Full Expensing for Business Investments and Tax Deduction of Domestic R&D

By Marco Q Rossi & Associati

BUSINESS EXPENSING FOR CAPITAL INVESTMENTS

The One Big Beautiful Bill Act (“OBBBA”), signed into law on July 4, 2025, reintroduced full expensing of capital expenditures for U.S. businesses. Under this new framework, companies may once again deduct the entire cost of most capital investments in the year they are incurred.

1) 168(N) QUALIFIED PRODUCTION PROPERTY DEDUCTION

For the first time, §168(n) provides first-year 100% expensing for certain structures, primarily newly constructed manufacturing facilities and other industrial-use buildings. The provision applies to projects where construction begins between January 19, 2025, and December 31, 2028, and the property is placed in service by January 1, 2031.

While temporary, this incentive is expected to accelerate construction timelines and encourage additional investment. If extended or made permanent, it could represent a significant expansion of cost recovery policy.

To qualify as Qualified Production Property (QPP), the asset must meet the following criteria:

• Non-residential real property located and used in the U.S.
• Construction start date: Must begin after January 19, 2025, and before January 1, 2029.
• Placed-in-service date: Must be placed in service before January 1, 2031.
• Original use requirement: The original use of the property must begin with the taxpayer.
• Use requirement: The property must be used as an integral part of a qualified production activity, which includes manufacturing, refining, agricultural processing, or chemical production of qualified products.
• Election requirement: The taxpayer must elect to treat the property as QPP. mrossi@mqrassociati.com www.mqrassociati.com
• ADS limitation: The alternative depreciation system (ADS) cannot be applied to such property.

Portions of a building used for office, administrative, engineering, research, software development, or sales activities do not qualify. Taxpayers must carefully identify and segregate construction costs to isolate qualifying areas from non-qualifying areas. If the property ceases to be used in a qualified production activity within 10 years of being placed in service, the benefit of the expensing must be recaptured.

2) 179 SMALL BUSINESS EXPENSING

The OBBBA raises the Section 179 first-year expensing cap from $1 million to $2.5 million, with inflation adjustments starting in 2026. This provision is available to pass-through businesses as well as C corporations, and it covers certain assets, such as used machinery, equipment, and HVAC systems, not eligible for bonus depreciation under §168(k). The deduction phases out beginning at $4 million of qualifying property placed in service, also indexed for inflation, and fully phases out at $6.5 million. The provision is crafted to direct the benefit primarily toward small and mid-sized businesses.

**Tax Loss Impact:** Section 179 deductions are limited to the amount of taxable income from active trades or businesses before the §179 deduction. Unused amounts carry forward indefinitely but do not create an NOL in the year claimed.

3) 168(K) PERMANENT 100% BONUS DEPRECIATION

OBBBA makes 100% bonus depreciation permanent for qualified property placed in service after January 19, 2025, pursuant to Internal Revenue Code §168(k). Before OBBBA, bonus depreciation was scheduled to phase down to 40% in 2025 and then to zero by 2027.

Full bonus depreciation allows businesses to deduct the entire cost of eligible new and used property (with a recovery period of 20 years or less) in the first year. Planning Tip for Prior- Year Purchases: If you acquired qualifying property in earlier year and have not fully depreciated it, the new OBBBA rules may allow you to deduct the entire remaining undepreciated basis in 2025. This can be achieved through an accounting method change or a one-time “catch-up” deduction, provided the asset still meets the eligibility requirements for bonus depreciation. A cost segregation study may also help identify additional components eligible for immediate expensing.

**Tax Loss Impact:** Bonus depreciation can generate a Net Operating Loss (NOL) if the total deductions exceed taxable income. NOLs from post-2017 years can generally be carried forward indefinitely, though they are limited to offsetting 80% of taxable income in future years. Certain industries, like farming and non-life insurance, may still carry back NOLs.

What qualifies for immediate expensing?

The definition of “qualified property” is broad. The following categories now benefit from immediate expensing, either under Section 179, bonus depreciation (Section §168(k)), or both:

• Tangible personal property with a MACRS recovery period of 20 years or less, such as machinery, production lines, computer hardware, forklifts, railcars, aircraft, heavy mobile equipment.
• Off-the-shelf software and depreciable costs of film, television, live-theatrical and sound-recording productions.
• Qualified Improvement Property (QIP), which includes interior improvements to existing non-residential buildings. Note that enlargements, structural components, elevators, and escalators remain excluded.
• Specific non-residential real-property upgrades eligible only for Section 179, including new roofs, HVAC systems, fire-protection or alarm systems and security systems.
• Land improvements with 15 or 20-year lives, such as parking lots, sidewalks, landscaping, and exterior lighting.
• Furnishings and appliances used predominantly in lodging businesses, provided business use exceeds 50%.
• Vehicles, with rules that vary by type:

• 1- Heavy SUVs, pickups, and vans (GVWR 6,001–14,000 lbs) qualify for Section 179 (up to approx. US $31,300 in 2025), with any excess eligible for bonus.
• 2- Light passenger automobiles (< 6,001 lbs) may qualify for bonus but are subject to annual luxury-auto depreciation caps.
• 3- Larger trucks and equipment over 14,000 lbs may qualify for full expensing without limitation.

