Senate Bill Provides Additional Favorable Tax Treatment For Three Main Business Provisions

The Senate Finance Committee released its markup of the One Big Beautiful Bill on June 17, 2025, which includes significant changes to state and local income tax deductions, various international provisions and clean energy credits. However, three provisions regarding bonus depreciation, interest expense limitation rules and domestic research and experimental expenditures are similar to the House bill and generally expanded to be more favorable to businesses under the Senate. This could be an indication that these three provisions will remain throughout negotiations between the Senate and the House before the bill goes to the president’s desk.

Like the House bill, the Senate proposed that 100% bonus depreciation be reinstated. The Senate clarifies that property allowed must be placed in service on or after January 19, 2025 (versus the House bill requiring a placed-in-service date after January 19). Both the House and the Senate also allow 100% bonus depreciation for specified plants planted or grafted on or after January 19, 2025.

The Senate bill also provides that the taxpayer can make an election to apply the 100% bonus depreciation instead of applying 40% for the 2025 calendar year. In other words, a taxpayer can choose to apply the 40% applicable rate in the 2025 calendar year, but the reduced percentage would only be applicable for the first taxable year ending after January 19, 2025.

While the House bill only provided 100% bonus depreciation to occur through January 1, 2030 (with the exception of an additional year for property with longer production periods or certain aircraft), the Senate bill provides that 100% bonus depreciation be made permanent.

Note: While taxpayers prefer tax law provisions to be made permanent, over the past decade, federal tax reform has increasingly become political, and there is still a risk of changing tax law with a new administration.

Both the Senate and the House bills provide for immediate expensing of domestic research or experimental (“R&E”) expenditures for R&E amounts paid or incurred in taxable years beginning after December 31, 2024, as opposed to the current law that requires domestic R&E to be capitalized over a five-year period. However, the Senate bill provides that this law is made permanent, whereas the House bill only allows domestic R&E immediate expensing for expenditures paid or incurred through January 1, 2030. In addition, both the House and the Senate bills provide that a taxpayer can make an election to amortize R&E expenditures over a 60-month period if timely elected and maintained over all future years, unless a method of accounting is filed and approved by the Secretary.

A significant Senate deviation from the House bill is the ability to expense previously capitalized R&E expenditures that were paid or incurred after December 31, 2021, and before December 31, 2024.

Small Business Taxpayer: If a taxpayer’s average annual gross receipts for the prior three taxable years is less than $31 million, any capitalized amounts related to domestic R&E expenditures can be immediately expensed by filing an amended tax return or filing a method of accounting change for any remaining capitalized amount as of December 31, 2024, to be deducted on the 2025 federal tax return. The decision to amend versus recognizing the deduction through a method change on a 2025 tax return would be influenced by whether or not taxpayers want to wait until they file their 2025 tax return (i.e. C corporation 2025 calendar year tax returns are due April 15, 2026, or if properly extended October 15, 2026) or if they would prefer to amend their returns to accelerate the cash refund into the 2025 taxable year.

Example: A C corporation has gross receipts of $3,000,000 for the 2022 taxable year, $5,000,000 for the 2023 taxable year, and $5,500,000 for the 2024 taxable year. As the prior three-year average of gross receipts is only $4.5 million, they will be deemed a small business taxpayer for the 2025 taxable year.

The C Corporation capitalized $1,000,000 per year in 2022, 2023, and 2024 in relation to domestic R&E over a 5-year period. The remaining uncapitalized balance as of December 31, 2024, was $2,100,000. The taxpayer can choose whether to include the $2,100,000 as a deduction when filing their 2025 federal income tax return or choose to amend the 2022, 2023, and 2024 federal tax returns to immediately deduct the entire $1,000,000 that was incurred each year.

Note: While cash optimization is important when small business taxpayers’ debate whether to amend prior year tax returns to reflect 174 R&E expenditures as fully deductible or take the remaining 174 domestic R&E capitalized balance as a deduction in the 2025 taxable year, Section 382 limitations should be evaluated. A proper understanding of how the timing of the deduction will impact losses in the various years and the 382 limitation should be reviewed before making a final decision.

In addition, as the Senate bill is currently written, if a taxpayer amends a tax return within a one-year period after the date of enactment they will be deemed as making a timely filed election under 280C and be allowed to offset any R&D credit by 21% of the credit as opposed to adjusting federal deductions.

Large Business Taxpayers: If a taxpayer is not considered a small business, they are only allowed to deduct capitalized domestic R&E expenditures incurred between December 31, 2021, and December 31, 2024, which remain unamortized as of December 31, 2024, on a go-forward basis. The ability to amend prior-year returns is not available. The Senate bill provides that the capitalized 174 R&E amounts remaining as of December 31, 2024, can be deducted either:

The ability to deduct unamortized domestic R&E expenditures as of December 31, 2024, is made through an automatic change in method of accounting.

Note: Neither the House nor the Senate bill allows for the immediate expensing of foreign R&E expenditures. Instead, foreign R&E expenditures are still required to be capitalized and amortized over 15 years, beginning with the midpoint of the taxable year in which the taxpayer pays or incurs the expenditure. In addition, foreign R&E capitalized assets will continue to be amortized, with no immediate deduction allowed when the asset is disposed of, retired or abandoned. The Senate bill does clarify that an immediate deduction is not allowed in relation to a basis reduction or a reduction in the amount realized upon sale.

Interest paid or accrued by a business is generally deductible in the computation of taxable income, but is subject to several limitations. The deduction for business interest expense includes a limitation of:

Under the current law, adjusted taxable income is calculated without the ability to add back depreciation, amortization or depletion. The Senate and the House bills allow for adjusted taxable income to include depreciation, amortization or depletion, often referred to as EBITDA. The House bill provided that the use of EBITDA only occurs for taxable years after December 31, 2024, and before January 1, 2030. The Senate bill provides the use of EBITDA for determining an interest expense limitation be made permanent.

Even though the Senate bill provides for a favorable adjustment in allowing adjusted taxable income to be based on EBITDA, it decreases EBITA for C corporations who have made a CFC Group Election. For C corporations with a group election, the Senate 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 Senate bill also addresses whether interest capitalization should be included when determining the overall 163(j) interest expense limitation. This specifically addresses the discussion that has been occurring across many advisory firms as to whether a planning opportunity to avoid the interest expense limitation rules could apply if business interest expense is capitalized to inventory.

The Senate 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 Senate 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. The amount of business interest expense allowable must first be applied to any business interest that was capitalized, and the remainder to ordinary business interest expense.

The Senate defines the interest capitalization provision as interest that is required to be charged to capital accounts or may be deducted or charged to a capital account. The Senate specifically excludes any interest which is capitalized in relation to straddles, as well as the ability to capitalize interest in relation to property produced by a taxpayer that has a long useful life, an estimated production period exceed two years or an estimated production period exceed one year and costs exceeding $1,000,000 from being classified as business interest when applying the 163(j) interest expense limitation rules.

The interest capitalization and removal of Subpart F income, Section 956 inclusions, Global Intangible Low-Tax Income (“GILTI”) and Section 78 Gross-up amounts are applicable for taxable year ending after December 31, 2025.

The Senate is expected to vote on the revised bill next week. However, even if approved, negotiations will still be required between the House and the Senate. While the original goal was to have the bill to President Trump for signing by July 4, depending on negotiations, it could take longer, with an anticipated passage date prior to the August recess.