The One Big Beautiful Bill: A Business Tax Outlook

The One Big Beautiful Bill (the “OBBB” or the “Bill”) has been approved by both chambers of Congress, and the President signed the bill on the afternoon of July 4. This DE Insight discusses key provisions of the OBBB impacting businesses, including nonprofits.

Key Tax Provisions Affecting Businesses

Opportunity Zones: Under current law, state governors could designate up to 25% of the state’s low-income communities as opportunity zones (“OZs”), where investments of capital gains rolled into qualified opportunity zone funds could be deferred or eliminated entirely if the taxpayer held their investment for at least 10 years. The latest round of designations was due to expire in 2028, but Section 70421 of the OBBB makes OZ incentives permanent, with some changes. The most significant is the change to the definition of “low-income community:” The definition of “low-income community” is narrowed to census tracts that have a poverty rate of at least 20 percent or a median family income that does not exceed 70% (formerly 80%) of the area median income. The Bill also provides enhanced benefits for investments in rural OZs. Businesses and investors that have made investments in OZs, or that have been considering investing in OZs, should pay close attention while the federal government updates eligible OZs to ensure that the desired tax benefits are still received.

Low Income Housing Credit: The OBBB changes the state “allocation ceiling,” which is the permissible amount of 9% low-income housing tax credits (“LIHTCs”) a state can allocate annually to low-income buildings in its state, as well as the private activity bond financing threshold for low-income housing eligible for the 4% credit. Under the Bill, the state allocation ceiling would increase by 12% for calendar years after 2025. Additionally, a new private activity bond-financing threshold is permanently established, which renders projects eligible for the credit if at least 25% of the project is financed by bonds, as long as at least 5% of the aggregate land and building costs are financed with private activity bonds issued after December 31, 2025. It is prudent for developers that were considering including LIHTCs as part of their sources and uses to revisit eligibility criteria and adjust their plans accordingly.

New Markets Tax Credit: The OBBB permanently extends the new markets tax credit (“NMTC”). The NMTC, which encourages private investment in eligible low-income communities by providing investors in qualified equity investments with a 39% tax credit over 7 years, was set to expire at the end of 2025. This is another great planning opportunity for businesses that want to stimulate economic development and create jobs in low-income communities, while still being able to attract equity investors on reasonable terms.

Limit on Corporate Charitable Contributions: In addition to the annual ceiling of 10% of taxable income that is applied to a corporation’s charitable contributions, the OBBB puts a floor of 1% of taxable income on the amount of charitable contributions a corporation must make to receive a deduction, effective beginning in 2026. This means that businesses should revisit their charitable giving programs to ensure that the program terms will allow compliance with the new floor to preserve tax benefits for their philanthropic activities.

Changes to Exception from PCM for Certain Residential Construction Contracts: The Bill expands the types of residential construction eligible for the exception from the percentage of completion method of accounting in Code section 460(e). This change expands the applicability of the exception widely, and developers of multi-unit residential buildings (particularly those that contain more than four units) should consider the tax opportunities that come with this expansion.

Deduction for Excess Business Losses: The OBBB makes permanent the limitation on the deduction for excess business losses of noncorporate taxpayers, which was due to expire in 2029. For taxpayers subject to this limitation, it may be time to speak with a tax professional regarding any restructuring options that will help avoid the limitations that are now permanent.

Limitation on Deduction of Business Interest: Code section 163(j) limits the deduction for business interest expense to the sum of business interest income, 30 percent of adjusted taxable income (“ATI”) of the taxpayer for the taxable year (not less than zero), and the floor plan financing interest of the taxpayer for the taxable year. The OBBB restores the exclusion from the computation of ATI for depreciation, amortization or depletion that expired at the end of 2021, and provides that the Section 163(j) limitation is calculated prior to the application of any interest capitalization provision. The bill also expands “floor plan financing” to include certain trailers and campers. Businesses, RV dealers in particular, can use this opportunity to revisit computation of their interest deduction ceiling and plan their borrowing accordingly.

MORE ANALYSIS ON THE OBBB: Renewable Energy | Estate Planning & Medicare

Application of Code Section 162(m) to Controlled Group Members: The OBBB adds an entity aggregation rule, beginning in 2026, for purposes of the disallowance of deductions by publicly held corporations and certain publicly traded partnerships for compensation in excess of $1 million paid to certain covered employees. This rule, which uses the controlled group definition applicable in other employee benefits contexts, also specifies how to allocate the $1 million deduction among controlled group members. Businesses that provide compensation packages in excess of $1 million should thoroughly review those packages and Code section 414 to confirm if any employees will be specified covered employees; otherwise, those businesses may see significant deductions disallowed beginning in 2026.

