Key Tax Changes Coming from the One Big Beautiful Bill Act

Main Takeaways

• The OBBBA permanently extends many 2017 tax cuts for individuals, businesses, and international operations, effectively preventing scheduled tax increases.
• Businesses stand to benefit from significant tax relief and investment incentives, including 100% bonus depreciation, a higher Section 179 expensing cap, a new qualified production property (QPP) depreciation allowance, and the immediate deduction of domestic research and experimentation (R&E) costs.
• The OBBBA significantly alters clean energy tax incentives, accelerating phase-outs for many key credits originally established by the Inflation Reduction Act (IRA).
• Beyond businesses, the bill also impacts individuals through permanent tax rate extensions and increased estate/gift tax exemptions, while introducing changes for tax-exempt organizations, including an expanded excise tax on executive compensation.
• Individuals will see a temporary increase in the state and local tax (SALT) deduction cap, and qualified small business stock (QSBS) benefits are substantially enhanced.

The recently enacted H.R. 1, One Big Beautiful Bill Act (OBBBA), is set to make major changes for businesses, introducing a host of tax provisions and regulatory adjustments designed to stimulate economic growth and incentivize domestic investment. The bill makes permanent many of the individual, business, and international tax cuts that were part of the 2017 Tax Cuts and Jobs Act (TCJA) but were set to expire after 2025. This article offers a breakdown of the key provisions.

OBBBA’s Business Tax Provisions

A key part of the OBBBA is the permanent extension of many of the 2017 tax cuts, preventing a scheduled tax increase on millions of businesses. Additionally, there are many other provisions within the OBBBA related to enhanced deductions. Some of the most notable include:

• Increased Section 179 Expensing Cap: The cap for Section 179 small business expenses is significantly increased to $2.5 million, allowing more small businesses to fully expense qualifying property purchases in the first year. The phaseout threshold was similarly increased to $4 million.
• 100% Bonus Depreciation: The OBBBA permanently reinstates 100% first-year bonus depreciation for qualified property acquired and placed in service after January 19, 2025. This allows businesses to immediately write off the full cost of eligible property and short-lived investments, providing a powerful incentive for capital expenditures.
• Qualified Production Property (QPP) Depreciation: A new 100% depreciation allowance is added for qualified production property (manufacturing property) placed in service after January 19, 2025 through 2030. This targets new construction and certain existing non-residential real estate used for manufacturing in the U.S.
• Immediate Deduction for Domestic R&E Costs: For domestic research and experimental (R&E) expenses incurred after December 31, 2024, businesses can now elect to immediately deduct these costs in the year incurred, reversing a prior requirement to amortize these costs over five years. This change aims to significantly boost domestic innovation as the 15 years amortization requirement remains in place for any foreign R&E costs. It also adds the ability for small businesses to apply this change retroactively. All other taxpayers have the option to accelerate any remaining unamortized Section 174 deductions. 
• Relaxed Business Interest Limitation (Section 163(j)): The limitation on deductibility of business interest is relaxed, reverting to the more favorable 30% of EBITDA (earnings before interest, taxes, depreciation, and amortization) for tax years beginning after 2024. This change provides greater flexibility for businesses to deduct interest expenses.
• Expanded Small Business Deduction (Section 199A): The popular 20% qualified business income (QBI) deduction, previously set to expire, is made permanent and expands the deduction phase-in range.
• Enhanced QSBS Benefits (Section 1202): The bill expands and enhances the benefits for qualified small business stock (QSBS). It increases the gross asset value cap for QSBS issuers from $50 million to $75 million and raises the dollar-based limit on excluded gain to $15 million (both indexed for inflation). It also introduces tiered gain exclusions for shorter holding periods, providing 50% exclusion for stock held over three years and 75% for over four years, with 100% for five years or more.
• Charitable Deduction for Corporations: The OBBBA introduces a 1% floor on charitable deductions, meaning corporations can only deduct contributions if the amount exceeds 1% of their taxable income. The existing 10% ceiling on corporate charitable deductions remains in place. Disallowed deductions can be carried forward for up to five years.

