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Key Business Tax Changes Under H.R. 1

Key Business Tax Changes Under H.R. 1

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Summary of Major Business Provisions

On July 4, 2025, President Trump signed into law H.R. 1, also known as the “One Big Beautiful Bill Act,” which is Public Law 119-21. The massive 940-page bill extends most of the 2017 TCJA tax provisions, adds completely new tax breaks, dismantles clean energy incentives and substantially reduces federal spending on low-income health care and food assistance. Still, the price tag on the bill is largely deficit-financed, with the Congressional Budget Office estimating it will cost $3.4 trillion over the next 10 years.

Below is an overview of the major business provisions in the new law.

Corporate Tax Rate and Passthrough Deduction

The 21% permanent corporate tax rate was left untouched in this bill, so it remains at the TCJA level.

The 20% passthrough deduction for qualified business income (QBI), which was set to expire after 2025, was not increased but has been made permanent.

The bill increases the income level at which the QBI deduction begins phasing out from $50,000 to $75,000 for single filers and from $100,000 to $150,000 for joint filers. The phase-out applies to specified service trade or businesses (SSTBs) and pass-through entities subject to the wage and investment limitations.

A new inflation-adjusted, minimum deduction of $400 is allowed for the active business income of taxpayers who have at least $1,000 of QBI from businesses in which the taxpayer materially participates. 

100% Bonus Depreciation Made Permanent

The new law makes permanent full expensing of business assets, or bonus depreciation, in the first year they are placed in service. Bonus depreciation was set to expire after 2026 in the original TCJA. The change applies to property acquired and placed in service on or after January 19, 2025.

Expensing of Qualified Production Property

The Act allows an election to 100% expense qualified production property (QPP), which is nonresidential real property used in domestic manufacturing, production (agricultural or chemical) or refining. Original use must begin with the taxpayer. Eligible property must be constructed after January 19, 2025 and before January 19, 2029, and must be placed in service before January 1, 2031.

Increased 179 Expensing Limits

The Act increases the Sec. 179 expensing limits for tangible, personal (not real) business property and off-the-shelf software to $2,500,000 per year, with a $4,000,000 purchase limitation. The inflation-adjusted amounts for 2025 under prior law were $1,250,000 and $3,130,000, respectively. Both amounts will be adjusted each year for inflation. The new limits apply to property placed in service after 2024.

Easing of Limit on Business Interest Deduction

The bill increases the amount of business interest that may be deducted by

reinstating the EBITDA-based limitation, effective in 2025. This means that the deduction limit of 30% of “adjusted taxable income” is calculated before taking into account deductions for interest, taxes, depreciation, amortization or depletion. This change means that depreciation and amortization can be added back to taxable income when determining the deduction limit, which can increase the amount of deductible interest.

Under a new ordering rule, if a taxpayer elects to capitalize interest, it will be subject to the interest deduction limitation first, after 2025.

R&E Expensing Reinstated

Immediate expensing for domestic research and experimental (R&E) expenses is reinstated after 2024, which means it has retroactive effect and is allowed for 2025. This is a permanent change with no sunset. Foreign research expenses still have to be amortized over 15 years.

Small businesses with average annual gross receipts of $31 million or less may apply this change retroactively back to 2022. This must be done on an amended return for each year, 2022, 2023 and 2024. Small businesses also can make (or revoke) an election to claim the reduced Section 41 research credit on an amended return.

All taxpayers can elect to accelerate unamortized amounts, their remaining deductions, for domestic R&E amounts they were amortizing between 2022-2024. They will be able to take the existing deductions over a one-year or two-year period, 2025 or 2025 and 2026.

REIT Asset Test

The Act increases the percentage of a Real Estate Investment Trust’s (REIT) assets that can be held in a Taxable REIT Subsidiary (TRS) from 20% to 25%, effective after 2025.

Extension of New Markets Tax Credit

The Act permanently extends the New Markets Tax Credit, a non-refundable tax credit intended to encourage private capital investment in eligible, low-income communities. 

1099 Reporting Threshold Increased

The threshold for reporting on Forms 1099-MISC and 1099-NEC for nonemployees is increased from $600 to $2,000 beginning in 2026. This amount will be adjusted for inflation going forward.

