Weekly Tax Brief

What you still need to know about the alternative minimum tax after the new law

Details: Published: 31 July 2025 31 July 2025

The alternative minimum tax (AMT) is a separate federal income tax system that bears some resemblance to the regular federal income tax system. The difference is that the individual AMT system taxes certain types of income that are tax-free under the regular system. It also disallows some deductions that are allowed under the regular system. If the AMT exceeds your regular tax bill, you owe the larger AMT amount.

Tax law changes

The Tax Cuts and Jobs Act (TCJA) made the individual alternative minimum tax (AMT) rules more taxpayer-friendly for 2018-2025 and significantly reduced the odds that you’ll owe the AMT for those years. But the new One Big Beautiful Bill Act (OBBBA) contains mixed news about your AMT exposure.

AMT rates

The maximum AMT rate is “only” 28% versus the 37% maximum regular federal income tax rate. At first glance, it may seem counterintuitive that anyone would worry about paying AMT. However, while the top AMT rate is lower, it applies to a much larger taxable base with fewer deductions and credits. That’s why people in certain situations still need to worry about it.

For 2025, the maximum 28% AMT rate kicks in when your taxable income, calculated under the AMT rules, exceeds an inflation-adjusted threshold of $239,100 for married joint-filing couples or $119,550 for other taxpayers. Below these thresholds, the AMT rate is 26%.

AMT exemptions

Under the AMT rules, you’re allowed an inflation-adjusted AMT exemption — effectively a deduction — in calculating your alternative minimum taxable income. The TCJA significantly increased the exemption amounts for 2018-2025. The OBBBA made the TCJA increased exemption amounts permanent, with annual inflation adjustments.

For 2025, the exemption amounts are $88,100 for unmarried individuals, $137,000 married joint-filing couples, and $68,500 for married individuals who file separate returns.

Exemption phase-out rule

At high levels of alternative minimum taxable income, your AMT exemption is phased out, which increases the odds that you’ll owe the tax. The TCJA dramatically increased the phase-out thresholds to levels where most taxpayers are unaffected by the phase-out rule. For 2025, the exemption begins to be phased out when alternative minimum taxable income exceeds $626,350 or $1,252,700 for a married joint-filing couple. For 2018-2025, the applicable exemption is reduced by 25% of the excess of your alternative minimum taxable income over the applicable phase-out threshold.

Mixed news in the OBBBA

Starting in 2026, the OBBBA makes the $500,000 and $1 million exemption phase-out threshold permanent. That’s the good news.

The bad news: Starting in 2026, the new law resets the exemption phase-out thresholds to $500,000 and $1 million with annual inflation adjustments for 2026 and beyond. So for 2026, these phase-out thresholds will be lower than the higher thresholds that apply for 2025. More bad news: Starting in 2026, the OBBBA increases the exemption phase-out percentage from 25% to 50%.

Bottom line: For 2026 and beyond, AMT exemptions for higher-income taxpayers can be phased out faster. That means more taxpayers may owe the AMT for 2026 and beyond.

AMT risk factors

Various interacting factors make it difficult to pinpoint exactly who’ll be hit by the AMT and who’ll dodge it. Here are five implications and risk factors.

Substantial income from capital gains or other sources. When you have high income, from whatever sources, it can cause your AMT exemption to be partially or completely phased out. That increases the odds that you’ll owe the AMT.
Itemized state and local tax (SALT) deductions. You can’t deduct SALT expenses under the AMT rules. This can hurt those living in high-tax states.
Exercise of incentive stock options (ISOs). When you exercise an ISO, the bargain element (the difference between the market value of the shares on the exercise date and your ISO exercise price) doesn’t count as income under the regular tax rules, but it counts as income under the AMT rules.
Standard deductions. Standard deductions are disallowed under the AMT rules.
Private activity bond interest income. This category of interest income is tax-free for regular tax purposes but taxable under the AMT rules.

