R&D, Depreciation and Interest Deductions: Federal Tax Law Updates

When the One Big Beautiful Bill Act (OBBBA) was signed into law, it revived three of the most business-friendly provisions from the Tax Cuts and Jobs Act (TCJA). For companies that had been struggling with increased tax liabilities since 2022, these changes represent real cash flow relief and simplified planning.

Here is a closer look at how bonus depreciation, R&D expensing and the Section 163(j) interest limitation have changed and what you can do now to capture these benefits.

The Return of 100% Bonus Depreciation

One of the biggest wins for businesses is the permanent reinstatement of 100% bonus depreciation for qualifying assets acquired and placed in service after January 19, 2025. Under the Tax Cuts and Jobs Act of 2017 (TCJA), the benefit was phasing down to 40% for 2025 and would have disappeared entirely after 2026. The phase down period remains for assets acquired or placed in service prior to January 20, 2025.

The OBBBA restores the full deduction and applies it to a new category of qualified production property (QPP) — assets that are integral to a qualified production activity, placed in service in the U.S., and its original use must be by the taxpayer. Construction must begin after January 19, 2025, and before January 1, 2029, with the property placed in service before January 1, 2031.

That means manufacturers, fabricators and certain processors may be able to immediately deduct the full cost of new facilities and equipment used in qualifying production activities. Companies with long lead times should start planning construction projects now to ensure eligibility within those dates.

Green Building

The news for taxpayers doing energy efficient green building improvements is not as good. The deduction for energy efficient buildings, Section 179(D), will be terminated for properties beginning construction after June 30, 2026. This also applies to the Section 45(L) energy efficient home credit for homes that are acquired after June 30, 2026.

R&D Expensing Made Permanent

Under the TCJA, companies were required to capitalize and amortize research and development (R&D) costs over five years (15 years for foreign research) beginning in 2022. That change created major cash flow challenges — especially for early-stage companies with limited revenue.

The OBBBA permanently reverses that rule for domestic R&D, restoring the ability to deduct R&D costs as incurred. Taxpayers can elect one of the following methods based on their entity size:

• Small businesses (3-year average of gross revenue less than $31 million) may retroactively apply the immediate expensing election for costs incurred in 2022-2024. If they elect to amend for immediate expensing, all affected tax years must be amended to expense R&D and consistently apply the accounting method.
• All taxpayers can deduct remaining unamortized amounts over a one- or two-year period starting in 2025.
• All taxpayers may do nothing and elect to continue amortizing capitalized R&E cost over the remaining life of the asset, continuing to identify and capitalize R&E cost as incurred. However, going forward, the costs may not be amortized until a benefit has been realized by the asset.

Foreign R&D expenditures must still be amortized over 15 years, but the immediate expensing of U.S.-based research restores a long-standing incentive to invest domestically.

Taxpayers should review the effect of the above elections on future tax projections to maximize its benefit.

Interest Deductions Expand Under EBITDA

Section 163(j) has also been modified to give businesses more flexibility. Beginning in 2025, the limitation on business interest expense will be calculated based on EBITDA (earnings before interest, taxes, depreciation and amortization) instead of EBIT.

This change reverses one of the TCJA’s less favorable provisions, which had reduced the amount of interest expense that could be deducted by excluding depreciation and amortization from the calculation. The EBITDA-based rule will increase the allowable interest deduction for most taxpayers.

For companies that have had carryforward interest expense from prior years, this modification may unlock additional deductions in 2025. The ordering rules have also been clarified. Section 163(j) now applies before the optional capitalization of interest under Section 266.

Implications for Tax Accounting

From a financial reporting perspective, these changes will have immediate ASC 740 impacts. The effects of the OBBBA must be recognized in the period of enactment, which is Q3 2025 for calendar-year filers.

Companies will need to:

• Reassess deferred tax balances and valuation allowances
• Adjust effective tax rates to reflect the timing of new deductions
• Model the combined effects of bonus depreciation, interest expense changes and R&D expensing on future reversals

Coordination between accounting and tax departments will be key in the 2025 provision cycle.

Other Business Provisions to Note

The law also includes several complementary updates:

• Section 179 expensing limits increase to $2.5 million, with phase-out beginning at $4 million of qualifying property.
• Advanced manufacturing credits increase from 25% to 35%.
• Opportunity zones are made permanent, although the definition of “low-income community” has been narrowed.
• Certain residential construction contracts may again use the completed contract method of accounting.

Key Takeaways

• Carefully consider acquisition and placed in service dates to ensure correct application of bonus depreciation rates.
• Revisit R&D schedules to claim immediate deductions or amend prior returns.
• Recalculate interest limitations under EBITDA to identify new deductible amounts.
• Coordinate with your accounting team early to capture deferred tax impacts in 2025 financials.

The OBBBA delivers long-awaited tax relief for businesses. With careful timing and documentation, taxpayers can make 2025 a year of significant savings. Contact us for more information.

©2025

Federal Tax Law Updates Series

Weaver’s Federal Tax Law Updates series explores key provisions of recent federal tax legislation and the implications for businesses and individuals. From depreciation and R&D expensing to energy incentives and state conformity, the series highlights what taxpayers should know to plan effectively in the evolving tax landscape.

• Business Tax Provisions: Federal Tax Law Updates
• Energy Tax Credits and Incentives: Federal Tax Law Updates
• Individual Tax Provisions: Federal Tax Law Updates

Additional Resources

The Tax Navigator is a comprehensive insight hub for updates on tax policy, planning and legislation. The following videos hosted by Sean Muller, Weaver’s partner-in-charge, specialty tax services, feature updates related to the federal tax legislation and trending topics mentioned in this blog.

• The Tax Navigator: House Passes Tax Bill — May 22 Update
• The Tax Navigator: June 10-17 Update
• The Tax Navigator: Section 174 Updates in the Tax Bill — June 27
• The Tax Navigator: Changes in Interest Limitation in 163(j) in the Tax Bill — July 8 Update
• The Tax Navigator: Proc 2025-28 Practical Framework — October 10, 2025 Update
• The Tax Navigator: Placed-in-Service Updates