Form 1099-K Thresholds for Third-Party Network Reporting Increased

Under prior law, third-party settlement organizations were required to issue Form 1099-Ks to merchants or businesses that receive gross payments exceeding $600 for goods or services, regardless of the number of transactions. That rule has been delayed since 2022. The new Act repeals that rule and increases the filing threshold to only require reporting for payees with more than $20,000 in gross receipts and more than 200 separate transactions, retroactive to 2022.

Reduced Holding Period for Exclusion of Qualified Small Business Stock Gain

Previously, the qualified small business stock exclusion was allowed only for stock held more than five years. The exclusion also was subject to a per-issuer cap: the greater of $10 million or 10 times the taxpayer’s basis in the stock. Eligibility also depended on the corporation’s aggregate gross assets not exceeding $50 million at the time of stock issuance.

Now, investors can exclude gain from the sale of qualified small business stock held for less than five years, on a sliding scale. The new law allows a tiered gain exclusion for stock issued after July 4, 2025 with these revised limitations and holding periods:

  • 50% exclusion for stock held at least three years
  • 75% exclusion for stock held four years
  • 100% exclusion for stock held five or more years

The proposal also increases the dollar cap to $15 million or 10 times the investor’s stock basis, and the corporate asset ceiling is increased to $75 million, both indexed to inflation beginning in 2027. Also, excluded gains will not be considered preference items for purposes of the individual alternative minimum tax.

Installment Payment of Capital Gains Tax on Farmland Sales

The Act allows sellers of U.S. farmland to elect to pay capital gains tax in four equal annual installments. The first payment is due in the year of sale. The land must be used as a farm or leased to a qualified farmer, and it has to be used for farming for the 10 years preceding the sale.

If the seller dies before the installments are paid, the full amount is due with the seller’s final return. The rule applies to farmland sold after the date of enactment of the new law, July 4, 2025.

Permanent Renewal of Opportunity Zones

The Act permanently renews the Opportunity Zone program and enhances the associated tax benefits, creating rolling, ten-year zone designations beginning in 2027. The definition of “low-income community” is narrowed, and the legislation creates a new category, “qualified rural opportunity funds” which will receive triple the step-up in basis.

Enhancement of Advanced Manufacturing Investment Credit

The Act increases from 25% to 35% the advanced manufacturing investment credit for investments in a facility under construction before 2027. The increased credit applies to property placed in service after 2025. An advanced manufacturing facility is a facility that has a primary purpose of manufacturing semiconductors or semiconductor manufacturing equipment.

Permanent Increase in State Ceiling for Low-Income Housing Credit

This new law permanently increases the state allocation ceiling for low-income housing credits by 12% and lowers the bond-financing threshold to 25% for projects financed by bonds, starting in 2026. The credit is allowed over a 10-year period for the costs of building or rehabilitating rental housing occupied by low-income tenants.

Increased Employer-Provided Child Care Credit

The Act increases the credit for employer-provided childcare from 25% to 40% of qualified expenses. For small businesses, the credit amount is 50%. The maximum annual credit amounts are increased to $500,000, or $600,000 for small businesses.

This means a regular business must spend at least $1.25 million on childcare related expenses to receive the full credit, and a small business must spend at least $1.2 million. These provisions take effect after 2025, and the new amounts will be adjusted for inflation beginning in 2027.

Employer’s Paid Family and Medical Leave Credit 

The Act extends the paid family and medical leave credit permanently and makes three beneficial changes to the rules. It allows the credit to be claimed for insurance policies that cover the credit; it makes the credit available in all states; and it lowers the eligible employee rule to workers employed for 6 months instead of one year.

The provision applies to taxable years beginning after December 31, 2025.

Partnership Disguised Sales Rules Clarified

The new law contains a clarification regarding partnership disguised sales and disguised fees for services. Previous law was construed to mean that the disguised sales rules only applied to payments from a partnership to a partner under the explicit language of the IRS regulations.

The new law states that the statutory rules are applicable even in absence of explicit coverage in the regulations. This technical provision has the effect of applying the disguised sales rules to transactions that are economically equivalent to a taxable sale even if the regulations would allow a better result for the taxpayer.

Compensation Deduction Limitation Extended to Controlled Groups

This Act includes an entity aggregation rule for purposes of the $1,000,000 limitation on the deduction of corporate officer compensation. Effective beginning in 2026, compensation paid by all members of the controlled group, including non-publicly traded entities, will be considered when imposing $1 million deduction limit. A controlled group is any group treated as a single employer under employee benefit rules. 

