The OBBBA is expected to provide a short-term boost to economic growth and create a positive environment for M&A and IPO activity, which has struggled this year from a heightened period of uncertainty brought on by volatile tariff and trade policies. It will also help offset some of the negative impact of tariffs on certain industries.
Businesses will benefit from several TCJA tax provisions that had already expired or were about to sunset. The TCJA also limited the ability to deduct certain expenses immediately as incurred, which the OBBBA now makes more favorable to businesses. The following are some of the business-friendly changes or new provisions introduced by the OBBBA:3
- Bonus depreciation: Qualified property acquired after January 19, 2025, is allowed bonus depreciation of 100%. Qualified property excludes real property, but includes items such as cars, computers or business equipment. While bonus depreciation was available under TCJA, the amount that could be deducted each year for tax purposes was declining over time. It was scheduled to be phased out after 2026. The OBBBA makes permanent the ability to immediately deduct 100% of the expenses incurred on qualified property.
- Qualified production property expenses: Bonus depreciation of 100% is allowed for qualified production property if construction began after January 19, 2025, and before January 1, 2029, and is placed in service before January 1, 2031. Qualified property is nonresidential real property used in a qualified production activity (i.e., in the manufacturing, production, or refining of a qualified product) and placed in service in the U.S. or one of its possessions.
- R&D expenses:4 The TCJA made the deductibility of R&D activities less favorable to taxpayers. Domestic R&D was required to be capitalized and amortized over a five-year period, whereas foreign R&D had to be amortized over 15 years. The OBBBA restores the ability to fully and immediately deduct domestic R&D expenses incurred from January 1, 2025. Foreign R&D remains at a 15-year amortization period. The OBBBA also allows taxpayers to accelerate the deduction of any remaining unamortized domestic R&D expenditures.
- Interest expense limitation: The TCJA introduced limitations on how much interest expense can be deducted each year for tax purposes as a function of an entity’s adjusted taxable income (ATI). Interest expense exceeding 30% of an entity’s ATI—which initially was essentially the same as EBITDA (earnings before interest, taxes, depreciation and amortization)—was disallowed as a current deduction and had to be carried forward. That limit became more stringent starting in 2022, with the definition of ATI becoming similar to EBIT (earnings before interest and taxes). The OBBBA restores the more generous definition of ATI (i.e., EBITDA, with certain adjustments) and makes this treatment permanent. Interest expenses incurred in taxable years after December 31, 2024, will benefit from the new definition.
The permanent aspect of the bonus depreciation provisions will incentivize more companies to invest, which in the long run can improve productivity and increase real economic growth. Temporary bonus depreciation tax provisions are seen by economists as simply a timing transfer in spending, with no long-term benefits to GDP growth. Making permanent the ability to immediately depreciate 100% of acquired qualified property brings more stability to businesses when planning out their capital expenditures. It also has a direct positive impact on their bottom lines. Companies in capital-intensive industries (e.g., telecom) will already see an accretive impact on earnings in 2025 from the acceleration of depreciation for tax purposes.
Additional incentives are being provided for the construction of new domestic manufacturing facilities, but they come with a time stamp. There will likely be an acceleration of construction projects, but challenges remain in getting those projects approved and the right workforce in place, so plants come online before 2031.
Economists will generally agree that being able to immediately deduct R&D expenses for tax purposes encourages innovation and investment. This provision was one that pharmaceutical and technology companies were keen on restoring. Because the reinstatement of this favorable treatment is limited to domestic R&D expenses, there may be companies in life sciences and other R&D-intensive industries that move more of those activities back to the U.S.
The combined effects of OBBBA and the threat of significant new tariffs on pharmaceutical products and semiconductors create pressure to relocate R&D and production activities for these industries and will impact supply chains in the years to come. More broadly, the significant investments that companies across all industries are planning to make in artificial intelligence (AI) will partly qualify as an R&D expense for tax purposes, resulting in an immediate cash tax benefit for the entire economy.
The more generous treatment of interest expense limitations will encourage leveraged buyouts by making debt financing more attractive. This treatment will support a latent demand for M&A activity and private equity exits, particularly if the Federal Reserve cuts interest rates in the fall, as expected by markets. Dividend recapitalizations, where a company takes on new debt to pay a special dividend to shareholders, may also benefit from the more favorable interest deductibility treatment. Certainly, lower interest rates would make the use of dividend recaps more appealing.
In the particular case of multinational companies, the OBBBA brings significant changes to international tax provisions, modifying several aspects that were introduced by the TCJA. It will force an adjustment to transfer pricing policies, which will require careful consideration of interactions with the OECD global minimum tax, tariff policies, and other aspects of the OBBBA, such as relocation of R&D or production activities.
Finally, from an industry standpoint, the OBBBA brings notable changes to the energy sector. Tax credits and incentives introduced by the Inflation Reduction Act to promote the production and use of clean/renewable energy are being curtailed. Some incentives are still available, but projects need to be placed in service much earlier than under prior law, which will lead to an acceleration and/or rationalization of projects that can be completed by the new deadlines. On the other hand, subsidies for oil production, pipeline projects, and coal are expanded under the OBBBA.
