Congress Passes One Big Beautiful Bill – President to Sign on July 4

Election for Retroactive Application By Certain Small Businesses: Small Business Taxpayers can elect to apply the ability to immediately expense Section 174 expenditures starting for taxable years after December 31, 2021, no later than 1 year after the date of enactment. This would provide that an amended return be filed for 2022, and 2023. However, to the extent the 2024 taxable year has not been filed, 174 domestic R&E can be immediately deducted. If a 2024 tax return has already been filed, then an amendment would be required.

In order to be a small business taxpayer for the 2025 taxable year, a taxpayer’s average annual gross receipts for the prior three taxable years must be less than $31 million. Aggregation rules under 52(a), 52(b) and 414(0) will apply.

Large Business Election: A taxpayer with domestic R&E expenditures paid by a large business after December 31, 2021 and before January 1, 2025, can elect to deduct any remaining unamortized amounts starting in the first taxable year beginning after December 31, 2024 or deduct such remaining amounts over a 2-year taxable period beginning with the first taxable year after December 31, 2024.

For C corporations with a group election, the Bill no longer allows Subpart F income, Section 956 inclusions, Global Intangible Low-Tax Income (“GILTI”), or Section 78 Gross-up amounts for deemed paid foreign tax credits to be includible in adjusted taxable income.

The final Bill clearly states that the 163(j) interest expense capitalization rules apply to both business interest expense and business interest that was capitalized under an interest capitalization provision. Therefore, as an example, the Bill would require both business interest capitalized in inventory, as well as business interest that is an ordinary deduction, to be combined when assessing the interest expense limitation rules.

A taxpayer can elect to apply the 40% bonus depreciation instead of the 100% rate, but this election is only applicable for the first taxable year ending after January 19, 2025.

Applies to property placed in service after the date of enactment of the Bill, but before January 1, 2031.

In addition, the current phase-out of SSTB’s 199A deduction when taxable income exceeds $100,000 for married filing joint taxpayers ($50,000 for all others) was increased to $150,000 for married filing joint taxpayers ($75,000 for all others).

Effective date for taxable years beginning after December 31, 2025.

Effective for taxable years beginning after December 31, 2024.

Beginning in 2026, increases the deduction to $40,400 per year (50% of that amount for married filing separately), subject to the reduction above, with income limitations of $505,000 (50% of that amount for married filing separately).  Amounts continued to be adjusted until the the state and local tax cap will revert to $10,000 in the 2029 taxable year. 

Limit the criteria for low-income communities, only allowing areas with a statewide median income of 70% or less (previously 80% or less) to be eligible for OZ designation. At least 25% of designated communities must be low-income communities. 

Requires that of the low-income communities identified, at least one-third of low-income designated zones be in rural areas. 

While the original Senate bill provided for an increase in basis over a rolling 6-year period, the final Senate bill passed limits the 10% (30% in the case of a qualified rural opportunity fund) to not take effect until after the investment was held for at least 5 years. 

In addition, the final bill would require the investor to hold the investment for 30 years in order for the basis of the investment to equal the FMV of the investment, and therefore trigger no additional gain or loss.