The tax-filing season for individuals just opened recently, but businesses already got a head start on benefiting from the various tax incentives included in last July's One Big Beautiful Bill Act.
Among the major changes are new deductions for
"I think that tax season is always going to be challenging anytime there's recent legislation, but I think we're fortunate in that most of the legislation was just extending expiring provisions at the end of 2025, so that we're not going to see huge changes on those 2025 returns," said Tony Nitti, a partner in Ernst & Young's private tax group. "It's not like the 2025 law was dramatically revamped. That being said, bringing back bonus depreciation for 2025 is certainly something where it's going to change the composition of the tax returns, and so I definitely expect to see an impact there."
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. Foreign R&D expenses will still need to be amortized over a 15-year period for research conducted outside the U.S. But companies can once again fully deduct their research expenses incurred in the U.S.
"As a result of the OBBBA, you're now getting this benefit where any unamortized R&D — the domestic only — you are now able to expense, starting in 2025," said Kevin Gehrmann, a partner in the tax services group at Wiss & Co., a Top 100 Firm in Florham Park, New Jersey. "There's a few options on how you can take that expense. You can decide to take everything in 2025. You can take it pro rata between '25 and '26, so 50/50, or you can just keep doing what you've always done, which is keep amortizing over the remaining five years. The key here for taxpayers is understanding where you think you're going to be from a tax perspective, planning out '25 and '26 to see what provides you the most tax benefit, what helps with cash flow."
In some cases, though, businesses may still want to stretch out those deductions beyond the first year.
"The scenario we most commonly discuss with our clients is you don't want to just take the position to take the entire deduction in '25 because what could happen here is, you take the deduction in '25 and you create a very large loss," said Gehrmann. "That loss will then carry over to '26. Right now that operating loss can only offset 80% of taxable income, so you could end up in the spot where you create a loss in '25 and not be able to get a full benefit in 2026 and end up paying tax in '26. Whereas if you were to spread that deduction 50/50 between '25 and '26, it could have resulted in a loss for both years, deferring any tax payments all the way to the end of 2027. That's why we've been encouraging clients to really get a model out to see the impact of what makes the most sense for you and your business, based on where you think you're going to end up at the end of the year."
Lawmakers made multiple attempts to get the R&D expensing amortization requirement in Section 174 of the Tax Code, including in the Build Back Better Act, which was
"Obviously, the repeal of the 174 amortization was a big thing," said John Rose, national tax director in the professional practice group of Aprio, a Top 25 firm in Atlanta. "It was one of those things, in talking with people in Washington — staffers and the like — I don't think anybody really expected that to last. I think the 174 amortization requirement was thrown in so that they could meet the reconciliation PAYGO. And the prevailing wisdom, if you want to call it that, was that cooler heads would prevail and they would fix this because it would be disadvantageous for American business. That didn't happen until the OBBBA."
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.
"It put a real crimp in a lot of businesses, especially software businesses," said Rose. "It was a cash flow hit. With the repeal, what's most interesting about the provision is the catch up, how taxpayers can go back there. They're allowing amended returns for certain qualified businesses, rather than making them go through the [Form] 3115 route. As an accounting purist, just looking at it from a tax and financial reporting doctrinaire approach, this should have been a change of accounting method. If we're carrying the process and the rules to the nth degree, businesses are changing their accounting methods again. Allowing eligible small businesses to amend returns to get their cash more quickly was, I think, a very valuable tool for businesses who have been impacted by the prior amortization requirements."
However, there are still some requirements faced by businesses that haven't yet taken advantage of the opportunity to amend their tax returns, and in some ways they will be better off than those who complied with the amortization requirements.
"One thing that's really important, though, is that for those eligible businesses, they have to amend by the middle of next year," said Rose. "They have to amend by July 15, and they also have to be mindful of the regular standing tax statute limitations. From an advisory standpoint, that's one of the things that we have been actively telling our clients: Take a look at where you're at, what the amortization requirements are. Do you qualify for an eligible small business such that you can take the amendment? Do you want the benefit over one or two years?"
"Of course, this is all assuming that taxpayers have properly amortized," he continued. "A peculiarity of the law really is that, in a sense, it leaves folks who did not comply with the amortization requirements in a better situation than those folks who did, because they don't see the Service going back and doing mass exams of taxpayers to see whether they properly amortized through 174. The provision's repealed, so there's going to be a subset of businesses that either by choice or by information didn't amortize, and they got to keep their cash."
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. "It would be a 481(a) adjustment if we were doing it as a change of accounting method," said Rose. "But as it is, the taxpayer is able to amend the return. That's a year acceleration for getting the cash back, unless it's an AAR [administrative adjustment request] partnership."
The IRS and the Treasury have been providing some
Qualified production property
The R&D amortization isn't the only retroactive tax break available under the OBBBA.
Another new tax break in the OBBBA includes the new Section 168(n) for the qualified production property deduction."As part of the OBBBA, 168(n) that says if you buy new, nonresidential real property or building to be used in manufacturing here in the U.S., you are potentially eligible take 100% bonus [depreciation] on that, which is a huge benefit, because normally they are amortized and depreciated over 39 years," said Gehrmann. "Obviously, taking that all in one year versus 39 is a big change, and a lot of taxpayers are very interested in that."
Taxpayers are still awaiting further guidance, however, on how to determine the allocation of the building price between manufacturing and nonmanufacturing to qualify for the benefit.
