After months of waiting, clarity is finally coming. The tax and spending package unofficially known as the “One Big Beautiful Bill” Act (OBBB) has been signed into law—and tax planners everywhere are retooling their tax plans accordingly. Clients who own businesses may be especially eager to learn whether the new provisions could lower their tax bills and offset rising costs.
Which parts of the OBBB present the best tax planning opportunities for businesses? Today, we’ll cover two major tax deductions: 100% bonus depreciation and 100% R&D expensing.
100% Bonus Depreciation
Depreciation deductions can provide a major boost to businesses, allowing them to invest in new assets and write off the costs. However, as tax planners know, timing is key when it comes to making the most of a deduction. This is why the change to the bonus depreciation rules could be greatly beneficial. The OBBB restores the option to depreciate 100% of the cost of the asset in the year it is acquired and put into service. For some taxpayers, this can provide the immediate tax savings and cash flow they need.
This 100% bonus depreciation option is now permanent and applies to any depreciable property, such as automobiles, computer equipment and software, land improvements, manufacturing equipment, office furniture, and real property. Keep in mind that tax law says the asset must also:
- Be owned by the business
- Be used in the business or in an income-producing activity
- Have a determinable useful life
- Be expected to last a year or more
To determine if a specific asset qualifies, consult the IRS guidelines.
The OBBB introduces a couple of important changes to the 100% bonus depreciation provision. First, qualifying property must be acquired and placed in service after January 19, 2025. So the asset must be put into use for business purposes either on January 20, 2025 or later to claim this benefit.
Second, the OBBB contains a “transition rule” for those businesses that were already planning on the previous maximum of 40% bonus depreciation. If that rate would be more beneficial to your clients, they can opt into the 40% rate for 2025 only.
Finally, the maximum deduction allowed has been raised to $2.5 million. For property worth over $4 million, the benefit starts to phase out, though so keep this in mind when determining whether full bonus depreciation makes sense for your clients.
100% R&D Expenses
For businesses interested in innovation, research and development (R&D) expensing can provide major tax savings. The R&D tax deduction is joining the 100% club, alongside bonus depreciation. Now businesses can fully deduct all domestic research or experimental expenses in the year they are incurred. Note the word “domestic.” This means that any research conducted outside the U.S. does not qualify for the immediate 100% deduction. Per existing tax law, foreign R&D must be amortized over the course of 15 years.
The guidelines for qualified research expenses are not expected to change. Both in-house research expenses and contract research expenses can be deducted, including employee wages, supplies, and computers—as long as they are specifically applied to research. What does not qualify? Land improvements or other depreciable property and certain ore or mineral deposit exploration costs are on the list of exceptions.
Tax planners’ favorite aspect of the new R&D provision may be its flexibility. For R&D expenses incurred in 2025, taxpayers have two options: they can either fully expense the cost or amortize the cost for up to 60 months. The best part? The taxpayer can choose their preferred amortization period. This means that you can strategically identify the tax years when those deductions will make the biggest impact and stagger the deductions across those years. The election just needs to be submitted by the tax return deadline. Once that election is made, it cannot be changed without special approval from the IRS—a process that has yet to be defined.
What are our options for expenses from 2022 through 2024? If these R&D costs are currently in the amortization process, businesses can choose from one of these three options:
- Stick with their current amortization schedule.
- Retroactively apply the new provision. Businesses that meet the small business cash method gross receipts test can file an election with the IRS to apply the 100% expense deduction all the way back to December 31, 2021. The business must have an average of $31 million or less in average gross receipts over the last three tax years. The election must be made within one year of the law’s enactment, but the exact process has not yet been published by the IRS.
- Deduct the remaining unamortized expenses now. Businesses can also take the expenses that were capitalized but not yet deducted and deduct them all in 2025—or pro rata between 2025 and 2026.
These choices provide us with a tremendous tax planning opportunity, since we can potentially take a bigger deduction this year if we can benefit from it. Keep in mind that if the taxpayer previously took a deduction (for 2022-2024 expenses) and you decide to reverse it, they will have to pay interest on it. Make sure to factor this into your calculations when deciding which option to recommend.
Summary
These changes to the OBBB can benefit businesses with a little advance planning. By understanding the new rules—and any transition allowances built into them—tax planners can determine whether to recommend a 100% deduction this year or to continue a slower amortization process over time. Taxpayers may be tempted to jump at the chance for a bigger deduction for 2025, but as we know, slow and steady is sometimes the way to win the race. You can use tax preparation software to easily compare and contrast different applications of the OBBB and make a recommendation to your clients that will actually result in the biggest savings.
To continue receiving training on how to apply OBBB provisions and other tax policies, sign up to become a Certified Tax Planner today.
