In this episode, Karen Snodgrass, one of our tax partners, breaks down the major business tax changes introduced by the newly passed One Big Beautiful Bill Act. From the return of 100% bonus depreciation and expanded Section 179 expensing to new R&D expensing rules and the phasing out of clean energy credits, Karen explains what these updates mean for your business in 2025 and beyond. If you’re a business owner or financial decision-maker, tune in for practical insights on planning, compliance and maximizing the bill’s benefits.

Transcript:

My name is Karen Snodgrass. I’m a tax partner with Cray Kaiser Ltd. As you know, the president signed the one big beautiful bill over the July 4th weekend. There’s a lot of change here that we’re going to unpack, and really today we’re going to focus on the business provisions. And these are going to affect your taxes in both 2025 and over the next several years.

If you’re a business owner, you’re used to the benefits of bonus depreciation, but you’re also used to the reduced benefits we’ve had over the years. Before this bill, 2025 bonus depreciation was down to 40%. A significant win for business owners is we’re now back to 100% bonus depreciation. This is only effective on purchases made after January 19th of 2025. It’s a weird cutoff date, but purchases before January 20th, they’re still required to use 40% bonus. Even better news is this 100% bonus depreciation does not sunset, meaning future administrations may change this, but for now it’s a permanent provision that won’t be reduced below that 100%.

A significant change in the law related to bonus depreciation is a new class of qualified assets. Real property being referred to as “qualified production property” is now eligible for bonus depreciation. So, what does this mean? Think of a building that is used in manufacturing or a production process. The property related to the actual production would qualify, not necessarily attached offices or other non-production space. These properties must have a construction period between January 20, 2025 and the end of 2029. Given this is an entirely new provision, we’re going to need to wait for more clarity on this. We expect regulations will be issued to address a number of questions we have. It seems a cost segregation study will be needed if a client wishes to claim this deduction. With such a study, an architect or an engineer is going to be able to look at the building and parse out exactly what will qualify for the 100% bonus depreciation.

Another pro-tax provision related to capital acquisitions is expanded section 179. Like bonus depreciation, Section 179 allows for the immediate write-off of qualified property. The 2025 limitation on Section 179 is now increased to a whopping $2 and 1/2 million in property that can be expensed. As long as certain income qualifications are met. The phaseouton eligibility applies after four million has been acquired in any given year and they’re going to keep adjusting these limitations for inflation going forward. Once again these are provisions that look to be permanent.

But let’s talk about why someone may claim Section 179 versus bonus depreciation. I mean really they’re both immediate write-offs, what’s the difference, right? It’s important to note that some states don’t follow bonus depreciation, but they do conform to federal Section 179. So depending on the state, it may be more beneficial to claim Section 179. We recommend working with your tax advisor to ensure the maximum tax benefit for your cut-backs costs.

Our top question so far is about one of the few retroactive changes in the bill. Businesses that perform a significant amount of research and development activities, or R&D, were surprised with somewhat recent legislation that curtailed the deduction of these costs. This started in tax years beginning after December 31, 2021. Taxpayers were required to capitalize and amortize R&D costs over a five-year period for domestic costs and over an even longer 15-year period for any costs that were incurred internationally. That was quite the change from the immediate expensing that we enjoyed in prior years. What we found was that the benefit of the R&D credit was not sufficient to cover the additional tax due from not being able to write off these costs. The popular argument was that this policy actually harmed American taxpayers. The new bill actually creates a whole new code section, section 174A, which partially restores expensing of R&D costs. Domestic research costs are now fully deductible, but foreign R&D costs are still being advertised over 15 years. And this applies to tax years beginning after December 2024. But here, we need to talk through two different tax treatments based on your company’s size. Let’s start with what the IRS calls small taxpayers. These businesses have average annual gross receipts of $31 million or less. The bill actually allows these businesses to retroactively apply full R&D expensing for domestic costs to tax years beginning after December 31st, 2021, by amending prior returns. Or they can elect to continue to amortize these costs in 2024 and then expense the remaining domestic costs that haven’t been written off in either 2025 or 2026.

We’ll dive deeper into that in a little bit with an example. But let’s not forget about the larger businesses. Unfortunately, they don’t get the same retroactive treatment. However, they can elect to accelerate the remaining amortization over one or two tax years beginning in 2025. But let’s go back to the small taxpayers. And here we’ve actually walked through a case study with a client of ours that was considering do they use the retroactive R&D treatment or not. So what we did was we did our own study. What we found was that in 2022 we’ll definitely be able to decrease taxable income if we choose to immediately expense R&D. Now, in order to do that, the business is going to have to amend their 2022 return and, because this is an S-Corporation, all the owners are going to have to amend their 2022 returns as well. There’s a compliance cost associated with this and that needs to be measured against the refunds to be received. Fast forward to 2023. While, again, we’re going to be able to claim all those 2023 costs immediately. We actually lost the benefit of the amortization of the 2022 costs. And in this client’s case, 2023 taxable income is actually increased by applying these rules retroactively and the same holds true for 2024. Although it’s not the tax result we wanted in 2023 and 2024, once you make the election to apply the retroactive treatment, you still need to go through the process of amending all the business and owner returns for 2022 through 2024. So we had to weigh the benefit of the 2022 refund against additional tax in 2023 and 2024. Also, you have to think about the compliance costs. What’s it going to cost to amend all of these tax returns? And finally, let’s keep in mind the IRS has cut their staff by roughly 30%. We’re all used to waiting for our refunds, and that’s not going to change. We came to the conclusion with our client, we are not going to amend the prior returns. We’re not going to use the retroactive treatment even though it meant a better result in one tax year. Instead, we’re going to utilize the remaining deductions into ‘25. What we’ll be able to do is get cash flow benefit immediately. We’re going to reduce their quarterly tax payments due in September of this year. It’s a thoughtful easy button approach in this case.

We should talk through some other changes that will affect businesses. Clean energy credits appear to be on the chopping block. The bill eliminated some of these credits, too much to get into detail and to hear. But the president has already said he’s going to revisit this and perhaps further reduce the availability of clean energy credits.

Businesses that have had limitations on their deduction of business interest got a win under this bill. The computation of allowable expense has been expanded in a pro-tax pair away. And really, these are just the highlights. What are we recommending you do now? We know there’s a lot of clarifications needed on the bill. These are going to come in the form of regulations that may not be issued for months. There’s also rumbles of corrections to this bill. But at least we can see the direction of the congressional intent. While we usually start looking at year-end tax planning in the fourth quarter, now is really the time to talk with your advisor about the impacts of the bill on your specific situation. In particular, you may be able to reduce planned payments for the remainder of 2025, given the benefits you’ll see in this bill. As always, you can contact your advisor, Cray Kaiser, and we’ll be happy to walk through the situation and how it may affect you.