The Basics
- The OBBB restores 100% bonus depreciation and makes the 20% QBI deduction permanent, providing long-term tax certainty for capital investments and pass-through entities.
- New legislation allows for the immediate expensing of domestic R&D costs and introduces a 100% deduction for U.S. manufacturing buildings, bypassing traditional multi-year depreciation schedules.
- 2026 marks the beginning of strict payroll reporting requirements for tips and overtime, while state-level “decoupling” from federal rules may create unexpected tax liabilities.
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OBBB Changes and Opportunities Impacting Your Business’s 2026 Filings
The One Big Beautiful Bill (OBBB) is significantly shifting the tax landscape for American businesses. While much of the public focus has remained on individual tax breaks, the legislation provides a substantial set of benefits for businesses by restoring and making permanent several high-value incentives.
As the 2026 filing season gets underway, business taxpayers should be aware of the critical changes and strategic opportunities outlined below.
100% Bonus Depreciation Returns
One of the most impactful provisions of the OBBB is the restoration of 100% bonus depreciation. After several years of scheduled phasing down, the law now allows businesses to once again immediately deduct the full cost of eligible machinery, equipment, and certain property in the year of purchase. This change is permanent, providing long-term certainty for capital investment planning.
R&D Expensing: Ending the Capitalization Requirement
For the past several years, businesses were frustrated by a requirement to amortize domestic Research and Development (R&D) costs over five years. The OBBB repeals this requirement, allowing for full immediate expensing of domestic R&D costs retroactive to Jan. 1, 2025.
For costs previously capitalized between 2022 and 2024, the law provides a flexible “catch-up” mechanism:
- One-Year Election: Deduct the entire remaining balance in full on the 2025 tax return.
- Two-Year Election: Deduct the remaining balance ratably (50% per year) over the 2025 and 2026 tax years.
New Incentives for U.S. Manufacturing
In an effort to bolster domestic production, the OBBB introduced the Qualified Production Property (QPP) deduction under Section 168(n). This new provision offers a specific 100% deduction for new, qualified nonresidential real property or buildings used for manufacturing within the United States. This represents a significant shift, as real estate typically requires much longer depreciation schedules (39 years).
Permanence for Pass-Throughs
The legislation provides much-needed stability for “pass-through” entities (S corps, LLCs, and partnerships). Section 199A (QBI Deduction) The 20% Qualified Business Income deduction, which was originally set to expire, has been made permanent. This ensures that small business owners continue to pay an effective rate that is competitive with the corporate tax rate.
Qualified Small Business C-corporation Stock (Section 1202)
The OBBB strengthens Section 1202 by expanding the gain exclusion available on the sale of Qualified Small Business Stock. This enhancement makes equity investment in qualifying C corporations more attractive and provides founders and early investors with increased opportunities to reduce capital gains on exit.
Section 163(j): Higher Interest Deductions
The OBBB permanently restores the EBITDA-based calculation for business interest limits, replacing the more restrictive EBIT standard. Businesses can once again “add back” depreciation and amortization when calculating their deduction ceiling. This reversal significantly increases interest deductibility for capital-intensive firms.
Strategic Planning: Timing & Loss Limitations
While deductions are plentiful, taking a large single-year deduction may be less efficient than it appears due to two critical “loss traps” reinforced by the OBBB:
- Net Operating Losses (NOLs): Current rules limit NOL carryforwards to offsetting only 80% of taxable income. Over-deducting in a single year can lead to a large “paper loss” that you cannot fully use to efficiently wipe out tax in future profitable years.
- Excess Business Loss (EBL) Limit: The OBBB made the Section 461(l) limitation permanent. Non-corporate taxpayers (S corp and partnership owners) cannot use more than $313,000 ($626,000 for joint filers) of business losses to offset non-business income like capital gains or interest. Any loss above this cap is converted into an NOL and carried forward, delaying your tax relief.
Administrative Rigor: Qualified Tips and Overtime Reporting
While the IRS offered penalty relief for 2025 and allowed “reasonable methods” (like separate year-end statements) for tracking tax-free tips and overtime, 2026 marks the start of strict enforcement.
To remain compliant, you must update payroll systems now to isolate and report:
- Qualified Overtime: Specifically the FLSA “half-time” premium portion.
- Qualified Tips: Voluntary gratuities only (not mandatory service charges).
- Occupation Codes: Mandatory Treasury Tipped Occupation Codes (TTOC) for each worker.
Important: While employees receive an income tax break, employers remain liable for FICA and FUTA taxes on the full amount of these wages.
The Multi-State Maze: Conformity and Decoupling
A significant challenge for the upcoming season is the lack of uniformity between federal and state tax treatments. While the OBBB offers generous federal breaks, many states have begun to decouple from these provisions to protect their own tax revenues. Because some states use “static” or “fixed-date” conformity, they do not automatically adopt federal changes like the tip and overtime exemptions or accelerated depreciation.
In these jurisdictions, businesses may be required to “add back” federal deductions on their state returns, effectively maintaining two different sets of books. Before finalizing an investment strategy, it is critical to identify where state law diverges from the OBBB to avoid unexpected state-level tax liabilities.
The OBBB offers a rare combination of expanded deductions, enhanced incentives, and long‑term certainty for business taxpayers. However, optimizing these benefits requires deliberate coordination across federal, state, and operational considerations. As you prepare for the 2026 filing season, now is the time to evaluate your strategy, model your outcomes, and ensure your systems are ready for the new compliance requirements.
Look for guidance and insights as you respond to the OBBB’s changes and work to position your business to leverage the opportunities ahead? Learn more and reach out to one of our advisors here.
Frequently Asked Questions
Q: Can I deduct all R&D costs in 2025?
A: Yes, under the OBBB, businesses can fully expense domestic R&D costs immediately, retroactive to Jan. 1, 2025. In addition, for costs previously capitalized between 2022 and 2024, the law provides flexible “catch-up” options.
Q: Does the OBBB affect state tax returns?
A: Yes, many states have “decoupled” from federal OBBB provisions, meaning businesses may need to add back federal deductions on state returns.
Q: What is the new depreciation schedule for manufacturing real estate?
A: Section 168(n) allows for a 100% deduction for qualified nonresidential real property used for U.S. manufacturing, replacing the standard 39-year schedule.