jobs Act (TCJA). 

Significantly:

• Software development expenses continue to be treated as research expenditures subject to sections 174 and 174A as appropriate
• The proposed amendments are temporary and are not retroactive. The modifications apply to tax years beginning after Dec. 31, 2024, and before Jan. 1, 2030 (2025-2029 generally) and, for 2022 through 2024, domestic research expenses remain subject to capitalization and recovery over five years under the TCJA
• Implementation of the foregoing amendments is treated as an automatic accounting method change made on a cutoff basis (without a section 481(a) catchup adjustment)

Foreign research costs: must continue to be capitalized and recovered over 15 years under the TCJA.

Dispositions, retirements or abandonments: the House proposal favorably modifies section 179(d) to permit recovery of capitalized domestic research expenditures upon disposition, retirement or abandonment.

• No recovery is permitted for capitalized foreign research costs either as a deduction or a reduction to the amount realized for any property disposed, abandoned or retired after May 12, 2025.

Coordination with research and development (R&D) credit rules: the House proposal would modify section 280C to require taxpayers to reduce their deduction for research costs under section 174A by the amount of the research credit allowed under section 41, consistent with pre-TCJA treatment. Alternatively, taxpayers elect to claim a reduced research credit, as under current law.

Implications: The temporary suspension of capitalization treatment for domestic research costs aligns with other pro-growth business incentives in the bill that are intended to increase domestic capital investment and job creation (e.g., enhanced section 199A deduction, extended bonus depreciation under section 168(k), increased section 163(j) interest deduction threshold, special incentives for manufacturers). While the proposal to temporarily restore deduction treatment for domestic research activities is welcome news for research intensive businesses and may enhance or complement certain tax benefits such as R&D credits and Opportunity Zone gain deferral and exclusion provisions, 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 foreign-derived intangible income (FDII) and base-erosion and anti-abuse tax (BEAT) regimes. Therefore, taxpayers should act now to assess the potential implications and tradeoffs of the numerous proposals on their tax position and be ready to update tax projections for changes expected from the Senate.

Section 461(l) would be made permanent: The Inflation Reduction Act (IRA) extended the application of the excess business loss (EBL) limitation rules through Dec. 31, 2029; the proposed legislation would make the provision permanent.

Certain net operating losses would be subject to retesting: Under current law, a taxpayer’s net operating loss (NOL) resulting from the application of the EBL rules is not re-tested in the subsequent year for section 461(l) purposes. The proposed legislation would provide that an NOL carryforward resulting from a taxpayer being subject to section 461(l) in a tax year beginning after 2024 would be re-tested. Note, however, the changes to section 461(l) are effective for tax years beginning after 2025.

Consider:

• This change is very taxpayer unfavorable, 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 effective date presents a critical planning opportunity. Because the proposed change is not effective until tax years beginning on or after Jan. 1, 2026, taxpayers with a NOL resulting from section 461(l) carrying forward to 2025 may want to consider accelerating income into 2025. Doing so could help them fully utilize the NOL before it becomes subject to retesting and potentially more restrictive limitations starting in 2026.

Retroactive Employee Retention Credit (ERC) end dates: If the bill is enacted, no claims submitted after Jan. 31, 2024, will be processed. This would be an early end from the normal deadline to file 2020 ERC claims of April 15, 2024, and 2021 ERC claims of April 15, 2025.

Clawbacks: It is unclear what is going to happen to claims filed after Jan. 31, 2024, that have already been paid, but 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 exam.

Hard cut off, 2026 v. 2027: Amounts invested prior to or during the 2026 calendar year remain taxable on Dec. 31, 2026. Amounts invested between Jan. 1, 2027, and Dec. 31, 2033, are taxable on Dec. 31, 2033.

• Consider: An investment on Dec. 31, 2026, would receive no associated gain deferral. An investment on Jan. 1, 2027, would be deferred for seven years.

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 a 10-year hold period is met.

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.

• Consider: Note this requires an investment prior to Dec. 31, 2028, as the five-year hold period must be met before Dec. 31, 2033.

Increased reporting requirements: A brand-new internal revenue code section would create increased reporting requirements for qualified opportunity funds (QOFs) and qualified Opportunity Zone businesses (QOZBs), e.g., reporting NAICS codes and information about full-time employees. Penalties will be assessed for failure to comply.

New zones: CEOs of each state are to designate new zones, and these zones are effective beginning Jan. 1, 2027.

Increase in Qualified Business Income (QBI) Deduction: If enacted, the deduction increases from 20% to 23% of QBI (or net ordinary income, if less).

• Consider: For individual taxpayers subject to the maximum federal income tax marginal rate of 37%, this increase reduces the effective rate on QBI from 29.6% to approximately 28.5%.

QBI deduction made permanent: Under the TCJA, the QBI deduction sunsets after the 2025 taxable year. Under the House bill, the QBI deduction would become permanent.

Expansion of the QBI deduction to certain business development companies: Under existing law, the QBI deduction was eligible with respect to qualified trades or business, qualified REIT dividends and qualified publicly traded partnership income. The bill would add a fourth category for dividends attributable to net interest income of business development companies treated as a regulated investment company.

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 bill, the phase-in adjustment between the threshold amount and specified income amount has been replaced by a phase-in rule in which the QBI deduction (before applying the W-2 wages and/or 2.5% UBIA limitation) is reduced by 75% of the amount by which taxable income exceeds the threshold amount.

• Consider: While a specified services trade or business (SSTB) is not a qualified trade or business for purposes of the QBI deduction, the new limitation methodology could still yield a QBI deduction attributable to SSTB income.

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

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 (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 bill would again base the limitation on EBITDA for deductions from 2025 through 2029
• Many taxpayers subject to substantial section 163(j) limitations have considered capitalizing interest under either section 263(a) or 266 in order obtain a more timely 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.