David McGuire is a leading expert on cost segregation, fixed assets and depreciation law and a co-founder of McGuire Sponsel.
For many businesses, tax planning for 2025 could be the most important in recent memory. The passage of the One Big Beautiful Bill Act (OBBBA) reduced tax rates for some, restored bonus depreciation at 100% and reinstated full expensing for R&D, among other incentives. While these incentives offer significant potential tax benefits to companies, businesses must plan effectively to maximize them.
Understanding how to balance these incentives requires understanding their history. Looking back at 2017, the Tax Cuts and Jobs Act (TCJA) lowered tax rates for some, instituted 100% bonus depreciation and introduced many other business incentives. In 2017, Republicans held only a slim majority in the Senate. To pass the TCJA, they used a tool known as reconciliation, which allowed the law to pass by a simple majority. Reconciliation has a significant drawback in that it requires adherence to the “Byrd Rule,” a requirement of which is that the bill cannot increase the deficit for a fiscal year beyond the “budget window.”
With the TCJA in particular, the bill was too expensive to pass the Byrd Rule without creating some expiring provisions. This included individual tax rate cuts, a reduction in bonus depreciation from 100% and other changes, including adjustments to the amount of business interest that could be expensed in a given year. These provisions alone were not enough to meet the bill’s budgetary requirements, so additional changes to tax law were needed. The main change enacted involved Section 174, Research and Experimental Expenditures (R&E). Under Section 13206 of the TCJA, the bill required that starting in 2022, R&E expenditures would need to be capitalized and amortized over five years.
At the same time, bonus depreciation began to be leveraged down in 2023. As mentioned, the TCJA had included 100% bonus depreciation, which allows businesses to write off 100% of certain purchases in the first year. Starting in 2023, this deduction was reduced by 20% per year, meaning that the deduction was limited to 80% of the acquisition in 2023, 60% in 2024 and 40% in 2025. The combination of the R&D amortization requirements and the leveraging down of bonus depreciation increased tax rates for many businesses in 2022, 2023 and 2024.
This brings us to the OBBBA passed in early July of this year. This keystone bill included, among other things, permanent renewal of 100% bonus depreciation for assets acquired after January 19, 2025, restoration of full expensing of Section 174 costs and a way for businesses to pull forward unamortized 174 expenses into the next tax year. These were all welcome changes, allowing businesses to write off more of their business expenses moving forward. For some companies, these deductions may even outweigh their tax liability.
Take the 174 change, which allows businesses to fully expense their R&D. The new law allows small businesses to pull forward any unamortized costs into their 2025 return, or spread them over 2025 and 2026. In addition, small taxpayers with revenue under $31 million can choose to amend 2022, 2023 and 2024 to enact this change. For purposes of this discussion, we will concentrate on the methodology of pulling unamortized costs into 2025.
Take a business with $1 million in 174 expenditures in each of 2022, 2023 and 2024, for a total of $3 million. Under the old rules, they would have received a deduction of $100,000 in 2022, $300,000 in 2023 and $500,000 in 2024, for a total of $900,000. This means they have approximately $2.1 million in unamortized 174 expenditures that can be pulled into the 2025 return, spread out between 2025 and 2026, or the company can continue their amortization schedule.
At the same time, the business will receive 100% expensing for business assets under Section 168(k). Due to the transition rules under the new law, the company could either use the 100% bonus or elect under 168(k)(10)(A) to use a 40% bonus in 2025. For a company that acquires $1 million in equipment with a five-year depreciable life, they can either deduct $1 million by selecting a 100% bonus, $520,000 by electing a 40% bonus and depreciating the remaining amount over five years or $200,000 by electing out of a bonus.
Now, why would a company choose to limit deductions? For pass-through entities, it would be to take more deductions against the top marginal tax brackets. If the example business above had $2 million in taxable income before the 174 amortization pull forward, and the $1 million in bonus depreciation, taking the full amount of the deductions would put them into a $1.1 million loss ($2.1 million in 174 pull forwards, and $1 million in bonus depreciation). The business would not lose that deduction, but it would get carried forward into future years.
However, some of those deductions would be coming against lower marginal tax rates. With the top marginal tax rate of 37% and the lowest marginal tax rate of 10%, this can make a massive difference in the value of a deduction. For this entity, they could choose to spread the trailing 174 amortization over two years and elect a 40% bonus. This small change would move the $1.1 million tax loss to a $430,000 in taxable income ($1,050,000 in 174 amortization plus $520,000 in bonus). Assuming they are married filing jointly, this would help ensure they take the majority of their deductions at higher marginal tax rates.
Coupling this with other changes in the OBBBA, like the new deduction for building manufacturing buildings (168(n)), the changes to the deductibility of interest (163(j)) and other changes, it is critical that businesses and tax preparers take the time to plan around the 2025 and 2026 tax returns. While the new tax law can reduce taxes for businesses in many cases, not effectively planning can leave significant money on the table.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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