Congress has enacted the One Big Beautiful Bill Act (OBBBA), bringing significant changes to business income taxation. This newsletter highlights the most important provisions affecting businesses, with practical explanations and examples to help you plan for 2025 and beyond.
1. Permanent 100% Bonus Depreciation (Full Expensing)
What Changed: Businesses can now permanently deduct 100% of the cost of most new and used tangible property (with a recovery period of 20 years or less) in the year it is placed in service. This reverses the previous phase-down of bonus depreciation and makes full expensing a permanent feature for property acquired after January 19, 2025. There is also a transitional election to use a 40% rate for property placed in service in the first tax year ending after January 19, 2025, if preferred.
Practical Example: If your business buys $500,000 of new equipment in 2026, you can deduct the entire $500,000 on your 2026 tax return, rather than depreciating it over several years.
Special Note: A new provision allows 100% expensing for certain manufacturing buildings (see below).
2. Special Expensing for Manufacturing Buildings (Section 168(n))
What Changed: A new elective provision allows businesses to immediately deduct 100% of the cost of the portion of a nonresidential real property (i.e., a factory or plant) used in qualified production activities. To qualify, construction must begin after January 19, 2025, and before January 1, 2029, and the property must be placed in service before January 1, 2031. Qualified production activities include manufacturing, production, or refining that results in a substantial transformation of tangible personal property (not including food or beverages prepared in a retail establishment).
Practical Example: A company builds a new $10 million factory in 2026, used exclusively for manufacturing. The company can elect to deduct the full $10 million in 2026, rather than depreciating it over 39 years.
Caveats: Office space, parking, research, and other non-manufacturing areas do not qualify. If the property is converted to a non-qualifying use within 10 years, some of the deduction may be recaptured.
3. Section 179 Expensing Limits Increased
What Changed: The maximum amount a business can expense under Section 179 increases to $2.5 million per year (from $1 million), with the phase-out threshold rising to $4 million (from $2.5 million). Both amounts are indexed for inflation after 2025.
Practical Example: A small business purchases $2 million in qualifying equipment in 2026. The entire amount can be expensed under Section 179, provided total equipment purchases do not exceed $4 million.
4. Immediate Deduction for Domestic R&D Expenses
What Changed: Domestic research and experimental (R&D) expenditures can once again be fully deducted in the year incurred, reversing the prior requirement to amortize these costs over five years. This applies to expenses incurred after December 31, 2024. Foreign R&D expenses must still be amortized over 15 years.
Practical Example: A U.S. tech company spends $1 million on domestic R&D in 2025. The full $1 million is deductible in 2025.
5. Business Interest Deduction Limitation (Section 163(j))
What Changed: The limitation on business interest deductions is now permanently based on 30% of EBITDA (earnings before interest, taxes, depreciation, and amortization), rather than EBIT. This allows more interest to be deducted, especially for capital-intensive businesses.
Practical Example: A manufacturer with $2 million EBITDA and $700,000 in interest expense can deduct up to $600,000 (30% of $2 million), rather than a lower amount if depreciation and amortization were excluded.
6. Qualified Business Income (QBI) Deduction (Section 199A)
What Changed: The QBI deduction is made permanent. The phase-in threshold for wage and property limitations increases to $75,000 ($150,000 for joint filers). A new $400 minimum deduction is available for active business income (with at least $1,000 in QBI), indexed for inflation.
Practical Example: A sole proprietor with $2,000 in QBI and no employees or property can claim a $400 deduction, even if the normal calculation would yield less.
7. International Tax Changes
Key Provisions: The deduction for global intangible low-taxed income (GILTI, now called "net CFC tested income") is reduced to 40% (from 50%), and the deduction for foreign-derived intangible income (FDII, now "foreign-derived deduction eligible income") is reduced to 33.34% (from 37.5%). This increases the effective U.S. tax rate on these types of income. The BEAT (Base Erosion and Antiabuse Tax) rate is set at 10.5% (was scheduled to increase to 12.5%), and anti-avoidance rules are tightened. The look-through rule for related controlled foreign corporations is made permanent. Other Changes: New rules for sourcing income, allocating deductions, and determining pro rata shares for CFCs.
Practical Example: A U.S. corporation with foreign subsidiaries will see a higher U.S. tax rate on certain foreign earnings and must review how deductions and credits are allocated.
8. Other Notable Provisions
- Paid Family and Medical Leave Credit: Made permanent and expanded to include insurance premiums.
- Business Meals: Meals on certain fishing vessels and remote fish processing facilities are now fully deductible.
- Reporting Thresholds: The 1099-MISC/NEC reporting threshold increases to $2,000 (from $600), indexed for inflation.
- De Minimis Rule for Third-Party Networks: Restores the $20,000/200 transaction threshold for reporting (was $600).
What Should Businesses Do Now?
- Review Capital Expenditures: Consider accelerating or planning investments to take advantage of full expensing and the new manufacturing building deduction.
- R&D Planning: Domestic R&D can be expensed immediately; review your accounting methods and consider the impact on taxable income.
- Interest Expense: Recalculate your interest deduction under the more generous EBITDA-based limit.
- International Operations: Multinational businesses should review their structures and tax planning in light of higher GILTI/FDII rates and new allocation rules.
- Recordkeeping: Prepare for new reporting thresholds and ensure systems are updated for the new rules.
These changes are complex and may affect each business differently. Please contact our office to discuss how the OBBBA provisions apply to your specific situation.