Enforcement Provisions for the Employee Retention Credit

The Act imposes new penalties for promoters of fraudulent employee retention credit (ERC) claims. It also limits the credit period to claims filed before February 1, 2024. The legislation also extends IRS’s enforcement window for ERC claims to 6 years from the later of:

  • The filing date of the original
  • The date the return is treated as filed
  • The date a claim for credit or refund was made

Also, the penalty for an erroneous claim will now cover employment taxes, not just income taxes.

Corporate Charitable Contributions Restricted

The Act limits the corporate charitable deduction by imposing a 1% floor on top of the 10% of taxable income limitation. The deduction only will be allowed to the extent that the aggregate contributions exceed 1% of the taxpayer’s taxable income for the tax year. The provision is effective after 2025.

Contributions in excess of those limitations in any year can be carried forward and deducted over the next five years.

Business Meal Deduction Limited

The legislation eliminates the deduction for employer-provided meals after December 31, 2025, except for meals provided on commercial vessels, oils and gas rigs and fishing boats—primarily Alaskan industries. Restaurants have another exception. They can continue to deduct meals provided to their employees during work hours.

Note that this change also eliminates the deduction for employers providing snacks, coffee or on-site meals at the office.

Green Energy Tax Provisions Repealed

The new Act removes most green energy tax incentives contained in the 2022 Inflation Reduction Act.

  • Energy Efficient Commercial Building Deduction: This tax deduction is allowed for installing energy-efficient appliances and equipment in commercial buildings, like energy-efficient heating, lighting and hot water. It has been repealed for commercial buildings beginning construction more than 12 months after enactment, or after June 30, 2026.
  • Eliminates accelerated cost recovery under MACRS for newly constructed renewable energy property, including clean energy facilities, property and technology, effective in 2025.
  • Energy Efficient Home Improvement Credit: repealed after 2025
  • New Energy Efficient Home Credit: repealed after 2025
  • EV/Clean Energy Vehicle credits: repealed after September 30, 2025
  • Clean Energy Production credit: repealed after 2027
  • Alternative Fuel Vehicle Refueling Property credit: terminated after June 30, 2026
  • Terminates qualification of many green energy components for the Advanced Manufacturing Production Credit over the next two years.

New Incentives for Traditional Energy Sources

New tax benefits are provided for fossil fuels, coal, oil and gas and nuclear power including: reinstating full deductions for intangible drilling costs; increasing the carbon capture tax credit; and allowing the use of the advanced manufacturing tax credit for mining metallurgical coal.  

International Tax Provisions

The new Act contains numerous provisions affecting international tax including:

  • Renaming GILTI to Net CFC Tested Income (NCTI) and setting a 12.6 to 14% top rate, along with foreign tax credit changes
  • Renaming FDII to Foreign-Derived Deduction Eligible Income (FDDEI) and sets a 14% rate
  • Increasing the Base Erosion and Anti-Abuse Tax (BEAT) rate to 10.5%
  • Other CFC rules and foreign tax credit limitation changes
  • Reinstating the limitation on downward attribution of ownership contained in the TCJA, which had resulted in designations of CFC status even where no U.S. person owned shares of a foreign company. The new Act instead introduces new rules for Foreign Controlled Foreign Corporations and Foreign Controlled U.S. Shareholders

General Observations

The new law contains many favorable tax benefits including retroactive provisions that will allow taxpayers to amend returns and receive more favorable outcomes on their previous tax filings. The law also includes revenue raisers for the government, which repeal tax incentives and impose new restrictions on tax deductions.

At 940 pages, the legislation is complex and highly technical, with provisions buried in cryptic statutory language. Thus, it is important to consult with your expert tax advisor to determine how the new law can benefit you, your business and your investment strategy.

Contributors

Lucia Smeal, Tax Professor and Attorney, Georgia State University

Lucia Nasuti Smeal is a guest columnist on tax topics for Frazier & Deeter. She is an attorney, an adjunct tax professor with Georgia State University’s J. Mack Robinson College of Business and with Franklin University, and former editor of Tax Notes Today, published by Tax Analysts. In past years, Smeal worked for the Congressional Research Service and is a former member of the U.S. House Periodical Press Corps. She is a frequent speaker and writer on current tax developments.

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