The 2025 reconciliation bill signed into law on July 4, 2025, (commonly referred to as the “One Big Beautiful Bill Act” or “OBBBA”), brings sweeping changes to be discussed with clients.

This three-part series outlines several time-sensitive provisions that may impact clients’ 2025 tax planning. In Part 1, we looked at charitable giving, state and local tax, pass-through entity tax and expiring energy credits. Here we review depreciation and expensing for real estate & business assets; estate and gift planning; research & experimental (R&E) expenses; and international tax changes.

Depreciation and Expensing for Real Estate & Business Assets

• The law restores 100 percent bonus depreciation for qualifying property acquired and placed in service on or after Jan. 19, 2025. If your clients purchased or plan to purchase real estate this year, consider a cost segregation study to maximize deductions, including bonus depreciation. Manufacturers also benefit from a special provision for qualified production property, which ensures immediate expensing treatment for new or expanded facilities.

• Beginning in 2025, Section 179 expensing limits increase to $2.5 million of qualifying property, with a phase-out beginning at $4 million. This includes tangible personal property as well as certain nonresidential real estate improvements such as roofs, HVAC, fire protection and security systems.

• Keep in mind that passive activity loss rules and/or the excess business loss limitation (permanent beginning in 2026) may defer some deductions. While unused amounts carry forward, these rules can reduce the immediate cash-flow benefit.

Estate and Gift Planning

• The higher estate, gift and GST exemptions were permanently extended under the new law. For 2025, the exemption is $13.99 million per person, and beginning in 2026 it will increase to $15 million per person, adjusted annually for inflation. The step-up in basis at death remains unchanged, which often eliminates built-in capital gains for heirs.

• With fewer families facing estate tax directly, planning will increasingly focus on income tax and basis management strategies, including the use of non-grantor trusts to reduce state income taxes. Families with existing trusts may want to review whether swapping assets or modifying trust structures could help maximize step-up opportunities.

Research & Experimental (R&E) Expenses: New Rules

The new law rolled back the 2017 rule requiring capitalization of domestic research expenses. Beginning in 2025, domestic R&E costs may generally be deducted in the year incurred, while foreign R&E must still be amortized over 15 years. Per recently released IRS guidance, we now have clarity on how to handle the transition and prior-year amounts:

• Businesses with unamortized research costs from 2022-24 will have the opportunity to address them on their 2025 return, either deducting the full balance in 2025 or spreading it over two years.

• Small businesses (under $31 million average receipts, not tax shelters) may elect to apply the new rules retroactively to 2022-24 by amending returns, filing an Administrative Adjustment Request (AAR) or making an accounting method change. This election is due by July 6, 2026, so 2022 refund claims should be filed before the statute of limitations closes (April 15, 2026, for most calendar-year filers and their owners).

  • If a small business deducts R&E costs on its 2024 return, that is treated as making the retroactive election, requiring 2022 and 2023 returns to also be amended (or AARs filed) if costs were incurred in those years. By contrast, to avoid amending prior years, a Form 3115 may be filed with the 2025 return to make a prospective method change starting in 2025.

• 2024 returns filed under the old rules may be superseded to deduct those costs instead. Per IRS relief, any 2024 return with a tax year beginning in 2024 and ending before Sept. 15, 2025, and with an original due date before that date, is automatically treated as if a six-month extension had been filed.

  • If no superseding return is filed, the costs remain capitalized and will be addressed under the 2025 transition rules.

Planning note: Businesses should review how R&E expenses have been tracked since 2022 and evaluate whether amending or superseding returns could provide immediate tax savings (the IRS is treating timely 2024 filings as automatically extended, so more taxpayers will have the chance to supersede than under the normal rules). For 2025 and beyond, a choice will need to be made to deduct or amortize new domestic R&E costs.

International Tax Changes

The new law makes significant changes to international tax rules for tax years beginning after Dec. 31, 2025. In particular, several provisions affecting the taxation of cross-border income will result in higher effective tax rates, though this is not a comprehensive list of all international updates.

• Global Intangible Low-Taxed Income (GILTI) is renamed Net CFC Tested Income, and the Qualified Business Asset Investment (QBAI) exemption is eliminated. Foreign Derived Intangible Income (FDII) is renamed Foreign-Derived Deduction Eligible Income.

• The deduction for FDII decreases from 37.5 percent to 33.34 percent, raising its effective U.S. tax rate from 13.125 percent to about 14 percent. The deduction for GILTI decreases from 50 percent to 40 percent, raising its effective U.S. tax rate from 10.5 percent to about 12.6 percent. While the corporate tax rate remains at 21 percent, these smaller deductions increase the net tax cost on affected income.

Planning note: Corporations with cross-border income should review their global structure and consider accelerating revenue or deferring deductions into 2025, when the more favorable deduction rates still apply. Early planning in 2025 is key, as these rules will apply for tax years beginning after Dec. 31, 2025.

In Part 3, we look at other opportunities for individuals and families under the OBBBA, as well as businesses and investors, and interconnected provisions.

Any tax advice in this communication is not intended or written by Navolio & Tallman LLP to be used, and cannot be used, by a client or any other person or entity for the purpose of (i) avoiding penalties that may be imposed on any taxpayer, or (ii) promoting, marketing, or recommending to another party any matters addressed herein. With this newsletter, Navolio & Tallman LLP is not rendering any specific advice to the reader.