Deduction for Qualified Business Income: The OBBB makes permanent the deduction in Code section 199A for 20% of qualified business income (“QBI”) for noncorporate taxpayers. The Bill also expands the deduction limit phase-in range by increasing the $50,000 (non-joint returns) and $100,000 (joint returns) amounts to $75,000 and $150,000, respectively. This eases the impact of those limits for so-called “specified service trades or businesses” as well as for entities subject to the wage and investment limitations in Code Section 199A. The OBBB also introduces a new, inflation-adjusted, minimum deduction of $400 for taxpayers who have at least $1,000 of QBI from one or more active trades or businesses in which the taxpayer materially participates. These changes, collectively, create a more favorable tax position for some small businesses, by increasing deductions for QBI for those that qualify for these new provisions.

Bonus Depreciation: The OBBB reinstates and makes permanent 100% bonus depreciation, allowing businesses to immediately deduct the full cost of qualifying tangible property—such as machinery, equipment, and certain improvements—acquired and placed in service after January 19, 2025.

Deduction of R&E Expenditures: The Bill overturns the current requirement to amortize research and experimental expenditures over 5 years (or 15 years for foreign research). This provision allows taxpayers to fully deduct qualifying domestic research and experimental expenditures in the year incurred. Taxpayers may still elect to capitalize and amortize these costs over a 5-year period. Small business taxpayers may apply the rules retroactively to tax years beginning after December 31, 2021. All taxpayers may elect to accelerate previously capitalized and unamortized expenses over a 1-year or 2-year period beginning after December 31, 2024. This change of law will be extremely helpful for businesses in software development, among other industries, as the research and experimentation credit goes hand in hand with software development; however, these changes do not apply to certain industries, such as land acquisition and improvement and mineral exploration.

Expensing Depreciable Property: The OBBB raises the maximum allowable deduction and phase-out threshold under Code section 179 for expensing depreciable property, such as office equipment and certain vehicles. This makes it easier for small and mid-sized businesses to invest in assets without the complexity of long-term depreciation.

100% Depreciation Deduction for “Qualified Production Property”: The OBBB provides a special depreciation deduction specifically for nonresidential real property used in domestic production or manufacturing activities, the construction, reconstruction or erection of which by the taxpayer begins after January 19, 2025, and before January 1, 2029, and is placed in service after the date of enactment of the OBBB and before January 1, 2031; however, the placed in service deadline can be extended by the Treasury for up to 2 years if necessary due to acts of God. Manufacturing businesses, like steel plants and auto plants, should expect to see significant benefits. However, this deduction may also be applicable to a variety of other businesses that manufacture tangible property.

Credit for Paid Family and Medical Leave: The OBBB permanently extends the Code section 45S employer tax credit for paid family and medical leave, originally set to expire at the end of 2025. The Bill also modifies the credit to be claimed for an applicable percentage of premiums paid or incurred by an eligible employer during a taxable year for insurance policies that provide paid family and medical leave for qualifying employees, and lowers the minimum employee work requirement from 1-year to 6 months at the election of the employer.

Advanced Manufacturing Investment Credit: The OBBB raises the amount of the Code section 48D credit for advanced manufacturing from 25 percent to 35 percent beginning in 2026. This increased credit is intended to incentivize investment in domestic manufacturing of semiconductors or domestic manufacturing of the equipment used to fabricate semiconductors, which is a key component of the current administration’s agenda.

Spaceports Treated Like Airports Under Exempt Facility Bond Rule: The Bill amends the definition of “exempt facility” in Code section 142 to include spaceports, thereby allowing them to access tax-exempt private activity bond financing. Spaceports include any facility located at (or in close proximity to) any launch site or reentry site used for spacecrafts, space cargo, flight control operations or launch services and reentry services.

Modification of Excise Tax on Investment Income of Certain Private Colleges and Universities: The OBBB replaces the 1.4% excise tax in Code section 4968 on the net investment income of private colleges and universities with large endowments with a tiered system, imposing a tax of between 1.4% and 8% based on an institution’s student-adjusted endowment. This new revenue generation tool will balance out some of the tax incentives created throughout the OBBB. However, donors to private colleges and universities may want to consider whether and how to accomplish their charitable giving goals by other means.

