The House recently approved the Trump Administration’s multi-trillion-dollar tax reform bill — One Big Beautiful Bill. This legislation would make permanent many of the tax provisions set to expire from the Tax Cuts and Jobs Act (TCJA). While the bill still needs to pass through the Senate, where many changes may be made, the tax effects that this legislation in its current form would have on businesses and their leaders are worth exploring.

 

RESTRICTS CHARITABLE CONTRIBUTION DEDUCTIONS

Provisions under the tax legislation would restrict the deduction of aggregate charitable contributions made by corporations by adding a floor equal to 1% of taxable income. If contributions exceed the current 10% ceiling, the disallowed amount may be added under the 1% floor and carried forward to the following year. This change would apply beginning on or after Jan. 1, 2026.

GHJ OBSERVATION: Since the provision requires a contribution of at least 1% of taxable income to be deductible, this could discourage taxpayers from donating smaller amounts to charitable organizations.

 

RESTORES 100% BONUS DEPRECIATION

The tax bill proposes restoring the 100% bonus depreciation for property acquired and placed in service between Jan. 19, 2025 and Jan. 1, 2030 (or Jan. 1, 2031 for certain aircraft and eligible longer production assets). This provision also expands the bonus depreciation to specified plants bearing fruits/nuts, trailers/campers attached to automobiles and used as temporary accommodations, and certain qualified production property placed in service after the enactment date.

GHJ OBSERVATION: This provision could incentivize taxpayers and buyers to favor sale transactions that are structured as actual or deemed asset purchases (i.e., under Section 338) over stock acquisitions. This would allow for deducting a large portion of the purchase price and could create Net Operating Losses (NOLs) to offset future income.

 

RAISES SECTION 179 EXPENSING LIMITS

The tax bill would raise the Section 179 expensing limitation to $2.5 million (and the phaseout threshold to $4 million), adjusted for inflation starting in 2026. These changes would apply to property placed in service beginning on or after Jan. 1, 2025.

GHJ OBSERVATION: The Section 179 maximum deduction for the 2024 tax year is $1.22 million; the new provision thereby nearly doubles this limit. Further, the current phaseout begins at $3.05 million, so the new provision increases this by just under $1 million. Although these changes may not substantially increase the number of taxpayers that can elect Section 179 expensing, the raised dollar limit would benefit those that are eligible.

 

EBITDA LIMITATION UNDER SECTION 163(j) MADE PERMANENT

The tax legislation proposes to restore the Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) limitation under Section 163(j) for tax years between Dec. 31, 2024 and Jan. 1, 2030. As a result, taxpayers would determine Adjusted Taxable Income (ATI) used to calculate business interest deductions without considering depreciation, amortization or depletion expenses.

GHJ OBSERVATION: Business leaders should assess the potential impacts that replacing the current EBIT method may have on taxable income (loss) in the future. Taxpayers may need to evaluate future taxable income under both approaches to determine how significantly the change could affect their business. The enhanced deductibility of interest expense has a direct effect on the true cost of debt financing for businesses.

 

GHJ OBSERVATION: Manufacturers and other industries with high capital investment were significantly impacted by the previous shift to EBIT. Reverting to EBITDA, along with the proposed 100% bonus depreciation and special allowances for production property, could significantly boost interest deductions for these companies.

 

ALLOWS FOR FULL EXPENSING OF SECTION 174 EXPENDITURES

The tax bill proposes to restore the full expensing of U.S. Research or Experimental (R&E) expenditures paid or incurred between Dec. 31, 2024 and Jan. 1, 2030. The new Section 174A would also remove the requirement to capitalize and amortize the expenditures over five years. Rather, business leaders can choose to do one of the following:

  1. Deduct the domestic R&E expenses in the tax year paid or incurred
  2. Elect to capitalize and amortize the R&E expenses evenly over a period not less than five years, starting from the middle of the tax year paid or incurred
  3. Elect to capitalize and amortize the R&E expenses over a period of 10 years in the tax year paid or incurred, under Section 59(e)

This requires a change in accounting method for both:

  1. Domestic R&E expenditures paid or incurred in tax years beginning after Dec. 31, 2024, with no adjustment made under Section 481(a) and accounted for under proposed Section 174A
  2. Domestic R&E expenditures paid or incurred in tax years beginning after Dec. 31, 2029, with no adjustment made under Section 481(a) and accounted for under Section 174

There is no proposed change to non-domestic R&E expenditures. Taxpayers are still required to capitalize and amortize foreign research and development costs over a period of 15 years.

GHJ OBSERVATION: This provision could incentivize taxpayers to invest and engage in domestic research, rather than foreign. Corporations, particularly those subject to the Corporate Alternative Minimum Tax (CAMT), may want to consider the most beneficial option outlined above to potentially minimize or eliminate their CAMT liability. 

As an example, the immediate expensing of domestic R&E expenditures could lead to lower taxable income when compared to Adjusted Financial Statement Income (AFSI) under the CAMT.

