Make sure your business gets a head start taking advantage of the tax incentives included in last year’s One Big Beautiful Bill Act.
Among the major changes for businesses, the OBBBA renews and makes permanent these tax breaks:
- 100% bonus depreciation,
- Immediate expensing of domestic R&D costs without a 5 year amortization requirement,
- Business interest expensing, qualified small business stock, the qualified business income deduction, qualified production property and more.
Most of the legislation merely extended expiring provisions at the end of 2025, so many businesses may not see huge changes on their 2025 returns. But bringing back bonus depreciation for 2025 is certainly something which will impact tax returns.
The ability to fully deduct domestic R&D costs in the first year had been sought ever since the passage of the Tax Cuts and Jobs Act of 2017 required companies to start amortizing the expenses over five years starting in 2022. Companies can once again fully deduct their research expenses incurred in the U.S. However, foreign R&D expenses will still need to be amortized over a 15-year period for research conducted outside the U.S. Companies have options on how to take that expense. For example, take everything in 2025, or take it 50/50 pro rata between 2025 and 2026, or continue amortizing over the remaining 5 years. The key is understanding what yields the best tax benefit, and helps with cash flow.
In addition to eliminating the amortization requirement for R&D in the U.S., the OBBBA added a way for companies to deduct unamortized domestic R&D expenses they had paid or incurred from 2022 through 2024. With the repeal, came a provision for a “catch up.” They are allowing amended returns for certain qualified businesses, rather than just the Form 3115. Those eligible businesses have to amend by the middle of next year, July 15, and they also have to be mindful of the regular standing tax statute limitations. Now is the time a look at where you’re at, what the amortization requirements are, and investigate if you qualify as an eligible small business so you can take the amendment? Do you want the benefit over one or two years?” Many taxpayers are likely to now file amended returns to reclaim the tax break rather than going the route of filing for a change of accounting method.
Qualified production property
Another new tax break in the OBBBA includes the new Section 168(n) for the qualified production property deduction. 168(n) says if you buy new, nonresidential real property or building to be used in manufacturing in the U.S., you are potentially eligible take 100% bonus depreciation on that property. This is a huge benefit, because normally such property is amortized and depreciated over 39 years. Further guidance is needed on how to determine the allocation of the building price between manufacturing and non-manufacturing to qualify for the benefit.
There are some technical questions regarding the qualified production property deduction and the 100% deduction for manufacturing facilities, and folks who engage in transactions to purchase facilities or construct them will need some clarification of whether they fully qualify. Yet there are some real opportunities for folks to plan out how to maximize their opportunities over the next couple of years, as some of these changes are implemented.
Careful tax modeling and planning
Taxpayers will be able to take advantage of the OBBBA’s tax breaks long into the future since so many were made permanent, but proper planning is essential. The bonus depreciation, interest expense limit, and the Section 174 costs, have freed up a lot of deductions for businesses going back to the beginning of 2025. Businesses need to model and project out how those all interact, making sure to optimize their positions. There’s a specific point for when you consider the interest expense limitation. That leads to a spot where you may want to slow down deductions, specifically amortization deductions, in order to increase your interest expense limitation and get to a better result.
This may go against the grain of normal tax planning, which would accelerate deductions and deferred income, so check with your TFG tax professional. Details really do matter, and multiyear projections are probably the most important thing that businesses should be doing right now to think about what you do about the 2025 tax return, and what you do in the future.
Qualified small business tax breaks
Pass-through businesses may take permanent advantage of the 20% Section 199A qualified business income deduction as well as a newly expanded tax break for qualified small business stock.
The QBI deduction hasn’t really changed in a significant way, and has maintained the relative parity between the 21% corporate rate and the effective tax rate on flow-through businesses. However, the qualified small business stock gain exclusion under Section 1202 was a meaningful expansion of the gain exclusion. It will result in more corporations being eligible to issue qualifying stock, and ultimately more taxpayers being eligible to exclude gain under that provision. Hence, the topic which needs discussion now is entity choice and whether a business should be structured as a C-corporation, or a Partnership, or as a S-corporation (the old flow-through vs C corporation discussion).
While OBBBA extended or made permanent a number of expiring provisions, the QSBS tax break was a surprise of sorts. You may want to speak to your TFG tax professional to reexamine the entity options for your current business, or your future endeavors, amid the changes the OBBBA made.
The qualified small business stock tax break may have many businesses looking into whether to switch over from an S-corporation to a C-corporation. Extending the 20% pass-through deduction is going to make pass-through entities a preferred vehicle for a lot of businesses, but what few saw coming was the very significant expansion of Section 1202 and the benefits that arise on the sale of qualified small business stock in the form of an exclusion. Qualified small business stock is strictly a benefit of the C-corporation. You can’t benefit from this QSBS exclusion if you’re an S-corporation or a Partnership, so that is a major factor to be taken into consideration. If folks are starting a business from scratch, and that corporate rate is 21%, and now there’s a great expansion of Section 1202 that provides for when they exit the corporation after four or five years, a portion of the gain can be excluded, a C-corporation makes sense to qualify for those benefits upon sale of the stock.
Reach Out to Us: There are a lot of pieces to the tax puzzle this year, which is making tax advantaged planning and filing more difficult. Be sure to discuss your options both for 2026 and 2026 with your TFG Tax Professional to be sure your get the greatest benefit from the OBBBA provisions. Contact us at CPA@fuoco.com.
