On July 4, 2025, President Trump signed into law the legislation commonly referred to as the One Big Beautiful Bill or OBBBA, which includes several changes to the federal income tax treatment of trade or business activities. Below is a summary of some of the more significant provisions of general applicability to business taxpayers.
Deduction for Qualified Business Income
- OBBBA makes permanent the deduction for qualified business income (“QBI”) under Section 199A of the Internal Revenue Code (the “Code”) as originally enacted by the Tax Cuts and Jobs Act of 2017 (the “TCJA”)—generally equal to 20 percent of a noncorporate taxpayer’s aggregate QBI but subject to certain adjustments—which had been scheduled to expire for taxable years beginning after December 31, 2025.
- A new minimum deduction of $400 per year, indexed for inflation, has been added for any noncorporate taxpayer whose aggregate QBI from all qualified trade or business activities in which the taxpayer materially participates exceeds $1,000.
- With respect to existing limitations on the QBI deduction in the case of a “specified service trade or business” or for those businesses that do not incur sufficient W-2 wage expense or capital expenditures, OBBBA stretches out the range of taxable income over which such limitations are phased in for single filers from $50,000 to $75,000 and for joint filers from $100,000 to $150,000.
Bonus Depreciation
- So-called bonus depreciation for qualified property under Code Section 168(k)—which had been expanded by the TCJA based on a percentage of the taxpayer’s basis in the property generally beginning at 100 percent for the years 2018-2022 and then phasing down at the rate of 20 percent per year until reaching zero in 2027—has been overhauled and extended on a permanent basis so that 100 percent bonus depreciation generally is allowable for qualified property acquired after January 19, 2025.
- Property acquired after the regular January 19, 2025 effective date is not eligible for the new regime if it was acquired pursuant to a binding written contract entered into before January 20, 2025.
- Special rules apply to property with longer production periods, self-constructed property, and certain plants.
Research and Experimental Expenditures
- OBBBA permanently reinstates immediate deductibility of domestic research or experimental (R&E) expenditures paid or incurred by the taxpayer during taxable years beginning after December 31, 2024. Previously, deductibility had been disallowed by the TCJA for taxable years beginning after December 31, 2021, and replaced with a requirement to capitalize and amortize such expenditures over a five-year period beginning with the midpoint of the taxable year in which R&E expenditures are paid or incurred. Foreign R&E expenditures remain amortizable over 15 years.
- In lieu of immediate deductibility, OBBBA provides an election by which taxpayers may capitalize and amortize post-2024 domestic R&E expenditures either (i) ratably over a period of not less than 60 months, beginning with the month in which the taxpayer first realizes benefits from the expenditures, or (ii) ratably over 10 years, beginning with the taxable year of the expenditure.
- Under an elective transition rule, OBBBA allows certain relatively small businesses to apply the new rules retroactively to taxable years beginning after December 31, 2021, which would necessitate filing an amended return for each year affected by the election. The election must be made no later than July 4, 2026. For this purpose, a “small business” is defined generally as any taxpayer that meets the gross receipts test of Code Section 448(c), under which certain taxpayers are entitled to use the cash receipts method of accounting, generally requiring average annual gross receipts to be no more than $31 million over a three-year lookback period.
- Under another elective transition rule, with respect to domestic R&E expenditures previously capitalized during taxable years beginning after December 31, 2021, and before January 1, 2025, the taxpayer may elect to deduct any remaining unamortized balance of such expenditures either (i) entirely in the first taxable year beginning after December 31, 2024, or (ii) ratably over the two-year period beginning with the first taxable year beginning after December 31, 2025.
Deductibility of Business Interest Expense
- For purposes of the Code Section 163(j) limitations on deductibility of business interest expense, OBBBA reinstates and makes permanent the definition of adjusted taxable income (ATI) that mimics the financial accounting concept of earnings before interest, taxes, depreciation, and amortization (EBITDA) that had been in effect for taxable years 2018-2021 rather than the concept of EBIT that became effective beginning in 2022.