Determine your status

The TCJA significantly reduced the odds that you’ll owe the AMT. But the OBBBA increases the odds for some taxpayers, thanks to unfavorable changes to the AMT exemption rules that will take effect in 2026. Don’t assume you’re exempt from AMT — especially if you have some of the risk factors outlined above. Contact us to determine your current status after the OBBBA changes take effect.

The QBI deduction and what’s new in the One, Big, Beautiful Bill Act

Details: Published: 30 July 2025 30 July 2025

The qualified business income (QBI) deduction, which became effective in 2018, is a significant tax benefit for many business owners. It allows eligible taxpayers to deduct up to 20% of QBI, not to exceed 20% of taxable income. It can also be claimed for up to 20% of income from qualified real estate investment trust dividends.

With recent changes under the One, Big, Beautiful Bill Act (OBBBA), this powerful deduction is becoming more accessible and beneficial. Most important, the OBBBA makes the QBI deduction permanent. It had been scheduled to end on December 31, 2025.

A closer look

QBI is generally defined as the net amount of qualified income, gain, deduction and loss from a qualified U.S. trade or business. Taxpayers eligible for the deduction include sole proprietors and owners of pass-through entities, such as partnerships, S corporations and limited liability companies that are treated as sole proprietorships, partnerships or S corporations for tax purposes. C corporations aren’t eligible.

Additional limits on the deduction gradually phase in if 2025 taxable income exceeds the applicable threshold — $197,300 or $394,600 for married couples filing joint tax returns. The limits fully apply when 2025 taxable income exceeds $247,300 and $494,600, respectively.

For example, if a taxpayer’s income exceeds the applicable threshold, the deduction starts to become limited to:

50% of the amount of W-2 wages paid to employees by the qualified business during the tax year, or
The sum of 25% of W-2 wages plus 2.5% of the cost (not reduced by depreciation taken) of qualified property, which is the depreciable tangible property (including real estate) owned by a qualified business as of year end and used by the business at any point during the tax year to produce QBI.

Also, if a taxpayer’s income exceeds the applicable threshold and the QBI is from a “specified service business,” the deduction will be reduced and eventually eliminated. Examples of specified service businesses are those involving investment-type services and most professional practices, including law, health, consulting, performing arts and athletics (but not engineering and architecture).

Even better next year

Under the OBBBA, beginning in 2026, the income ranges over which the wage/property and specified service business limits phase in will widen, potentially allowing larger deductions for some taxpayers. Instead of the distance from the bottom of the range (the threshold) to the top (the amount at which the limit fully applies) being $50,000, or, for joint filers, $100,000, it will be $75,000, or, for joint filers, $150,000. The threshold amounts will continue to be annually adjusted for inflation.

The OBBBA also provides a new minimum deduction of $400 for taxpayers who materially participate in an active trade or business if they have at least $1,000 of QBI from it. The minimum deduction will be annually adjusted for inflation after 2026.

Action steps

With the QBI changes, it may be time to revisit your tax strategies. Certain tax planning moves may increase or decrease your allowable QBI deduction. Contact us to develop strategies that maximize your benefits under the new law.

Significant business tax provisions in the One, Big, Beautiful Bill Act

Details: Published: 18 July 2025 18 July 2025

The One, Big, Beautiful Bill Act (OBBBA) was signed into law on July 4. The new law includes a number of favorable changes that will affect small business taxpayers, and some unfavorable changes too. Here’s a quick summary of some of the most important provisions.

First-year bonus depreciation

The OBBBA permanently restores the 100% first-year depreciation deduction for eligible assets acquired after January 19, 2025. This is up from the 40% bonus depreciation rate for most eligible assets before the OBBBA.

First-year depreciation for qualified production property

The law allows additional 100% first-year depreciation for the tax basis of qualified production property, which generally means nonresidential real property used in manufacturing. This favorable deal applies to qualified production property when the construction begins after January 19, 2025, and before 2029. The property must be placed in service in the United States or one of its possessions.

