With the fourth quarter underway, recent changes to federal tax law made by the One Big Beautiful Bill Act (OB3) remain at the forefront of business planning for operations, investments, and acquisitions. OB3 became law July 4 and provides many tax planning opportunities for businesses.
The primary goal of OB3 was to make permanent the many tax provisions enacted under the Tax Cuts and Jobs Act of 2017 (TCJA) that were otherwise scheduled to expire at the end of this year. OB3 succeeded on this front, although Congress could repeal or change any of these provisions in the future.
OB3 made permanent the reduced 37% top marginal individual tax rate enacted under the TCJA (a reduction from 39.6%) and the Section 199A qualified business income deduction, which provides noncorporate taxpayers with a deduction of up to 20% of the taxpayer’s qualified business income. Notably, OB3 did not change the flat corporate income tax rate of 21% (established permanently by the TCJA) or the maximum long-term capital gains rate (20%).
OB3’s key changes impacting businesses include the following:
Renewal of 100% Bonus Depreciation for Personal Property
- Key changes — Before OB3, bonus (or first-year) depreciation was subject to a phasedown with the rate at 40% for 2025. OB3, however, reverses this phasedown and permanently restores the rate to 100% for qualified property (e.g., equipment, computer software, and vehicles, to name a few) acquired and placed in service after January 19.
- Impact — Businesses may be able to claim greater depreciation deductions for 2025 than expected. We expect cost segregation studies will become a popular strategy for boosting depreciation deductions. Businesses should weigh the ability to use depreciation deductions for fourth-quarter expenditures versus pushing costs (and the associated depreciation deduction) into a subsequent tax year. Also, in the M&A space, buyers have an increased incentive to obtain a stepped-up basis in the assets of the target business, particularly if the value of the target business’ fixed assets is significant.
New Depreciation Deduction for Domestic Qualified Production
- Key changes — Intending to boost domestic manufacturing, OB3 created a new provision (Section 168(n)), which allows for 100% first-year depreciation for the costs of certain nonresidential real property used domestically for a qualified production activity if specific requirements are satisfied, including:
- The property is used primarily in U.S. manufacturing, production, or refining of tangible personal property.
- Original use of the property begins with the taxpayer.
- Construction must begin after January 19, 2025 and before January 1, 2029, and the property must be placed in service before January 1, 2031.
- No portion of the property used for offices, administration, parking, sales, or other functions unrelated to manufacturing is eligible for the deduction.
Recapture at ordinary income tax rates will apply if a taxpayer disposes of or otherwise ceases use of the property within 10 years from placing it in service.
- Impact — Businesses investing in U.S. manufacturing may be able to claim accelerated deductions for real property, which could help lower the costs associated with building new domestic manufacturing facilities.
Restoration of Deductions for Research and Experimental Costs
- Key changes — Prior to the TCJA, businesses could deduct research and experimental (R&E) expenses in the tax year they were incurred. As a revenue raiser, starting in 2022, the TCJA required that domestic R&E expenditures be capitalized and amortized over a period of five years (15 years for foreign expenditures). This rule had a negative impact on many businesses. A new OB3 provision (Section 174(A)) has reverted to the pre-TCJA rule for domestic R&E expenditures, allowing for immediate deduction of U.S.-based costs. The new rule applies to tax years after December 31, 2024. Taxpayers may deduct previously incurred, unamortized expenses in 2025. Further, eligible small businesses (less than $31 million in average annual gross receipts) may take advantage of retroactive deductions for tax years 2022 through 2024 as set forth in IRS Revenue Procedure 2025-28, which provides alternative methods (i.e., amending returns or an accounting method change) for unlocking these deductions for prior tax years.
- Impact — Businesses may have increased deductions available in 2025. Eligible small businesses should explore the alternatives provided in IRS Revenue Procedure 2025-28 to access deductions for prior tax years.
Improved Eligibility for Qualified Small-Business Stock
- Key changes — Pre-OB3 Section 1202 allowed noncorporate taxpayers selling “qualified small-business stock” (QSBS) with a five-year holding period to exclude generally up to $10 million of capital gains on the sale. OB3 unexpectedly (i) increased the capital gains exclusion to $15 million, (ii) expanded the gross asset threshold from $50 million to $75 million, and (iii) changed the five-year cliff holding period to a phase in (50% exclusion if held for three years, 75% at four years, and 100% if five-year holding period is satisfied). OB3 did not change many of the complex rules under Section 1202 nor the rule that “specified service trades or businesses” such as accounting, finance, health, law, and others do not qualify.
- Impact — New businesses making choice-of-entity decisions should consider whether operating in a corporate form as opposed to a pass-through is desirable given the $15 million exclusion available on a future sale of corporate stock. With the expanded gross asset threshold, more businesses may qualify, and the M&A markets may see more equity sales instead of asset deals. Buyers in M&A transactions may specifically plan into qualifying for QSBS treatment, while sellers will need to navigate negotiations for an equity sale or consider whether liquidations following a sale of assets nevertheless can reap some tax benefits under Section 1202.
For questions about this alert, please contact the authors or the Steptoe & Johnson Taxation and Nonprofit Law Team.
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