Business Related Tax Credits

The OBBBA significantly changes the scope of various tax credits, particularly those related to clean energy. The more relevant ones are:

• Employee Retention Credit (ERC) Scrutiny: The bill includes new restrictions on ERC claims and changes to the statute of limitations, giving the IRS more time to review past claims.
• Paid Family and Medical Leave Credit: The bill makes the employer credit for paid Family and Medical Leave Act (FMLA) leave permanent and further enhances the credit to allow employers to claim credits for paid FMLA leave insurance premiums or wages. 
• Clean Energy Credit Changes: The OBBBA phases out clean energy incentives, including the Clean Electricity Production Tax Credit (Section 45Y) and the Clean Electricity Investment Tax Credit (Section 48E). Eligibility for both credits will terminate for wind and solar facilities placed in service after December 31, 2027 and all other facilities after 2032.

International Tax Framework Under OBBBA

The OBBBA introduces modifications to the U.S. international tax framework:

• GILTI and FDII Adjustments: The bill permanently decreases the deduction for global intangible low-taxed income (GILTI) to 40% (renamed net controlled foreign corporation (CFC) tested income or NCTI) and for foreign-derived intangible income (FDII) to 33.34% (renamed foreign-derived deduction eligible income or FDDEI).
• Foreign Tax Credits (FTCs): Deemed paid credits under Section 960 are increased from 80% to 90%, with related adjustments to disallow FTCs on a portion of foreign taxes tied to certain distributions.
• Base Erosion Anti-Abuse Tax (BEAT): The BEAT rate is permanently changed to 10.5%, an increase from 10% currently.

OBBBA for Non-Profits and Tax-Exempt Organizations

The OBBBA impact on tax exempt organizations consists primarily of changes to excise taxes, and indirect funding implications through modification of charitable contribution rules for certain taxpayers:

• Excise Tax on Excess Compensation: Tax-exempt organizations pay a 21% excise tax on compensation exceeding $1 million, and on certain large severance payments (often referred to as golden parachute payments), paid to covered employees. Previously only the top five highest compensated employees, and those who previously had been such an employee in a preceding year, were considered covered employees. Under the OBBBA, the definition of covered employee is expanded such that all current and certain former employees receiving such compensation would trigger the tax.
• Excise Tax on Colleges and Universities: The net investment income tax for certain private colleges and universities increases from a flat rate of 1.4% to a graduated rate structure, based on student-adjusted endowment, with a maximum tax rate of 8%. 
• Funding for 501(c)(3) Organizations: These tax-exempt organizations may see fluctuations in contribution revenues as corporate and individual taxpayers adjust to new charitable deduction rules. These updates are discussed in the business provisions section above, and the additional OBBBA tax changes, below.

Earlier versions of the bill contained a number of provisions that were modified or removed before becoming law.

Additional OBBBA Tax Changes

While some are outside of the corporate tax scope, a few other changes worth mentioning are listed below:

• Opportunity Zones (OZs): The OBBBA permanently renews the opportunity zone regime, allowing for deferral and potential elimination of taxable gain when proceeds are reinvested in designated OZs. It also introduces a rural OZ program with a larger permanent exclusion.
• Individual Income Tax Rates: The bill makes permanent the individual income tax rates established by the TCJA, including the current top rate of 37%. This affects a broad spectrum of taxpayers.
• State and Local Tax (SALT) Deduction Cap Increase: The SALT provision increases the individual limit from $10,000 to $40,000 for 2025. The limitation is set to gradually decrease until reverting back to the $10,000 limit in 2030. Additionally, there is no SALT limitation for pass-through entities.
• Estate and Gift Tax Exemption: The bill permanently increases the unified credit and generation-skipping transfer tax (GSTT) exemption threshold from $10 million to $15 million per individual, indexed for inflation.
• Individual’s Charitable Contributions: Aggregate charitable contributions will need to exceed .5% of the taxpayer’s contribution base before they may be deducted by taxpayers who itemize.  The calculation and carryforward procedures for certain gifts is updated as well. Individual taxpayers who do not itemize their deductions may now deduct up to $1,000 in charitable contributions ($2,000 for married taxpayers, filing jointly). There is also a tax credit of $1,700 available to individuals for grants made to qualifying scholarship granting organizations.

Questions? Johnson Lambert Can Offer Tailored Guidance

The One Big Beautiful Bill Act presents a comprehensive package of corporate tax relief and incentives that is sure to have far reaching impacts across all industries, including insurance entities and nonprofit organizations. Johnson Lambert will continue to delve into the OBBBA tax implications and provide updates as more guidance is released. Businesses are advised to review the specific provisions carefully and consult with the Johnson Lambert tax team to understand the full implications for their operations.