Section 179 expensing

For eligible assets placed in service in taxable years beginning in 2025, the OBBBA increases the maximum amount that can be immediately written off to $2.5 million (up from $1.25 million before the new law). A phase-out rule reduces the maximum deduction if, during the year, the taxpayer places in service eligible assets in excess of $4 million (up from $3.13 million). These amounts will be adjusted annually for inflation starting in 2026.

R&E expenditures

The OBBBA allows taxpayers to immediately deduct eligible domestic research and experimental expenditures that are paid or incurred beginning in 2025 (reduced by any credit claimed for those expenses for increasing research activities). Before the law was enacted, those expenditures had to be amortized over five years. Small business taxpayers can generally apply the new immediate deduction rule retroactively to tax years beginning after 2021. Taxpayers that made R&E expenditures from 2022–2024 can elect to write off the remaining unamortized amount of those expenditures over a one- or two-year period starting with the first taxable year, beginning in 2025.

Business interest expense

For tax years after 2024, the OBBBA permanently restores a more favorable limitation rule for determining the amount of deductible business interest expense. Specifically, the law increases the cap on the business interest deduction by excluding depreciation, amortization and depletion when calculating the taxpayer’s adjusted taxable income (ATI) for the year. This change generally increases ATI, allowing taxpayers to deduct more business interest expense.

Qualified small business stock

Eligible gains from selling qualified small business stock (QSBS) can be 100% tax-free thanks to a gain exclusion rule. However, the stock must be held for at least five years and other eligibility rules apply. The new law liberalizes the eligibility rules and allows a 50% gain exclusion for QSBS that’s held for at least three years, a 75% gain exclusion for QSBS held for at least four years, and a 100% gain exclusion for QSBS held for at least five years. These favorable changes generally apply to QSBS issued after July 4, 2025.

Excess business losses

The OBBBA makes permanent an unfavorable provision that disallows excess business losses incurred by noncorporate taxpayers. Before the new law, this provision was scheduled to expire after 2028.

Paid family and medical leave

The law makes permanent the employer credit for paid family and medical leave (FML). It allows employers to claim credits for paid FML insurance premiums or wages and makes other changes. Before the OBBBA, the credit was set to expire after 2025.

Employer-provided child care

Starting in 2026, the OBBBA increases the percentage of qualified child care expenses that can be taken into account for purposes of claiming the credit for employer-provided child care. The credit for qualified expenses is increased from 25% to 40% (50% for eligible small businesses). The maximum credit is increased from $150,000 to $500,000 per year ($600,000 for eligible small businesses). After 2026, these amounts will be adjusted annually for inflation.

Termination of clean-energy tax incentives

The OBBBA terminates a host of energy-related business tax incentives including:

The qualified commercial clean vehicle credit, effective after September 30, 2025.
The alternative fuel vehicle refueling property credit, effective after June 30, 2026.
The energy efficient commercial buildings deduction, effective for property the construction of which begins after June 30, 2026.
The new energy efficient home credit, effective for homes sold or rented after June 30, 2026.
The clean hydrogen production credit, effective after December 31, 2027.
The sustainable aviation fuel credit, effective after September 30, 2025.

More to come

In the coming months, the IRS will likely issue guidance on these and other provisions in the new law. We’ll keep you updated, but don’t hesitate to contact us for assistance in your situation.

Tap into the 20% rehabilitation tax credit for business space improvements

Details: Published: 08 July 2025 08 July 2025

If your business occupies a large space and you’re planning to relocate, expand or renovate in the future, consider the potential benefits of the rehabilitation tax credit. This could be particularly valuable if you’re interested in historic properties.

The credit is equal to 20% of the qualified rehabilitation expenditures (QREs) for a qualified rehabilitated building that’s also a certified historic structure by the National Park Service. A qualified rehabilitated building is a depreciable building that has been placed in service before the beginning of the rehabilitation and is used, after rehabilitation, in business or for the production of income (and not held primarily for sale). Additionally, the building must be “substantially” rehabilitated, which generally requires that the QREs for the rehabilitation exceed the greater of $5,000 or the cost of acquiring the existing building.