• Aircraft, rail rolling stock and heavy mobile machinery, subject to more than 50% business-use and other listed-property rules.
• Qualified Production Property (QPP), which includes newly constructed non-residential buildings whose original use is manufacturing, refining, agricultural processing, or chemical production. Construction must begin after January 19, 2025, and before January 1, 2029, with the building placed in service by January 1, 2031.

State Conformity

While the OBBBA applies at the federal level, state conformity varies and can significantly impact the actual benefit to taxpayers.

• California does not conform to §168(k), §168(n), or §179. State conforms to the IRC as of an older date and must enact legislation to update.
• New York conforms to §168(n) and §179 but does not conform to §168(k), requiring an addback for bonus depreciation.
• Michigan conforms to §179 and §168(n) but does not conform to §168(k).
• Florida conforms to §179, §168(k), and §168(n), so most federal benefits flow through for state tax purposes.

II. DOMESTIC RESEARCH & DEVELOPMENT (R&D) COSTS: IMMEDIATE DEDUCTION, WITH FLEXIBLE OPTIONS (SECTION 174)

OBBBA also delivers a major shift for domestic R&D incentives. It eliminates the five-year amortization rule introduced by the TCJA and allows businesses to once again immediately deduct domestic research and experimentation (R&E) expenses in the year incurred, effective for amounts paid or incurred after December 31, 2024 (Section 174A).

This change reestablishes the U.S. as a more competitive environment for innovation, encouraging companies to invest in domestic R&D activities without waiting years to recover costs.

**Tax Loss Impact:** Immediate expensing of domestic R&D costs can generate an NOL, which may be carried forward under general NOL rules. Retroactive deductions for 2022– 2024 (small business relief) can reduce income in those years and potentially free up NOL carryforwards from other deductions, but generally cannot be carried back to pre-2022 years.

What Qualifies as Domestic R&D?

Under new §174A, eligible research and development expenses generally include:

• Wages paid to employees conducting qualified research end experimental activities
• Supplies used in research activities
• Contract research costs (up to 65% if the taxpayer retains rights to results)
• Costs for developing or improving products, processes, techniques, software, inventions, or formulas that are technological in nature
• Costs that meet the four-part test for qualified research under IRC §41: permitted purpose, technological in nature, elimination of uncertainty, and a process of experimentation.

Expenses related to general management, marketing, foreign research, or routine quality control are excluded.

Additional Flexibility

In place of immediate deduction, businesses may elect to spread the deduction over time. Two options are available: a 60-month amortization beginning when the research benefits first arise, or a 10-year amortization under IRC §59(e). These alternatives may be attractive for companies seeking a more stable earnings profile.

Relief for Small Businesses

Small businesses with average gross receipts under $31 million may elect retroactive relief and deduct R&D costs previously capitalized in 2022–2024. To take advantage of this provision, businesses must file amended returns for the relevant years, replacing the amortization previously applied with full deduction of qualifying expenses.

These amended returns must be submitted within 12 months of the enactment of the OBBBA (i.e., by July 4, 2026). This retroactive benefit applies only to U.S.-based research, foreign R&D costs remain subject to 15-year amortization.

For your convenience, we have included a Domestic R&D Deduction & Retroactive Relief Checklist as an attachment to this Client Alert. This tool can help determine whether your business qualifies for the immediate deduction and/or the retroactive benefit.

State Treatment of R&D Expensing

State conformity to the reinstated immediate deduction for domestic R&D expenses will also vary.

• California and Florida conform to §174 immediate deduction, but conformity may require legislative action to fully align with OBBBA.
• New York conforms to federal §174 rules.
• Michigan fully conforms to the IRC on this point, allowing immediate state deductions in line with the federal change.

Final Planning Notes With the reinstatement of full deductions for both business investments and R&D costs, 2025 offers a unique window to boost cash flow and support long-term growth plans. Maximizing these benefits will require close coordination between tax, finance, legal, and operations teams.