Expanding Application of Tax on Excess Compensation Within Tax-Exempt Organizations: Beginning in 2026, the OBBB expands the Code section 4960 excise tax on compensation above $1 million paid to employees of tax-exempt organizations by striking the provision limiting the excise tax to the five highest paid employees. Nonprofits that have highly paid employees should take immediate action to review the compensation packages of their highest paid employees. There is still time to make adjustments to accommodate this change of law, while still complying with excess benefit transaction limitations and other best practices for nonprofit governance.

Expansion of Qualified Small Business Stock Exclusion: The OBBB eases requirements and expands the qualified small business stock (“QSBS”) exclusion of Code section 1202, which currently allows investors to exclude 100% of gains from the sale of qualified small business stock acquired after September 27, 2010 (QSBS acquired in earlier years is subject to different rules) and held for at least five years; the phase-in permits exclusion of 50% of gain for stock held for 3 years and 75% gain exclusion for stock held for 4 years. The Bill also would increase the lifetime exclusion for QSBS gains from a single issuer for stock acquired after enactment from $10 million to $15 million (adjusted for inflation after 2026) and raise the gross asset limit, effective for stock issued after enactment, for a corporation to qualify as a “qualified small business” from $50 million to $75 million (adjusted for inflation after 2026). This is a unique tax planning opportunity that, when coupled with trust planning and gifting strategies, will allow a significant amount of wealth to be preserved when disposing of QSBS—in some instances even far exceeding the $15 million limitation.

Increase in Threshold for Requiring Information Reporting with Respect to Certain Payees: The OBBB raises the de minimis threshold for information reporting (e.g., Forms 1099-NEC and 1099-MISC), from $600 to $2,000, effective beginning in 2026. This change, although small, may save significant time and effort for businesses that otherwise struggle to meet reporting requirements timely—and who typically file Forms 1099 late (or fail to file them at all).

Exclusion of Interest on Loans Secured by Rural or Agricultural Real Property: The Bill provides a federal income tax exclusion to certain lenders for 25% of interest income received from loans secured by qualifying rural or agricultural property, but only to the extent the loans are issued after the enactment of the Bill. The current administration has publicly announced its support for farmers and rural America. This exclusion benefits banks, state- and federally-regulated insurance companies and some other similar entities, who provide qualified loans secured by rural or agricultural land (or to tenants’ interests in the rural or agricultural land). However, this exclusion does not apply to loans that are used to refinance existing loans, if those existing loans were advanced prior to enactment of the Bill. Transactions involving loans for land used to produce agricultural products or fisheries and seafood processing should carefully consider when and how financing is received—for example, a family farm may be able to receive better terms under the Bill, but only if they pay off prior financing before borrowing new funds; similarly, if a new entity were to lease their land and have a contract to work the land, that new entity may be able to access funds at a lower interest rate due to the change of law. There are a myriad of planning opportunities that could be used to bring debt and equity investment into farmlands and fisheries throughout the United States.

Enforcement Provisions with Respect to COVID-Related Employee Retention Credits: The OBBB provides enhanced enforcement tools for the IRS to pursue improper claims of the employee retention tax credit (“ERTC”), including $1,000 penalties on so-called “COVID-ERTC promoters” for failure to comply with due diligence requirements, extension of the 20% penalty for excessive refund claims to all employment taxes, extension of the statute of limitations for IRS assessments and other adjustments related to the ERTC, and banning post-enactment refund for ERTC refund claims filed after December 31, 2024. This is part of the administration’s crackdown on waste, fraud and abuse; however, any businesses that claimed the ERTC (or assisted others in obtaining the ERTC) should be proactive about organizing documentation in case they become subject to an enforcement action.

How to Prepare for the OBBB

Like the Tax Cuts and Jobs Act in the first Trump administration, the OBBB adds many incentives for real estate investors, including in the form of enhancements to OZs, LIHTCs, the NMTC and favorable construction contract accounting, therefore providing an opportunity for developers, particularly those in low-income communities, to reevaluate their capital stack and attract more investors. The OBBB also contains numerous incentives to encourage domestic manufacturing for corporate and non-corporate taxpayers alike. The Bill, however, pairs those incentives with tighter restrictions on deductions for corporate charitable contributions and compensation paid to top executives of both for-profit and nonprofit entities, an increased tax on many university endowments, and a permanently limited deduction for excess business losses for noncorporate taxpayers. In addition, many of the favorable changes in law, especially elective ones, constitute changes in accounting method, requiring additional attention to tax compliance for the affected tax years. All businesses potentially affected by the Bill should contact their tax advisors for more information on these provisions and related planning opportunities.

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