- To put this amendment in proper context, a taxpayer’s deduction for business interest expense for any taxable year generally is limited by Code Section 163(j) to the sum of (i) the taxpayer’s business interest income for the tax year, (ii) 30 percent of the taxpayer’s ATI, and (iii) the taxpayer’s floor-plan financing interest expense. By causing the calculation of ATI to revert from an EBIT-aligned metric to an EBITDA-aligned metric, OBBBA will enable many taxpayers to achieve higher deductibility of business interest expense.
- The reinstatement of the EBITDA-aligned metric applies only to tax years beginning after 2024 (i.e., the EBIT-aligned metric continues to apply for tax years 2022-2024).
- OBBBA also enacts new provisions for coordinating the Section 163(j) business interest limitations with existing Code provisions under which interest expense is subject to capitalization under a mandatory or an elective basis.
Expensing of Certain Depreciable Business Assets
- For property placed in service after December 31, 2024, OBBBA increases the maximum annual amount a taxpayer may elect to expense under Code Section 179 to $2.5 million and increases the phaseout threshold amount to $4 million, above which the annual cap amount is reduced on a dollar-for-dollar basis to the extent that the cost of Section 179 property placed in service during the year exceeds the cap. Each amount is indexed for inflation after 2025. Previously, the maximum expense had been $1 million (indexed for inflation at $1.25 million for 2025) and had been phased out starting at $2.5 million (indexed for inflation at $3.13 million for 2025).
- There are several technical differences between expensing under Code Section 179 and bonus depreciation under Code Section 168(k) that are beyond the scope of this alert, each of which needs to be evaluated by taxpayers on a case-by-case basis. In particular, the deduction under Section 179 for any taxable year cannot exceed the taxpayer’s taxable income derived from the active conduct of any trade or business, whereas bonus depreciation under Code Section 168(k) can create or increase a net operating loss (NOL) generally eligible for carryover to other years.
Special Depreciation Allowance for Qualified Production Property
- OBBBA has added a new category of bonus depreciation by which taxpayers may deduct 100 percent of the adjusted basis of qualified production property.
- “Qualified production activity” is defined as the manufacturing, production solely for agricultural or chemical purposes, or refining of any tangible personal property, excluding food or beverages prepared in the same building as a retail establishment in which such property is sold.
- Recapture rules are applied if the use of the property changes within 10 years of being placed in service.
Advanced Manufacturing Investment Credit
- OBBBA increases the advanced manufacturing investment credit on qualified investments in an advanced manufacturing facility to 35 percent, up from 25 percent.
- For this purpose, a taxpayer’s “qualified investment” as defined under Code Section 48D is the basis of any qualified property placed in service during the taxable year that is part of an “advanced manufacturing facility,” which, in turn, is defined as a facility for which the primary purpose is the manufacturing of semiconductors or semiconductor manufacturing equipment.
- The increase in the credit amount from 25 percent to 35 percent applies to property placed in service after December 31, 2025. However, as already provided in Code Section 48D(e)—which has not been changed by OBBBA—no credit is available unless the construction of the facility begins before January 1, 2027.
- Also as provided in existing Code provisions, there are circumstances in which taxpayers may elect to claim the credit based on qualified progress expenditures even though the property has not yet been placed in service, and these special rules have not been amended by OBBBA. Therefore, unless the IRS provides regulatory relief, it appears that taxpayers who have already claimed a 25 percent credit for previously made qualified progress expenditures may not be entitled to benefit from the 10 percent increase in the credit if the applicable property is placed in service after December 31, 2025.
Partnership Disguised Sales and Services
- OBBBA makes a subtle language change to Code Section 707(a)(2) so that, in effect, certain types of transactions between a partnership and its partners may be recharacterized for federal income tax purposes based on a reasoned interpretation of the statutory language and its legislative history, even though Treasury regulations for them have not been promulgated.
- To provide some context, recharacterization under the pre-OBBBA language of Section 707(a)(2) is prefaced by the words “[u]nder regulations prescribed by the Secretary,” which has been interpreted by some commentators as rendering Section 707(a)(2) inoperative in the absence of regulations. As amended by OBBBA, the quoted language has been changed so that recharacterization occurs “[e]xcept as provided under regulations prescribed by the Secretary,” with the result that Section 707(a)(2) should now be self-executing even in the absence of regulations. This OBBBA provision does not address any of the substantive factors involved in determining whether a particular transaction should be recharacterized.
