Impact of the 2025 Reconciliation Act on Businesses

On July 4, 2025, President Donald Trump signed into law “[a]n Act to provide for reconciliation pursuant to title II of H. Con. Res. 14.” (formerly known as the One Big Beautiful Bill Act, referred to herein as the “Act”), an all-encompassing reconciliation bill including sweeping domestic policy changes championed by the president that are expected to impact virtually every industry, business, and household of America.

The Act contains substantial changes to the Internal Revenue Code of 1986, as amended (the “Code”), making many provisions of the 2017 Tax Cuts and Jobs Act (“TCJA”) that were scheduled to expire in 2025 permanent. The following discussion describes in detail these and other changes that the current administration believes will positively impact businesses across the country.¹

Bonus Depreciation for Tangible Property and Depreciation for Qualified Production Property

The Act permanently restores 100% immediate expensing (also known as “bonus depreciation”) for qualifying depreciable tangible property acquired and placed in service after January 19, 2025. Historically, bonus depreciation has been only temporarily available for tangible property placed in service during a limited time period, and bonus depreciation has phased down (and ultimately phased out completely) the later it was placed in service during that time period. Bonus depreciation was last incorporated in the Code as part of the TCJA and was subject to phase-out beginning in 2023. The Act now eliminates phase-outs permanently. The Act allows for a transitional election of a reduced bonus depreciation percentage for tangible property for the first taxable year ending after January 19, 2025, which is generally 40%. Taxpayers can continue to elect out of bonus depreciation if they choose.

The Act also allows expensing of “qualified production property” so long as it is placed in service in the United States or a possession of the United States before January 1, 2031. “Qualified production property” includes the portion of any nonresidential real property that is originally used by the taxpayer as an integral part of manufacturing, producing or refining a “qualified product” (which generally means any tangible personal property) that results in a substantial transformation of the property comprising the qualified product. “Production” only includes agricultural production and chemical production. Further, qualified production property does not include any nonresidential real property that is used for offices, administrative services, lodging, parking, sales activities, research activities, software development or engineering activities, or other functions unrelated to the manufacturing, production, or refining of tangible personal property, and food and beverages prepared in the same building as a retail establishment are excluded from constituting a qualified product. This is the first time that bonus depreciation has applied to nonresidential real property and unlike bonus depreciation for tangible property, the taxpayer must make an affirmative election to apply it in a manner to be identified by the Treasury.

Interest Expense Deductions

The Act also permanently restores the TCJA-era calculation of the business interest expense deduction limitation under section 163(j) at 30% of earnings before interest, taxes, depreciation and amortization (EBITDA) for tax years beginning after December 31, 2024. Therefore, adjusted taxable income is computed without regard to the deduction for depreciation, amortization or depletion. From taxable years beginning in 2018 and through 2021, depreciation, amortization and depletion were not considered in the computation of adjusted taxable income used to determine the business interest expense deduction limitation, but for taxable years beginning after 2021 and prior to the enactment of the Act, the limitation was calculated at 30% of earnings before interest and taxes (EBIT). The Act thereby provides significant relief to certain taxpayers with substantial levels of depreciation, amortization or depletion deductions, as those items can now be excluded when calculating adjusted taxable income used to determine the deduction limitation.

However, the Act now excludes from the calculation of adjusted taxable income under section 163(j) certain income earned by controlled foreign corporations, global intangible low-taxed income, any gross-up for deemed paid foreign tax credits under section 78 and any portion of deductions allowed for certain foreign-sourced income under section 245A, effective for tax years beginning after December 31, 2025. Thus, the Act changes will in part be less favorable for taxpayers that generate substantial income from their foreign subsidiaries.

Research & Experimentation (“R&D”) Expensing

The Act repeals a TCJA provision that required domestic R&D expenses under section 174 to be capitalized and amortized over five years. Taxpayers can now immediately expense such expenditures paid or incurred in taxable years beginning after December 31, 2024. Certain small businesses may make elections to retroactively accelerate amortization of domestic R&D costs capitalized in 2022, 2023 and 2024. Taxpayers remain required to capitalize and amortize foreign research or experimental expenditures over 15 years.

Pass-Through Deduction

The 20% deduction for “qualified business income” for owners of pass-through entities (excluding certain industries) under section 199A, a cornerstone provision of the TCJA, has been made permanent for tax years beginning after December 31, 2025. The deduction is currently subject to limitations that phase in at $50,000 for single filers and $100,000 for married taxpayers filing jointly. The Act, however, increases these phase in thresholds to $75,000 and $150,000 respectively, making the deduction more favorable to middle-income owners of qualifying businesses. The Act also includes an inflation-adjusted minimum deduction of $400 for taxpayers with at least $1,000 of qualified business income from active trades or businesses.