Eligible expenses

A QRE is any amount chargeable to capital and incurred in connection with the rehabilitation (including reconstruction) of a qualified rehabilitated building. Qualified rehabilitation expenditures must be for real property (but not land) and can’t include building enlargement or acquisition costs.

The 20% credit is allocated ratably, to each year in the five-year period beginning in the tax year in which the qualified rehabilitated building is placed in service. Thus, the credit allowed in each year of the five years is 4% (20% divided by 5) of the QREs concerning the building. The credit is allowed against both regular federal income tax and alternative minimum tax.

Permanent changes to the credit

The Tax Cuts and Jobs Act, signed at the end of 2017, made some changes to the credit. Specifically, the law:

Now requires taxpayers to claim the 20% credit ratably over five years instead of in the year they placed the building into service, and
Eliminated the 10% rehabilitation credit for the pre-1936 buildings.

It’s important to note that while many individual tax cuts under the TCJA are set to expire after December 31, 2025, the changes to the rehabilitation tax credit aren’t among them. They’re permanent.

Maximize the tax benefits

Contact us to discuss the technical aspects of the rehabilitation credit. There may also be other federal tax benefits available for the space you’re contemplating. For example, various tax benefits may be available depending on your preferences regarding how a building’s energy needs will be met and where the building will be located. In addition, there may be state or local tax and non-tax subsidies available.

Beyond these preliminary considerations, we can work with you and construction professionals to determine whether a specific available “old” building can be the subject of a rehabilitation that’s both tax-credit-compliant and practical to use. And, if you find a building that you decide to buy (or lease) and rehabilitate, we can help you monitor project costs and substantiate the project’s compliance with the requirements of the credit and any other tax benefits.

Milestone moments: How age affects certain tax provisions

Details: Published: 02 July 2025 02 July 2025

They say age is just a number — but in the world of tax law, it’s much more than that. As you move through your life, the IRS treats you differently because key tax rules kick in at specific ages. Here are some important age-related tax milestones for you and loved ones to keep in mind as the years fly by.

Ages 0–23: The kiddie tax

The kiddie tax can potentially apply to your child, grandchild or other loved one until age 24. Specifically, a child or young adult’s unearned income (typically from investments) in excess of the annual threshold is taxed at the parent’s higher marginal federal income tax rates instead of the more favorable rates that would otherwise apply to the young person in question. For 2025, the unearned income threshold is $2,700.

Age 30: Coverdell accounts

If you set up a tax-favored Coverdell Education Savings Account (CESA) for a child or grandchild, the account must be liquidated within 30 days after the individual turns 30 years old. To the extent earnings included in a distribution aren’t used for qualified education expenses, the earnings are subject to tax plus a 10% penalty tax. To avoid that, you can roll over the CESA balance into another CESA set up for a younger loved one.

Age 50: Catch-up contributions

If you’re age 50 or older at end of 2025, you can make an additional catch-up contribution of up to $7,500 to your 401(k) plan, 403(b) plan or 457 plan for a total contribution of up to $31,000 ($23,500 regular contribution plus $7,500 catch-up contribution). This assumes that your plan allows catch-up contributions.

If you’re 50 or older at the end of 2025, you can make an additional catch-up contribution of up to $3,500 to your SIMPLE IRA for a total contribution of up to $20,000 ($16,500 regular contribution plus $3,500 catch-up contribution). If your company has 25 or fewer employees, the 2025 maximum catch-up contribution is $3,850.

If you’re 50 or older at the end of 2025, you can make an additional catch-up contribution of up to $1,000 to your traditional IRA or Roth IRA, for a total contribution of up to $8,000 ($7,000 regular contribution plus $1,000 catch-up contribution).

Age 55: Early withdrawal penalty from employer plan

If you permanently leave your job for any reason after reaching age 55, you may be able to receive distributions from your former employer’s tax-favored 401(k) plan or 403(b) plan without being socked with the 10% early distribution penalty tax that generally applies to the taxable portion of distributions received before age 59½. This rule doesn’t apply to IRAs.