- As a practical matter, the primary situations that may be impacted by this amendment are (i) a contribution of cash by a partner to a partnership in exchange for a partnership interest—coupled with a distribution of some or all of the contributed cash by the partnership to an existing partner in complete or partial redemption of the existing partner’s partnership interest—where the question presented is whether the transaction should be recharacterized as a disguised sale of some or all of the existing partner’s partnership interest to the contributing partner, and (ii) a cash distribution by a partnership to a partner—coupled with an allocation of gross or net income to that partner—where the question presented is whether the transaction should be recharacterized as a disguised fee for services rendered. Final regulations involving disguised sales of property by a partner to a partnership (or vice versa) have already been in effect for many years and are not likely to be affected by the OBBBA amendment.
- These new rules apply only to services performed and property transferred after July 4, 2025, and are not intended to create any inference as to the status of the law for pre-effective date transactions.
Excess Business Losses of Noncorporate Taxpayers
- OBBBA makes permanent the Code Section 461(l) limitation on a noncorporate taxpayer’s ability to deduct excess business losses in any taxable year, effective for taxable years beginning after December 31, 2026. This limitation—as originally enacted by the TCJA—was scheduled to expire for taxable years beginning after December 31, 2028.
- To provide further context, the losses subject to limitation under Section 461(l) include the taxpayer’s share of business losses from flow-through entities, and the limitations are applied after applying other loss limitation rules in the Code (e.g., basis, at risk, and passive activity limitations). The net loss subject to limitation under Section 461(l) is disallowed to the extent that such loss exceeds a baseline threshold, which, as originally enacted by the TCJA, was $250,000 for the year 2017 ($500,000 for married taxpayers filing jointly) subject to an inflation index, with the 2025 thresholds having previously been reset at $313,000 ($626,000 married filing jointly). Except for technical changes to the inflation adjustments, none of the substantive provisions of Code Section 461(l) have been amended by OBBBA.
- As a quirky feature of the original TCJA provision—which continues in effect after OBBBA—the excess loss disallowed for any year is not carried forward to subsequent years to be retested under Section 461(l); instead, it is treated as an NOL for purposes of determining the taxpayer’s NOL carryforward.
Miscellaneous
- No Change for Carried Interests. Although there was some speculation that the favorable tax treatment of partnership “carried interests” or “promotes” might be addressed by OBBBA, no such provision found its way into the final version of the legislation.
- Real Estate Investment Trusts (REITs). OBBBA relaxes one of the REIT asset tests by allowing a REIT to own up to 25 percent (rather than 20 percent) of its total asset value in so-called taxable REIT subsidiaries, effective for taxable years ending after December 31, 2025.
- Treatment of Spaceports Under Exempt Facility Bond Rules. OBBBA generally treats spaceports like airports for purposes of tax-exempt bond financing rules, effective for obligations issued after July 4, 2025.
- De Minimis Rules for Third-Party Network Transactions. The original Form 1099-K de minimis exception for third-party network transactions has been reinstated, such that a third-party settlement organization generally is subject to reporting obligations for reportable payment transactions with a participating payee only if the total payments to such payee exceed $20,000 and the total number of transactions with such payee exceeds 200, effective for calendar years after 2024.
- Information Reporting with Respect to Certain Payees. Effective for payments made after December 31, 2025, OBBBA increases the general reporting threshold and the reporting threshold for remuneration to non-employees from $600 to $2,000 (typically on Form 1099-MISC or 1099-NEC, respectively). Beginning in 2027, the general reporting threshold is adjusted annually for inflation, and it appears that those inflation adjustments are piggybacked for purposes of the non-employee threshold.
Please see What One Big Beautiful Bill Means for Your Industry to explore all of the firm’s OBBBA alerts to understand the key risks, emerging opportunities, and strategic considerations shaping each industry.
For questions regarding the business impact of OBBBA, please contact Alan Kornstein (akornstein@mccarter.com), Michael Puzyk (mpuzyk@mccarter.com), Michael Guariglia (mguariglia@mccarter.com), Jeffrey Muller (jmuller@mccarter.com), Paul Buonaguro (pbuonaguro@mccarter.com), and Daniela Gallagher (dcalabro@mccarter.com) in the Tax, Employee Benefits & Private Clients group.