Limitation on Excess Business Losses

Effective for tax years beginning after December 31, 2026, the Act permanently extends the limitation on excess business losses, which limits a noncorporate taxpayer’s aggregate business deductions to the amount of aggregate gross income or gain attributable to trades or businesses of the taxpayer plus a threshold amount. The Act provides that the threshold amount will be adjusted for inflation in tax years beginning after 2025.

Pass-through Entity Tax (“PTET”)

Notably, despite prior versions of the Act in its bill form, the Act does not affect PTET elections that allow eligible pass-through entities to be taxed at the entity level for state income tax purposes and to allocate the related credits and deductions to their owners without being subject to the federal cap on state and local tax deductions.

Payments from Partnerships to Partners for Property or Services

The Act clarifies that the “disguised sales” and “disguised payments” rules under section 707(a)(2) are self-executing, and that section 707(a)(2) applies even in the absence of final Treasury Regulations. Effective for services performed and property transferred after the enactment of the Act, distributions and allocations that are considered disguised sales of property or disguised payments for services between a partner and a partnership, and disguised sales of property between partners in a partnership are treated as payments for services or property rather than as distributions and allocation from a partnership to a partner. We understand that it is the IRS’ position that section 707(a)(2) has always been self-executing, but this revision appears to clarify this position, in particular with respect to the disguised sales of partnership interests for which no final Treasury Regulations currently exist.

Corporate Alternative Minimum Tax (“CAMT”) – Intangible Drilling and Development Costs

For taxable years beginning after December 31, 2025, intangible drilling and development costs will be taken into account for purposes of computing adjusted financial statement income, which is the basis for calculating the CAMT liability. Specifically, the Act provides that a taxpayer’s adjusted financial statement income, for CAMT purposes, will be reduced by deductions allowed for expenses with respect to intangible drilling and development costs for oil and gas wells and will be appropriately adjusted to disregard any depletion expense taken into account on the taxpayer’s applicable financial statement with respect to the intangible drilling and development costs of such wells.

Charitable Deductions

The Act establishes a floor for deductions for charitable contributions by a corporation. Deductions are now limited to contributions in excess of 1% of a corporation’s taxable income for tax years beginning after December 31, 2025. The ceiling limiting such deductions to 10% of a corporation’s taxable income remains. The Act allows corporate taxpayers to carry forward excess contributions for up to five years on a first-in first-out basis, but does not allow such a carry forward to the extent it would reduce taxable income and increase a net operating loss carryover under section 172 to a succeeding taxable year.

Taxable Real Estate Investment Trust Subsidiaries (“TRSs”)

The Act relaxes the asset test required to qualify as a real estate investment trust (“REIT”) and maintain REIT status by increasing the percentage of a REIT’s total assets that may be represented by securities of one or more TRSs from 20% to 25% for tax years beginning after December 31, 2025.

Employee Retention Tax Credit (“ERTC”) Abuse

Generally, anti-abuse measures applicable to ERTC misconduct are strengthened as of the date of the enactment of the Act. Penalties under the ERTC rules are expanded, section 6676 penalties for erroneous refunds now include ERTC refunds and the statute of limitations for ERTC claims is extended to 6 years. Additionally, the Act provides that ERTC claims filed after January 31, 2024 are disallowed.

¹ Section references are to the Code or the United States Treasury regulations thereunder (the “Treasury Regulations”) unless otherwise specified.

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Alexander Anderson, an O'Melveny partner licensed to practice law in New York; Luc Moritz, an O'Melveny partner licensed to practice law in California; Robert Fisher, an O'Melveny partner licensed to practice law in California; Billy Abbott, an O'Melveny partner licensed to practice law in California and New York; Will Becker, an O'Melveny partner licensed to practice law in Texas; Alexander Roberts, an O'Melveny partner licensed to practice law in New York; Dawn Lim, an O'Melveny counsel licensed to practice law in New York; Arsalan Memon, an O'Melveny associate licensed to practice law in California, New Jersey, and New York; Eleanor Gilbert Dunn, an O'Melveny associate licensed to practice law in Texas; and Lauren Lekey, an O'Melveny associate licensed to practice law in California, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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