The proposal would prohibit the deduction of any amount realized on the disposition of property that was developed with unamortized R&E expenditures under Section 174(d). This is an extension of the current rule prohibiting the deduction of unamortized R&E expenditures used to develop property being disposed in general. The new provision applies to property disposed, abandoned or retired after May 12, 2025.

GHJ OBSERVATION: The addition of this provision supports the ongoing requirement to amortize R&E expenditures when disposing of a property. Further, with the temporary rules allowing Section 174 capitalization, taxpayers are also permitted to use accelerated basis recovery when disposing of a property.

The proposal would modify Section 280C to reduce the amount capitalized under Section 174 to the extent that the Section 41 research credit exceeds the amortization allowed for the qualified research costs that year. In addition, the proposal would reduce the domestic R&E expenditures otherwise taken under Section 174A by the amount of research credit that year. Taxpayers may still decide to elect a reduced research credit instead of making this reduction.

GHJ OBSERVATION: Under the current law, taxpayers only had to reduce their capitalized Section 174 expenditures if their research credits exceeded the allowable deduction for those expenditures. For most, there was no excess, so taxpayers were allowed the full deduction (after the amortization period of five years). The proposed changes could make these deductions more difficult.

 

INCREASES GROSS RECEIPTS THRESHOLD

The bill would increase the gross receipts test threshold for certain manufacturers from $25 million to $80 million under Section 448(c) beginning on or after Jan. 1, 2026, adjusted for inflation. This affects entities with substantially all their gross receipts earned by the lease, rental, license, sale, exchange or other disposition of qualified products. This includes Tangible Personal Property (TPP) manufactured for purposes of a substantial transformation and excludes food and drinks assembled in the same retail location where similar property is sold. Taxpayers must also aggregate gross receipts of related passive trades or businesses.

GHJ OBSERVATION: The higher threshold may allow some taxpayers to now qualify for the small business exemption and benefit from the simpler provisions mentioned above by using cash basis accounting and qualify for exceptions under Section 163(j) and Section 263A. 

 

INTRODUCES QUALIFIED SOUND RECORDING PRODUCTIONS 

The bill introduces a new classification of qualified productions called “qualified sound recording productions” that is expensed under Section 181. Businesses must produce this in the U.S. under U.S. copyright laws to qualify. The deduction limit is $150,000 in the tax year paid or incurred for productions starting before Jan. 1, 2026. Any amounts not deducted are eligible for the 100% bonus depreciation if placed in service before Jan. 1, 2029.

GHJ OBSERVATION: Since the deduction under Section 181 does not extend to productions starting after the 2025 tax year, a crucial advantage is the ability to claim bonus depreciation through the 2028 tax year.

 

NEW CLASSIFICATION: QUALIFIED PRODUCTION PROPERTY 

The tax bill would establish a new classification of property called “qualified production property” that taxpayers can elect to fully depreciate under Section 168(n) in the year placed in service. To qualify, the property must be part of a depreciable nonresidential real property used as a key component of a “qualified production activity,” with construction beginning between Jan. 19, 2025 and Jan. 1, 2030. Businesses must also place the property in service within the U.S. before Jan. 1, 2033. The qualified production activity refers only to the development or enhancement (limited to agriculture and chemicals) of an eligible TPP manufactured for purposes of a substantial transformation. 

GHJ OBSERVATION: This special depreciation allowance for “qualified production property” under Section 168(n) is offered to taxpayers for three more years than bonus depreciation is (tax periods 2030 to 2032). 

 

CONSIDERATIONS FOR VALUATION ALLOWANCES

The proposed provisions may not necessarily have a sizeable impact on taxable income (loss) upon the effective date. However, it is advised that taxpayers plan and consider the impact this may have on income taxes in the future. Taxpayers that expect future taxable income to change under Section 163(j) limitations, Section 179 expensing or bonus depreciation should analyze existing valuation allowances and deferred tax assets/liabilities. This is done by comparing the impact on income under current law with that under the proposals. 

Business leaders can further assess this by considering existing temporary book to tax differences and then predict the reversal and realization of these adjustments. For example, if taxpayers apply the new proposals for GILTI and FDII, they will need to analyze the change to their valuation allowance and whether their taxable income is high enough to realize their deferred tax assets/liabilities. Business leaders are encouraged to reexamine their future taxable income if reversing the temporary tax adjustments is not possible.

 

ACTION STEPS FOR BUSINESS LEADERS

While the tax bill makes its way through Congress, business leaders must pay close attention to the impact this can have on their business. Opportunities for corporations may become available, but business leaders could face challenges as a result of some of the provisions. To prepare for potential tax changes, please talk to GHJ’s Tax Services team, who are closely monitoring these tax developments.

 

This article is for informational purposes only and not to be construed as professional advice. Please consult your tax advisor for guidance. The content in this material is accurate as of the date of publication, and the facts and circumstances of this material are subject to change.