Age 59½: Early withdrawal penalty from retirement plans

After age 59½, you can receive distributions from all types of tax-favored retirement plans and accounts (IRAs, 401(k) accounts and pensions) without being hit with the 10% early distribution penalty tax. The penalty generally applies to the taxable portion of distributions received before age 59½.

Ages 60–63: Larger catch-up contributions to some employer plans

If you’re age 60–63 at the end of 2025, you can make a larger catch-up contribution of up to $11,250 to your 401(k) plan, 403(b) plan, or 457 plan. This assumes your plan allows catch-up contributions.

If you’re age 60–63 at the end of 2025, you can make a larger catch-up contribution of up to $5,250 to your SIMPLE IRA.

Age 73: Required minimum withdrawals

After reaching age 73, you generally must begin taking annual required minimum distributions (RMDs) from tax-favored retirement accounts (traditional IRAs, SEP accounts and 401(k)s) and pay the resulting extra income tax. If you fail to withdraw at least the RMD amount for the year, you can be assessed a penalty tax of up to 25% of the shortfall. However, if you’re still working after reaching age 73 and you don’t own over 5% of your employer’s business, you can postpone taking RMDs from the employer’s plan(s) until after you retire.

Watch the calendar

Keep these important tax milestones in mind for yourself and your loved ones. Knowing these rules can mean the difference between a smart tax strategy and a costly oversight. If you have questions or want more detailed information, contact us.

Startup costs and taxes: What you need to know before filing

Details: Published: 01 July 2025 01 July 2025

The U.S. Census Bureau reports there were nearly 447,000 new business applications in May of 2025. The bureau measures this by tracking the number of businesses applying for an Employer Identification Number.

If you’re one of the entrepreneurs, you may not know that many of the expenses incurred by start-ups can’t currently be deducted on your tax return. You should be aware that the way you handle some of your initial expenses can make a large difference in your federal tax bill.

How to treat expenses for tax purposes

If you’re starting or planning to launch a new business, here are three rules to keep in mind:

Start-up costs include those incurred or paid while creating an active trade or business or investigating the creation or acquisition of one.
Under the tax code, taxpayers can elect to deduct up to $5,000 of business start-up costs and $5,000 of organizational costs in the year the business begins. As you know, $5,000 doesn’t go very far these days! And the $5,000 deduction is reduced dollar-for-dollar by the amount your total start-up or organizational costs exceed $50,000. Any remaining costs must be amortized over 180 months on a straight-line basis.
No deductions, including amortization deductions, are allowed until the year when “active conduct” of your new business begins. Generally, this means the year when the business has all the necessary components in place to start generating revenue. To determine if a taxpayer meets this test, the IRS and courts generally ask questions such as: Did the taxpayer undertake the activity with the intention of earning a profit? Was the taxpayer regularly and actively involved? And did the activity actually begin?

Expenses that qualify

In general, start-up expenses are those you incur to:

Investigate the creation or acquisition of a business,
Create a business, or
Engage in a for-profit activity in anticipation of that activity becoming an active business.

To qualify for the limited deduction, an expense must also be one that would be deductible if incurred after the business began. One example is money you spend analyzing potential markets for a new product or service.

To be eligible as an “organization expense,” an expense must be related to establishing a corporation or partnership. Some examples of these expenses are legal and accounting fees for services related to organizing a new business, and filing fees paid to the state of incorporation.

Plan now

If you have start-up expenses you’d like to deduct this year, you need to decide whether to take the election described above. Recordkeeping is critical. Contact us about your start-up plans. We can help with the tax and other aspects of your new business.

Is college financial aid taxable? A crash course for families

Details: Published: 26 June 2025 26 June 2025

College can be expensive. According to the College Board, the average sticker price for tuition and fees at private colleges was $43,350 for the 2024–2025 school year. The average cost for tuition and fees for out-of-state students at public colleges was $30,780. For in-state students, the cost was $11,610. Of course, there are additional costs for housing, food, books, supplies, transportation and incidentals that can add thousands to the total.