This article is provided for general information only and does not constitute legal or tax advice. Readers should consult their advisors to determine how the OBBBA provisions apply to their particular circumstances. mrossi@mqrassociati.com www.mqrassociati.com

Checklist – OBBBA Domestic R&D Deduction & Retroactive Relief

Part 1 – Immediate Deduction for Domestic R&D (Starting 2025)

Check all that apply to your business:

☐ R&D expenses are incurred in the U.S. (activities and resources used within U.S. territory).

☐ Activities qualify as “qualified research” under IRC §41 (meeting the four-part test: permitted purpose, technological in nature, elimination of uncertainty, and process of experimentation).

☐ Includes only eligible costs, such as:

☐  – Salaries of employees directly engaged in research

☐  – Supplies consumed during research activities

☐  – Contract research costs (up to 65% if taxpayer retains rights to results)

☐ Does not include excluded expenses such as marketing, general administration, foreign research, or routine quality control.

☐ Adequate records and documentation (time sheets, project logs, technical notes, and expense receipts) are maintained.

Part 2 – Retroactive Relief (Tax Years 2022–2024) Check all that apply to your business:

☐ Average annual gross receipts of $31 million or less over the past three tax years (per definition of ‘eligible small business’).

☐ Domestic R&D expenses incurred in 2022, 2023, and/or 2024 were capitalized and amortized under prior §174 rules.

☐ Intend to file amended returns for the applicable years within 12 months of OBBBA’s enactment (deadline: July 4, 2026).

☐ Sufficient documentation exists to prove expenses qualify as domestic R&D.

☐ None of these expenses relate to foreign research (which remains subject to 15-year amortization).

By L&S Lighting

Visplay and Flux Join the Group.

The portfolio of lighting and modular solutions for commercial projects is now complete with the addition of Visplay and Flux.

L&S Group, the global leader in the design and production of bespoke and technologically integrated LED lighting systems and solutions, has finalized an international strategic step with the acquisition of Visplay, a group focused on modular electrified structures dedicated to the retail vertical, headquartered in Germany in the prestigious Vitra Campus area.

This step strengthens both our offering and our international presence in the Retail and Contract sectors.

Visplay is the leader in the design and manufacturing of high-quality electrified modular structures for retail applications. Its versatile, functional and innovative solutions are designed to optimize and enhance store layouts, office interiors and exhibition areas. Visplay has a long-standing history of collaboration with architects, designers and leading global brands.

The acquisition of Vislay follows that of Flux, completed at the end of February. Flux is a designer and manufacturer of lighting solutions for the luxury retail sector. Among its clients are major international players and leading fashion and luxury Made in Italy brands.

Each company will continue to operate seamlessly under the new ownership, and the dedicated commercial contact remains unchanged.

By Prager Metis

The landscape of sales tax compliance has fundamentally shifted since the 2018 South Dakota v. Wayfair Supreme Court decision. What once required physical presence in a state to trigger tax obligations now extends to businesses with significant economic activity, creating new challenges for companies operating across state lines.

Understanding Physical vs. Economic Nexus

Traditional physical nexus remains straightforward—having offices, warehouses, employees, or even attending trade shows in a state typically establishes tax obligations. However, the Wayfair decision introduced economic nexus, which focuses on sales volume and transaction counts rather than physical presence.

Most states now require businesses to collect and remit sales tax once they exceed $100,000 in annual sales or 200 transactions within the state. Notable exceptions include California, New York, and Texas, which set higher thresholds at $500,000. Delaware, Montana, New Hampshire, and Oregon don’t impose state sales tax.

Critical Compliance Steps

Businesses must conduct nexus studies to identify where they owe taxes. This involves analyzing sales data by state, tracking transaction volumes, and maintaining detailed records. Proper accounting requires treating collected sales tax as a liability, not revenue, with accurate journal entries and regular reconciliation.

International Considerations

Foreign companies face additional complexities, including entity registration challenges, currency conversion requirements, and distinguishing between VAT and sales tax obligations. Despite lacking physical U.S. presence, international businesses may still owe state taxes based on their American customer base.

Technology and Professional Support

Modern businesses benefit from automated tax software integrated with ERP systems, but technology alone isn’t sufficient. Professional tax advisors help navigate varying state requirements, conduct compliance audits, and develop ongoing monitoring systems.

Proactive compliance prevents costly penalties and protects business reputation. Companies should establish regular assessment schedules, maintain comprehensive documentation, and stay current with evolving state tax laws to ensure long-term success.

by Mowery & Schoenfeld, LLC

President Trump signed the One Big Beautiful Bill Act (OBBBA) into law on July 4, bringing sweeping tax changes for businesses. The legislation builds on key provisions from the 2017 Tax Cuts and Jobs Act (TCJA), while introducing several new benefits aimed at reducing business tax burdens and encouraging investment, manufacturing, and innovation.The following highlights the new or modified provisions, but it is not an exhaustive list.

