How The New Big Beautiful Business Related Tax Bill Act Affects Businesses
100% BONUS DEPRECIATION IS BACK
Business owners can again utilize bonus depreciation for “qualified property” acquired on or after January 20, 2025. The new tax act permanently restores the 100% bonus depreciation.
“Qualified property” is defined as tangible personal property with a recovery period of 20 years or less, and also certain qualified improvement property for real estate purposes.
Also included for 100% bonus depreciation is “qualified production property” for which construction began after December 31, 2024 and which is placed in service before January 1, 2034. In general, this means nonresidential real property used in the manufacturing, production or refining of tangible personal property. Arizona Tax Advisors can help you to determine what qualifies.
PERMANENT EXPANSION OF BUSINESS INTEREST RATE DEDUCTION
In determining a taxpayer’s allowable business interest deduction, the bill reinstates a more generous definition of “adjusted taxable income” (ATI). Under the Bill, a taxpayer’s ATI is computed without regard to the deductions for depreciation, amortization, and depletion. This increases the taxpayer’s ATI and thus also increases the taxpayer’s business interest expense deduction under Section 163(j).
Under Internal Revenue Code (IRC) Section 163(j), the deduction for business interest expense is generally limited to the sum of:
- Business interest income for the taxable year,
- 30% of adjusted taxable income (ATI) for the taxable year, and
- Floor plan financing interest expense for the taxable year.
This limitation applies to most businesses, with exceptions for certain small businesses that meet the gross receipts test (average annual gross receipts of $30 million or less for tax years beginning in 2024) and certain excepted trades or businesses, such as electing real property trades or businesses.
Disallowed business interest expense can be carried forward to the next taxable year. Taxpayers subject to this limitation must file Form 8990 to calculate the amount of business interest expense deductible and the amount to carry forward.
NEW SECTION 199A QUALIFIED BUSINESS INCOME (QBI) PROVISIONS
The 20% QBI deduction for non-corporate taxpayers is now permanent. This is good news for owners of pass-through entities such as sole proprietorships, partnerships, and S-Corporations (includes LLCs which are considered disregarded entities by the IRS, so are taxed as one of the entities listed above).
The deduction percentage rate has been raised to 23% for eligible taxpayers.
Income thresholds for phasing in limitations related to W-2 wages and capital investment have been increased to $75,000 for single filers ($150,000 for joint filers). Thresholds will be adjusted for inflation starting in 2026.
A new minimum deduction of $400 has been created for taxpayers with at least $1,000 of qualified business income from active trades or businesses in which they materially participate. This will also be adjusted for inflation starting in 2026.
RESEARCH AND EXPERIMENTAL EXPENDITURES DEDUCTION RESTORED
Under the bill, beginning with tax year 2025, a taxpayer is entitled to deduct domestic R&E expenditures in the same year in which they are incurred. This reverses the five-year amortization requirement.
However, a small business taxpayer with average annual gross receipts of $31M or less will generally be permitted to apply the rule retroactively to 2022 and all subsequent years. This allows eligible small businesses to amend prior tax returns to claim full deductions for R&E expenses previously amortized.
And, all taxpayers that made domestic R&E expenditures in years 2022-2024 will be permitted to elect to accelerate the remaining deductions for those expenditures over a one- or two-year period beginning in 2025.
For research conducted outside the United States, taxpayers must continue to capitalize and amortize over a 15-year period.
EXCESS BUSINESS LOSSES (EBL)
The bill extends the special limitation on the deductibility of excess business losses of non-corporate taxpayers. This limitation was set to expire after 2028. The EBL limitation restricts the amount of business losses that noncorporate taxpayers (like individuals and trusts) can use to offset non-business income, such as wages or investment income.
An EBL happens when a taxpayer’s total deductions from all trades or businesses exceed their gross income or gains from those trades or businesses, plus a threshold amount. For tax year 2025, threshold amounts are:
- $313,000 for single filers
- $626,000 for joint filers
Any disallowed excess business loss in a particular year is treated as a net operating loss (NOL) carryforward subject to the NOL rules.
OPPORTUNITY ZONES
The existing favorable treatment of gains from investments in qualified opportunity zones is now permanent. For investments made after December 31, 2026, capital gains can be deferred for five years from the investment date, replacing the previous fixed deferral period. Additionally, a 10% step-up in basis is granted after five years.
A category has been added – Qualified Rural Opportunity Funds (QROFs). Investments in QROFs receive a 30% basis step-up after five years, and the substantial improvement requirement for properties is reduced from 100% to 50%.
Beginning July 1, 2026, governors are required to nominate new OZs every ten years, with the first new designations effective January 1, 2027.
The bill mandates annual reporting for QOFs and QROFs which includes detailed information on investments, assets, and employment impacts within the zones.
EMPLOYEE RETENTION CREDITS (ERCs)
The IRS is not allowed to issue a refund with respect to an ERC claim made for the third quarter of 2021 unless the taxpayer filed the claim on or before Jan 31, 2024.
For claims related to the third and fourth quarters of 2021, the statute of limitations has been extended to April 15, 2028. This extended period gives the IRS more time during which they may challenge an ERC refund claim. These claims face increased scrutiny and potential denial.
Additionally, the bill imposes stricter penalties on promoters of fraudulent ERC claims. Also, a 20% penalty applies to erroneous refunds unless the taxpayer can demonstrate reasonable cause.
It is important to maintain thorough documentation to substantiate ERC claims in case of future audits.
CHARITABLE CONTRIBUTION DEDUCTIONS
For C-corporations, charitable contribution deductions are allowed when total contributions exceed 1% of the corporation’s modified taxable income, and do not exceed the 10% cap.
EXEMPT ORGANIZATIONS
Excess compensation tax will no longer be limited to the organizations five most highly compensated current and former employees in a tax year. Beginning after Dec. 31, 2025, any employee of organization that is paid more than $1 million can result in tax being imposed on that organization.
For pass-through entities such as sole proprietorships, partnerships and S-Corps, the contribution amounts pass-through to the owner/members/shareholders and the individual tax return rules apply. (LLCs are considered disregarded entities by the IRS and are taxed as one of these entities.)