Fortunately, a surprisingly high percentage of students at many schools receive at least some financial aid, and your child’s chances may be better than you think. So, if your child cashes in on some financial aid, what are the tax implications? Here’s what you need to know.

The basics

The economic characteristics of what’s described as financial aid determine how it’s treated for federal income tax purposes.

Gift aid, which is money the student doesn’t have to work for, is often tax-free. Gift aid may be called a scholarship, fellowship, grant, tuition discount or tuition reduction.

Most gift aid is tax-free

Free-money scholarships, fellowships and grants are generally awarded based on either financial need or academic merit. Such gift aid is nontaxable as long as:

The recipient is a degree candidate, including a graduate degree candidate.
The funds are designated for tuition and related expenses (including books and supplies) or they’re unrestricted and aren’t specifically designated for some other purpose — like room and board.
The recipient can show that tuition and related expenses equaled or exceeded the payments. To pass this test, the student must incur enough of those expenses within the time frame for which the aid is awarded.

If gift aid exceeds tuition and related expenses, the excess is taxable income to the student.

Tuition discounts are also tax-free

Gift aid that comes directly from the university is often called a tuition discount, tuition reduction or university grant. These free-money awards fall under the same tax rules that apply to other free-money scholarships, fellowships and grants.

Payments for work-study programs generally are taxable

Arrangements that require the student to work in exchange for money are sometimes called scholarships or fellowships, but those are misnomers. Whatever payments for work are called, they’re considered compensation from employment and must be reported as income on the student’s federal tax return. As explained below, however, this doesn’t necessarily mean the student will actually owe any tax.

Under such arrangements, the student is required to teach, do research, work in the cafeteria or perform other jobs. The college or financial aid payer should determine the taxable payments and report them to the student on Form W-2 (if the student is treated as an employee) or Form 1099-MISC (if the student is treated as an independent contractor).

Taxable income doesn’t necessarily trigger taxes

Receiving taxable financial aid doesn’t necessarily mean owing much or anything to the federal government. Here’s why: A student who isn’t a dependent can offset taxable income with the standard deduction, which is $15,000 for 2025 for an unmarried individual. If the student is a dependent, the standard deduction is the greater of 1) $1,350 or 2) earned income + $450, not to exceed $15,000. The student may have earned income from work at school or work during summer vacation and school breaks. Taxable financial aid in excess of what can be offset by the student’s standard deduction will probably be taxed at a federal rate of only 10% or 12%.

Finally, if you don’t claim your child as a dependent on your federal income tax return, he or she can probably reduce or eliminate any federal income tax bill by claiming the American Opportunity Tax Credit (worth up to $2,500 per year for the first four years of undergraduate study) or the Lifetime Learning Credit (worth up to $2,000 per year for years when the American Opportunity credit is unavailable).

Avoid surprises at tax time

As you can see, most financial aid is tax-free, though it’s possible it could be taxable. To avoid surprises, consult with us to learn what’s taxable and what’s not.

Are you missing a valuable tax deduction for Medicare premiums?

Details: Published: 19 June 2025 19 June 2025

If you’re age 65 or older and enrolled in basic Medicare insurance, you may need to pay additional premiums to receive more comprehensive coverage. These extra premiums can be expensive, particularly for married couples, since both spouses incur the costs. However, there may be a silver lining: You could be eligible for a tax deduction for the premiums you pay.

Deducting medical expenses: What counts?

For purposes of claiming an itemized deduction for medical expenses on your tax return, you can combine premiums for Medicare health insurance with other eligible medical expenses. These include amounts for “Medigap” insurance and Medicare Advantage plans. Some people buy Medigap policies because Medicare Parts A and B don’t cover all their health care expenses. Coverage gaps include co-payments, coinsurance, deductibles and other costs. Medigap is private supplemental insurance that’s intended to cover some or all gaps.

Is itemizing required?

Qualifying for a medical expense deduction can be difficult for many people for several reasons. For 2025, you can deduct medical expenses only if you itemize deductions on Schedule A of Form 1040 and only to the extent that total qualifying expenses exceed 7.5% of adjusted gross income.