100% bonus depreciation is back

Under prior law, bonus depreciation was scheduled to phase out, reaching 0% by 2027. The new law permanently restores 100% bonus depreciation for eligible property placed in service on or after Jan. 19, 2025. This change allows businesses to fully deduct the cost of qualifying equipment and other assets in the year of purchase, substantially improving cash flow. The section 179 expensing provision limit is boosted to $2.5 million, indexed for inflation, with a phase-out beginning at $4 million for the cost of qualifying property.

Additionally, a new provision for bonus depreciation was added that allows for 100% deduction for real property directly related to domestic manufacturing, but only for property beginning construction after Jan. 19, 2025, and placed in service before Jan. 1, 2030.

Qualified small business stock exclusion expanded

The updated rules for Qualified Small Business Stock (QSBS) under Section 1202 offer expanded tax benefits for investors. Now, capital gains on QSBS can be excluded on a tiered basis: 50% for stock held over three years, 75% after four years, and a full 100% exclusion after five years. These changes apply to stock issued or acquired after the law takes effect. The per-issuer gain cap increases from $10 million to $15 million, with inflation adjustments starting in 2027. Additionally, companies can now qualify as small businesses with up to $75 million in gross assets (up from $50 million), also indexed to inflation beginning in 2027.

Expanded R&D expensing

Domestic research and development costs incurred beginning after Dec. 31, 2024, can now be fully expensed rather than amortized. Additionally, an election can be made to expense unamortized domestic R&D costs over one or two years, starting for tax years after Dec. 31, 2024. This permanently reverses the TCJA provision that required domestic R&D expenses to be capitalized and amortized over five years. Foreign R&D expenses are still required to be capitalized and amortized over 15 years. Businesses must still comply with documentation and accounting method requirements, with further guidance on implementation expected from the Treasury.

Interest limitation calculation reverts to EBITDA

Another important shift: the new law permanently returns the business interest deduction limitation to an EBITDA-based calculation for tax years beginning after Dec. 31, 2024. Previously, the calculation was basically based on EBIT, but now with the law change, businesses can add back depreciation, depletion, and amortization to the interest limitation calculation, thus potentially increasing the deductible amount of interest expense.

The new rule requires businesses to calculate the interest deduction limit before applying any rules that require interest to be capitalized, except in two specific cases: interest related to straddles (IRC 263(g)) and self-produced property (IRC 263A(f)). This change significantly reduces planning opportunities that previously allowed businesses to capitalize interest into inventory, property, or accounts receivable under provisions like IRC 266 or IRC 263A. In short, businesses will have less flexibility to shift interest expenses to the balance sheet to preserve deductibility.

Reforms to international taxation

Under the new rules for multinational businesses, the Section 250 deduction now allows a 40% deduction for GILTI — renamed Net CFC Tested Income (NCTI) — and a 33.34% deduction for FDII, now called Foreign-Derived Deduction Eligible Income (FDDEI). Both NCTI and FDDEI are permanent reductions and are effective Jan. 1, 2026. The prior benefit of the “net deemed tangible income return,” which reduced GILTI and FDII, has been eliminated. The BEAT (Base Erosion and Anti-Abuse Tax) rate also permanently increases to 10.5%.

Additionally, businesses face tighter limits on using deductions to offset foreign income. Only deductions directly tied to NCTI may be used for the foreign tax credit, and FDDEI can no longer be reduced by interest or R&D expenses, which narrows the potential tax benefits.

Other notable business tax law changes

• Establishes a 1% floor on corporate charitable deductions
• Makes the 20% passthrough entity deduction permanent
• Limits disallowance of on-premises meal deductions starting in 2026
• Makes the excess business loss provisions permanent
• Terminates many of the clean energy tax incentives previously introduced by the Inflation Reduction Act

What is not in the OBBBA

• No corporate tax rate changes, nor a separate domestic manufacturer rate
• No changes to deductibility of pass-through entity taxes, nor a corporate state and local tax limitation
• No changes to the controversial carried interest provisions
• No corporate “retaliation” tax, which would have penalized foreign tax regimes deemed aggressive

We’re here to help
The new tax law significantly enhances many of the TCJA’s most business-focused provisions, while adding new incentives aimed at capital investment, research, and manufacturing. Whether you own a small local business or operate internationally, these updates may offer new opportunities for savings and planning. Reach out to your Mowery & Schoenfeld tax advisor to discuss how these changes may impact your business.