Navigating income tax reform requires not only an understanding of new tax code provisions but also a strong grasp of the ever-evolving, complex regulatory landscape. Recent legislative changes, specifically the 2025 One Big Beautiful Bill Act, commonly referred to as the OBBBA or OB3, affect the amount or, in some cases, the timing of tax deductions, many of which are taxpayer-friendly. For businesses, these changes require a comprehensive evaluation of the impacts under ASC 740, the U.S. GAAP accounting standard for income taxes. This means companies must analyze how the new or extended provisions will affect their tax strategies and their financial statements.
The OBBBA includes several changes applicable to businesses, including what we’re calling the “Big Three”: bonus depreciation, domestic research and experimental (R&E) expenditures and business interest expense limitations. Additionally, the OBBBA makes changes to the taxation of non-U.S. earnings. For financial reporting purposes under U.S. GAAP, companies need to determine the impact of the new tax law in the periods that include the enactment date of July 4, 2025 (ASC 740-10-50-22). For calendar year-end companies reporting interim financial results, this will be included in the upcoming third-quarter financials for 2025, and for certain items in 2026. Companies with a fiscal year ending after the date of enactment, for example, those with a year-end of July 31, 2025, will also need to consider the impacts of the OBBBA in their annual financial statements.
Key changes to bonus depreciation, interest expense limitations and domestic R&E expenses may take effect in 2025, depending on the taxpayer’s year-end. Others related to international taxes are generally effective for tax years beginning after December 31, 2025.
Major Changes from the OBBBA
R&E Expenditures
The OBBBA enacted Internal Revenue Code (“IRC”) Section (“§”) 174A, which allows for domestic R&E to immediately be deductible for taxable years beginning after December 31, 2024. This is a significant change from IRC §174, which required domestic R&E to be capitalized over a five-year period for taxable years beginning after December 31, 2021. Based on the OBBBA modifications made to IRC §174, §174A and §59(e), taxpayers can now choose to:
- Immediately deduct domestic R&E expenditure for taxable years beginning after December 31, 2024.
- Elect to capitalize domestic R&E expenditures and be allowed an amortization deduction of such expenditures ratably over a period of not less than 60 months beginning with the month in which the taxpayer first realizes benefits from such expenditures.
- Elect to capitalize R&E expenditures and deduct the expenditure ratably over 10 years.
It is important to note that the requirement to capitalize foreign R&E under IRC §174 and amortize the costs over 15 years remains.
As part of the transition relief, the OBBBA allows for taxpayers to deduct any remaining unamortized R&E amounts incurred in taxable years after December 31, 2021, and before January 1, 2025, in the tax year ending December 31, 2025, taxable year (for calendar year taxpayers) or deduct the remaining unamortized amount ratably over December 31, 2025, and December 31, 2026 (for calendar year taxpayers). This is an election by the taxpayer, and the taxpayer can instead choose to allow the domestic R&E capitalized amounts incurred in taxable years after December 31, 2021, and before January 1, 2025, to continue being amortized over the remaining five-year amortization period required under IRC §174.
Disallowed Interest Expense
The OBBBA restored the previous definition before December 31, 2021, of adjusted taxable income under IRC Sec. 163(j) to allow depreciation, amortization and depletion to be added back to taxable income before applying the 30% interest expense limitation. The OBBBA permanently restored the use of EBITDA.
In addition, under the OBBBA, a new tax law was added stating that the interest expense limitation rules under IRC §163(j) must be applied to both capitalized interest and interest that is deducted. For example, business interest expense that may have been capitalized under 263A or 266 must be included when assessing the interest expense limitation. This provision is effective for tax years beginning after December 31, 2025.
Restoring 100% Bonus Depreciation
The OBBBA modified bonus depreciation for qualified assets placed in service on or after January 20, 2025, to provide a 100% deduction. A transitional election permits taxpayers to apply 40% or 60% bonus depreciation on certain property placed in service after January 19, 2025. The changes also include a new category, Qualified Production Property (QPP), which is eligible for the 100% bonus depreciation.
U.S. International Taxes
The OBBBA redefined the global intangible low-taxed income (GILTI) and foreign-derived intangible income (FDII), specifically renaming them as net CFC-tested income (NCTI) and foreign-derived deduction-eligible income (FDDEI). These changes were discussed in greater detail in a previous article on the OBBBA’s impact on international tax provisions.
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Tax Impacts of the OBBBA
- Impacts on the current payable or receivable: ASC 740-270-25-5 provides that the effect of tax law changes on the current income tax payable or receivable should be reflected in the estimated annual effective tax rate (EAETR) no earlier than the period of enactment. Consideration of the receivable is also relevant to small business taxpayers, given the ability to amend prior-year tax returns to deduct R&E expenditures.
- Impacts on deferred taxes: Entities should record the effect on beginning deferred taxes as of the enactment date as a discrete item in the period of enactment. Given the OBBBA’s enactment date in July, calendar-year entities should consider adjustments required for opening deferred tax balances, which may be relevant to taxpayers amending their tax returns.
- Valuation allowance (VA) adjustments: Entities with a valuation allowance are required to consider the guidance under ASC 740-270-25-7, which provides that a change in judgment regarding sources of income related to future years should be reflected as a discrete item. Attention should be given to the VA assessment due to its impacts on projected taxable income, which supports tax attribute utilization and the scheduling of deferred taxes.
- Impacts to GILTI and FDII: Taxpayers were provided a one-time election to recognize deferred taxes impacting GILTI. The majority of companies did not make this election. In addition, FDII is generally viewed as a special deduction. As a result, both GILTI (now referred to as NCTI) and FDII (now FDEI) are typically treated as period costs. Companies should therefore carefully consider the timing of their impact when planning. Impacts to state and local taxes: Taxpayers need to consider all of these impacts on state and local taxes. Certain states have rolling conformity, while others have a fixed-date conformity. Therefore, taxpayers should not assume that states that adopted changes related to the Tax Cuts and Jobs Act necessarily adopt changes enacted by the OBBBA.
Impacts to disclosure: The tax effects of the law changes should be disclosed in its financial statements beginning with the third quarter results for calendar year-end filers.
Next Steps for Businesses Under the OBBBA
As businesses digest the implications of the OBBBA, the next step is to take a proactive approach to tax planning. Companies should begin by assessing the timing and impact of key provisions, especially the “Big Three,” on their current and future reporting periods. Withum’s experienced team is ready to assist with both income tax accounting and advisory services, including multi-year modeling to leverage the OBBBA and position your business for strength.