The One, Big, Beautiful Bill Act (OBBBA) includes numerous provisions affecting the tax liability of U.S. businesses. For many businesses, the favorable provisions outweigh the unfavorable, but both are likely to impact your tax planning. Here are several provisions included in the new law that may influence your business's tax liability. Additional articles in this series are forthcoming to address additional provisions.
Qualified business income (QBI) deduction
The Tax Cuts and Jobs Act (TCJA) created the Section 199A
deduction for QBI for owners of pass-through entities (such as partnerships,
limited liability companies and S corporations) and sole proprietorships. The
deduction had been slated to expire after 2025, putting many business owners at
risk of higher taxes.
The OBBBA makes the QBI deduction permanent. It also expands the
deduction limit phase-in ranges for specified services, trades or businesses,
and other entities subject to the wage and investment limitation. For these
businesses, the deduction is reduced when taxable income falls within the
phase-in range and is eliminated when taxable income exceeds the range. Previously, the phase-in range for the wage and property limitations (and for the exclusion of specified service trades or businesses, or SSTBs) was $50,000 above the income threshold for single filers and $100,000 for joint filers. The OBBBA increases these ranges to $75,000 and $150,000, respectively, and indexes them for inflation after 2026. This means more taxpayers will be able to claim the deduction, and higher-income taxpayers in service businesses may benefit before the deduction phases out.
The OBBBA also adds an inflation-adjusted minimum QBI deduction
of $400, beginning in 2025. It's available for taxpayers with at least $1,000
of QBI from one or more businesses in which they materially participate.
Accelerated bonus depreciation
The OBBBA makes permanent 100% first-year bonus depreciation for
the cost of qualified new and used assets acquired and placed into service
after January 19, 2025. Under the TCJA, the deduction was limited to 40% for
2025, 20% in 2026 and 0% in 2027.
The new law also introduces a 100% deduction for the cost of
"qualified production property" (generally, nonresidential real property used
in manufacturing) placed into service after July 4, 2025, and before 2031. In
addition, the OBBBA increases the Sec. 179 expensing limit to $2.5 million and
the expensing phaseout threshold to $4 million for 2025, with each amount
adjusted annually for inflation.
Together, the depreciation changes are expected to encourage
capital investments, especially by manufacturing, construction, agriculture and
real estate businesses. Additionally, the permanent 100% bonus depreciation may alleviate
the pressure on companies that didn't want to delay purchases despite the smaller
deduction.
Research and experimentation expense
deduction
Beginning in 2022, the TCJA required businesses to amortize Sec.
174 research and experimentation (R&E) costs over five years if incurred in
the United States or 15 years if incurred outside the country. With the
mandatory mid-year convention, deductions were spread out over six years. The
OBBBA permanently allows the deduction of domestic R&E expenses in the year
incurred, starting with the 2025 tax year.
The OBBBA also allows "small businesses" (those with average
annual gross receipts of $31 million or less) to claim the deduction
retroactively to 2022. Any business 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 in the years beginning after December 31, 2024.
Clean energy tax incentives
The OBBBA eliminates many of the Inflation Reduction Act's clean
energy tax incentives for businesses, including the:
- Qualified commercial clean vehicle credit,
- Alternative fuel vehicle refueling property credit, and
- Sec. 179D deduction for energy-efficient commercial
buildings.
The law accelerates the phaseouts of some incentives and moves
up the project deadlines for others. The expiration dates vary. For example,
the commercial clean vehicle credit can't be claimed for a vehicle acquired
after September 30, 2025, instead of December 31, 2032. However, the alternative
fuel vehicle refueling property credit doesn't expire until after June 30,
2026.
Qualified Opportunity Zones
The TCJA established the Quality Opportunity Zone (QOZ)
program to encourage investment in distressed areas. The program generally
allows taxpayers to defer the gain on the sale or exchange to an unrelated
party if the gain is invested in a qualified opportunity zone within 180 days
of the sale. The OBBBA creates a permanent QOZ policy that builds off the
original program.
The new program includes stricter eligibility criteria, new
reporting requirements, penalties for noncompliance, and a new category of
fund, Qualified Rural Opportunity Fund. The gain is now excluded from
gross income until the earlier of (1) the date on which the investment is sold
or exchanged or (2) five years from the date the investment in the QOF was
made. Additionally, if the investment is held for at least five years,
the basis in the investment is stepped up by 10 percent (30% if the investment
is in a Qualified Rural Opportunity Fund). The first round of QOFs available
under the permanent policy will begin on January 1, 2027.
The OBBBA also introduces a new type of QOF for rural areas. Investments in such funds will receive triple the step-up in basis.
International taxes
The TCJA added several international tax provisions to the tax code, including deductions for foreign-derived intangible income (FDII) and global intangible low-taxed income (GILTI). It also established the base erosion and anti-abuse tax (BEAT) on certain large U.S. corporations.
The OBBBA makes permanent the FDII and GILTI deductions and
adjusts the effective tax rates for FDII and GILTI to approximately 14%. It also makes
permanent the minimum BEAT, increasing the tax rate to 10.5%. These changes
take effect beginning in 2026.
Employer tax provisions
The new law makes permanent the exclusion from gross income (for
employees) and from wages for employment tax purposes (for employers) for
employer payments of student loans. It also provides that the maximum annual
exclusion of $5,250 be adjusted annually for inflation after 2026.
In addition, the OBBBA permanently raises the maximum
employer-provided child care credit from 25% to 40% of qualified expenses, up
to $500,000 per year. (For eligible small businesses, these amounts are 50% and
up to $600,000, respectively.) The maximum dollar amount will be adjusted
annually for inflation after 2026.
The OBBBA also makes permanent the employer credit for paid
family and medical leave (FML) after 2025. Employers will also be allowed to
claim the credit for a portion of premiums for paid FML insurance.
Employee Retention Tax Credit
If you filed an Employee Retention Tax Credit claim after
January 31, 2024, you may not see your expected refund. The OBBBA bars the IRS
from issuing refunds for certain claims submitted after that date. It also
gives the IRS at least six years from the date of filing to challenge these
claims.
Other provisions
The OBBBA increases the limit on the business interest deduction
by excluding depreciation, amortization and depletion from the computation of
adjusted taxable income (ATI), starting in 2025. The deduction is generally
limited to 30% of ATI for the year.
The new law also makes permanent the excess business loss limit,
which was set to expire in 2029. And it permanently extends the New Markets Tax
Credit, which was scheduled to expire in 2026.
What's next?
Since the OBBBA is simply extending or making relatively modest
modifications to existing tax law, it probably won't result in the years-long
onslaught of new regulations and IRS guidance that followed the TCJA's
enactment. We will keep you informed about any new developments.