"We're in this interesting time where there are a lot of retroactive changes in the Big Beautiful Bill that go back to the beginning of January 2025," said Stephen Eckert, national tax office practice leader at Plante Moran, a Top 25 Firm based in Southfield, Michigan. "Everybody is still trying to get their arms around those changes and how those end up on a tax return for 2025 while also planning for the future. On the retroactive side, there are some technical questions, and we see things like some of the business deductions, in particular the qualified production property deduction, the 100% deduction for manufacturing facilities. We need some additional technical guidance to implement that, and that's an area that I think folks who engage in transactions to purchase facilities or construct them are probably looking back for some clarification of whether they fully qualify. For example, there's those that were kind of cleaning up in positions that you'd be taking for 2025 returns, while then also pivoting into 2026, planning. There's a few different stories there, but both will turn on some of the guidance. I think there are some real opportunities for folks to then plan out how to maximize their opportunities over the next couple of years, as some of these changes work through."
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, I think the most interesting aspect of those is the acknowledgement that freed up a lot of deductions for businesses going back to the beginning of 2025," said Eckert. " But those deductions interact with each other, and the main story there is the need to model and project out how those interact, so that you're making sure to optimize your 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."
That may go against the grain for some tax planners.
"It leads to sort of an inversion of normal tax planning, which would accelerate deductions and deferred income," Eckert added. "When you start considering the interest expense limitation, I think there will be certain businesses that will choose to elect back into the five-year amortization for research costs, slowing down those deductions in order to increase their interest expense limitation and get to a better aggregate deduction position."
Some businesses may even decide to hold off on taking full advantage of some of these tax breaks. "You see those three changes, and you get more deductions," said Eckert. "More businesses have opportunities to deduct more things, but you really need to consider how those deductions interact with each other and also how they interact with other tax rules before you make a choice as to how to take advantage of those. This is where the details really do matter, and multiyear projections are the 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 advantage of the Section 199A qualified business income deduction as well as the tax break for qualified small business stock.
"The Section 199A qualified business income deduction, in a lot of ways, there were technical adjustments to that, but it was largely a permanent extension of the rules as we have been accustomed to," said Eckert. "Fortunately, that 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. In some ways, that's not a huge change. I would contrast that a little bit with the qualified small business stock gain exclusion under Section 1202. That 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. And I think that specific topic has reinvigorated the discussion around entity choice and whether a business should be structured as a C corporation or a partnership or an S corporation — the flow-through versus C corporation discussion. The expansion of that qualified small business stock rule has reignited those discussions in a significant way."
Accountants and tax professionals may want to reexamine the entity options for their business clients amid the changes in the OBBBA, also known as the 2025 Budget Reconciliation Act.
"Business owners are always thinking about their choice of entity from a tax perspective, whether it's their existing business or whether it's future endeavors," said Nitti of EY. "And this choice of entity analysis that you put in — C corp versus partnerships versus S corporation — is obviously very input dependent. You need to understand your tax rates for the different entities. You need to understand the availability of the 20% pass-through deduction. And the reality is, until the reconciliation bill was passed, those inputs were uncertain because we were living in a law where the tax rates were going to reset at the end of 2025."
"The 20% pass-through deduction was going to disappear at the end of 2025, so from a choice of entity perspective, while there are some smaller things around the periphery that were done in the reconciliation bill that absolutely impact the choice of entity, the biggest impact was that it gave us certainty with our inputs," he continued. "Now we know the top individual rate is not going to jump from 37% to 39.6%. It's going to stay at 37. We know that the 20% pass-through deduction is here to stay, which is obviously extremely meaningful to pass-through businesses."
Many businesses and their tax advisors would be facing difficult choices as a result of the potential expiration of those tax breaks.
"If that 20% deduction had expired at the end of 2025, you would have seen in all likelihood a mass exodus from pass-through status to taxpayers choosing to become a C corporation," said Nitti. "Now that those inputs are set, there's still no one-size-fits-all answer. You can't say to somebody definitively in all situations a C corp's better or an S corp's better, but on a case by case basis, you can look at the inputs with certainty and say based on your fact pattern and knowing what we know about the rates and that they're not going anywhere —at least based on the legislation that exists — we can actually crunch the numbers now and decide what's best for you. And that's just something we couldn't do for 2017 until July of 2025 because of the uncertainty that existed post 2025, and so the best thing to come out of the reconciliation bill, when you think about choice of entity, is that we just know the inputs, and now we can plug those in with certainty and decide on the best answer for our business clients."
The qualified small business stock tax break will have many businesses looking into whether to switch over from an S corp to a C corp.
"Extending the 20% pass-through deduction is going to make pass-through entities a preferred vehicle for a lot of businesses, but one of the things that came out of the reconciliation bill that no one 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," said Nitti. "Qualified small business stock is strictly the domain of the C corporation. You can't benefit from this QSBS exclusion if you're an S corp or a partnership, so that is a major factor to be taken into consideration. Now particularly when you're starting a business in a post-reconciliation bill world, so you're starting from scratch, it's like, boy, that corporate rate is 21%, and now there's been this great expansion of Section 1202 that provides that perhaps when I exit from my corporation after three, four or five years, I can exclude a portion of the gain. That is something that tax advisors everywhere really pay close attention to say a C corporation makes sense if I can qualify for these benefits upon sale of the stock."
While the reconciliation bill extended or made permanent a number of expiring provisions, the QSBS tax break was new to many tax professionals and their clients.
"This was something that is new law that we weren't anticipating that absolutely changes the choice of entity conversation, because it's unique to a C corporation, and the other business types can't benefit from it," said Nitti. "I think tax advisors all around the country are looking at C corporations with a renewed interest now because of the expansion of the qualified small business stock exclusion."
