On May 22, 2025, the U.S. House of Representatives passed the “One Big, Beautiful Bill” (hereinafter referred to as the OBBB), which includes a comprehensive package of tax provisions aimed at reforming the U.S. tax code. The bill now heads to the GOP-controlled Senate for consideration and likely modification. In the paragraphs below, several of the key provisions that would impact business taxation are reviewed.

R&E and Software Development Costs

Beginning in 2022, research and experimental (“R&E”) expenditures are required to be capitalized and amortized over a five-year period (a 15-year period for research conducted outside the U.S.). These R&E expenditures include software development costs which were also, historically, currently deductible. The OBBB would provide taxpayers with new flexibility in terms of the treatment of such domestic costs. In tax years beginning after December 31, 2024, and before January 1, 2030, taxpayers may now elect to:

• immediately deduct R&E costs in the year incurred,
• capitalize and amortize costs over the useful life of the research (not less than 60 months), or
• capitalize and amortize the costs over 10 years. 

This will have a major impact on businesses that invest heavily in R&E and software development. This impact will extend to international tax provisions such as the foreign-derived intangible income deduction, the global intangible low-taxed income (GILTI) calculation and the foreign tax credit limitation. 

Capitalization and amortization over 15 years remain required for foreign R&E costs, consistent with the Trump Administration’s “America First” agenda. 

Turning to credits, the OBBB would continue and enhance the ability of small businesses and startups to claim “refundable” R&D tax credits. The “refundability” is provided by allowing an eligible business to offset its portion of the employer’s social security obligation with the credit, up to $500,000. This could prove especially valuable to young businesses that have not yet generated taxable income.

Bonus Depreciation

For years before 2023, taxpayers had grown accustomed to 100% bonus depreciation. However, starting in 2023, the allowance for first-year depreciation was phased out at a rate of 20 percentage points a year such that, for tax year 2025, bonus depreciation is only allowed at a 40% rate. The OBBB reinstates an increased deduction percentage as well as an extension of eligibility. The amended bonus depreciation provisions would once again allow 100% first-year depreciation for qualified property acquired and placed in service after January 19, 2025, and before January 1, 2030.

In addition to bonus depreciation, another elective 100% depreciation allowance is added for qualified production property (QPP) through 2030, and for aircraft and certain long-production-period property through 2031. QPP covers aircraft, and newly constructed and certain existing non-residential real estate used for manufacturing, production, or refining in the United States. 

The Section 179 deduction cap is also extended from $1 million to $2.5 million, with phase-outs beginning at $4 million for property placed in service after December 31, 2024.

Should the OBBB in its current form be enacted, businesses may wish to consider accelerating the planned capex to take advantage of the bonus depreciation provisions and the somewhat unprecedented write-offs available for QPP. These provisions have the potential to substantially improve the economics of capital investments and may prove to be an important catalyst in triggering the explosive growth the Trump Administration is seeking.

Business Interest Expense Deductibility

Section 163(j) imposes a limitation on the deductibility of interest expense for business. Roughly speaking, the limitation is currently 30% of EBIT (computed on a tax basis and referred to as “adjusted taxable income”) plus floor plan financing interest. The OBBB will allow the add-back of depreciation, amortization and depletion when calculating adjusted taxable income for years beginning after December 31, 2024, and before January 1, 2030. 

For many businesses, the deductions for amortization and depreciation significantly reduce taxable income so their add-back for purposes of computing the interest limitation can be key to lessening its negative impact. Businesses will want to reconsider debt/equity ratios and where leverage is positioned in their global organizations to confirm that leverage in the United States is optimized.

Qualified Business Income (“QBI”) Deduction

The Tax Cuts and Jobs Act of 2017 (“TCJA”) established a temporary 20% deduction for qualified business income (the QBI deduction, also known as the Section 199A deduction) for certain sole proprietorships, partnerships, S corporations, and some trusts and estates through the end of 2025. Starting in 2026, the OBBB proposes to make the QBI deduction permanent and increase its size to 23% along with additional changes to the phase-in of previously established limitations. 

The QBI has played a significant role in reducing the effective tax rates for people able to avail themselves of the benefit. In general terms, the QBI deduction kept the taxation differential of persons with qualified flow-through businesses relatively comparable to the taxation of shareholders of C corporations receiving qualified dividends when the corporate tax rate dropped to 21%. A person subject to the highest individual income tax rate of 37% saw that rate drop to 29.6% (assuming no other limitations reduced the QBI deduction) with the QBI deduction. 

Should the OBBB pass in its current form, the rate will drop from 29.6% to 28.49% for QBI eligible income.  A C corporation shareholder would suffer a 21% corporate tax rate and an effective 15.8% rate on a distribution of the remaining profits as a qualified dividend for a total tax of 36.8%. The proposed increase in the QBI deduction percentage will further widen this effective rate gap. (Had the floated 15% C corporation tax rate for domestic manufacturers been included in the OBBB, the rates would be much closer.)

Concluding Thoughts

If ultimately passed with the above-described business tax provisions largely intact, the OBBB will represent landmark business tax legislation. The above provisions alone will likely be material factors as businesses plan for future expansion, distributable earnings, M&A activity, etc. Business leaders should carefully consider and monitor these developments to optimally position their organizations for financial success. 

Content provided by LBMC tax expert Dennis Metzler.

LBMC tax tips are provided as an informational and educational service for clients and friends of the firm. The communication is high-level and should not be considered as legal or tax advice to take any specific action. Individuals should consult with their personal tax or legal advisors before making any tax or legal-related decisions. In addition, the information and data presented are based on sources believed to be reliable, but we do not guarantee their accuracy or completeness. The information is current as of the date indicated and is subject to change without notice.