In recent years, many people haven’t been itemizing because their itemized deductions are less than their standard deductions. For 2025, the standard deduction amounts are $15,000 for single filers, $30,000 for married couples filing jointly and $22,500 for heads of household. (Under The One, Big, Beautiful Bill being considered by Congress, these amounts would increase. If the bill is enacted, the standard deduction will increase for 2025 through 2028 by an additional $1,000 for singles, $2,000 for married joint filers and $1,500 for heads of households.)

Note: Self-employed people and shareholder-employees of S corporations don’t need to itemize to get tax savings. They can generally claim an above-the-line deduction for their health insurance premiums, including Medicare premiums.

What other expenses qualify?

In addition to Medicare premiums, you can deduct various medical expenses, including those for dental treatments, doctor visits, ambulance services, dentures, eye exams, eyeglasses and contacts, hearing aids, hospital visits, lab tests, qualified long-term care services, prescription medicines and others.

There are also many other items that Medicare doesn’t cover that can be deducted for tax purposes if you qualify. And itemizers can deduct transportation expenses to get to and from medical appointments. If you go by car, you can deduct a flat 21 cents-per-mile rate in 2025, or you can keep track of your actual out-of-pocket expenses for gas, oil, maintenance and repairs.

Claim all eligible expenses

Contact us if you have any questions about whether you’re able to claim medical expense deductions on your tax return. We’ll help ensure you claim all the tax breaks you’re entitled to.

The One, Big, Beautiful Bill could change the deductibility of R&E expenses

Details: Published: 11 June 2025 11 June 2025

The treatment of research and experimental (R&E) expenses is a high-stakes topic for U.S. businesses, especially small to midsize companies focused on innovation. As the tax code currently stands, the deductibility of these expenses is limited, leading to financial strain for companies that used to be able to expense them immediately. But proposed legislation dubbed The One, Big, Beautiful Bill could drastically change that. Here’s what you need to know.

R&E expenses must currently be capitalized

Before 2022, under Section 174 of the Internal Revenue Code, taxpayers could deduct R&E expenses in the year they were incurred. This treatment encouraged investment in innovation, as companies could realize a current tax benefit for eligible costs.

However, beginning in 2022, the Tax Cuts and Jobs Act (TCJA) changed the rules. Under the law, R&E expenses must be capitalized and amortized over five years for domestic activities and 15 years for foreign activities. This means businesses can’t take an immediate deduction for their research spending.

The practical impact on businesses

Startups, tech firms and manufacturers, in particular, have reported significant tax hikes, even in years when they operated at a loss. The shift from immediate expensing to amortization has created cash flow issues for innovation-heavy firms and complicated tax reporting and long-term forecasting.

Lobbying groups, tax professionals and industry associations have been pushing for a reversal of the TCJA’s Sec. 174 provisions since they took effect.

What’s in The One, Big, Beautiful Bill?

The One, Big, Beautiful Bill is a comprehensive tax and spending package that narrowly passed in the U.S. House in May. It contains a provision that would restore the immediate deductibility of R&E expenses, among other tax measures.

Specifically, it would allow taxpayers to immediately deduct domestic R&E expenditures paid or incurred in taxable years beginning after December 31, 2024, and before January 1, 2030. This provision would also make other changes to the deduction.

If enacted, the bill would provide a lifeline to many businesses burdened by the amortization requirement — especially those in high-growth, innovation-focused sectors.

Legislative outlook and next steps

Passage of the current version of The One, Big, Beautiful Bill remains uncertain. The bill is now being debated in the U.S. Senate and senators have indicated they’d like to make changes to some of the provisions. If the bill is revised, it will have to go back to the House for another vote before it can be signed into law by President Trump.

However, it offers hope that lawmakers recognize the challenges businesses face and may be willing to act. If enacted, the bill could restore financial flexibility to innovators across the country, encouraging a new wave of research, development and economic growth.

Stay tuned, and contact us if you have questions about how these potential changes may affect your business.