Several provisions of the One, Big, Beautiful Bill Act (OBBBA) — enacted on July 4, 2025 — alter the tax rules for businesses. The new law generally extends and expands many provisions of the Tax Cuts and Jobs Act of 2018 (TCJA). If Congress hadn’t passed the OBBBA, many temporary TCJA provisions would have expired.
Not all the OBBBA changes are favorable to business owners, and the effects of the new law will vary from business to business. But one thing is certain: Valuation professionals will need to consider the new law when they estimate the value of business interests. Here are four key changes that could affect an equity investor’s expected cash flows and a company’s cost of capital:
1. Extension and expansion of the QBI deduction
The TCJA created the Section 199A qualified business income (QBI) deduction for owners of pass-through entities (partnerships, S corporations and, usually, limited liability companies) and sole proprietorships. The deduction was scheduled to expire after 2025, but the OBBBA makes it permanent. This change will increase expected cash flows for many business owners.
The deduction can be up to 20% of QBI, not to exceed 20% of the owner’s taxable income. Additional limits begin to apply if an owner’s taxable income falls within the 2025 phase-in range of $197,300-$247,300 ($394,600-$494,600 for married couples filing jointly). The limits fully apply (in some cases eliminating the deduction) when income exceeds the applicable range.
Under the OBBBA, beginning in 2026, the income ranges over which the additional limits phase in will widen from $50,000 to $75,000 (from $100,000 to $150,000 for joint filers). This will potentially allow larger deductions for some taxpayers.
Also starting in 2026, the new law establishes a minimum QBI deduction of $400 for taxpayers with at least $1,000 of QBI from one or more active trades or businesses in which they materially participate.
The QBI deduction is intended to help achieve tax-rate parity between C corporations and pass-throughs. Now that this provision is permanent, it may cause valuation experts to rethink their position in the so-called “tax-affecting” debate. However, it’s important to note that C corporations are still subject to double taxation — once at the entity level and again when dividends are paid or a sale results in capital gains.
2. Changes to first-year deductions for fixed asset purchases
The TCJA allowed businesses to claim 100% first-year bonus depreciation on qualifying new and used assets placed in service between September 28, 2017, and December 31, 2022. Thereafter, the bonus depreciation percentage decreased 20 percentage points annually and was scheduled to expire at the end of 2026. Before the OBBBA, the bonus depreciation percentage was only 40% for 2025.
However, the OBBBA:
- Permanently reinstates 100% first-year bonus depreciation for qualified new and used assets acquired and placed into service after January 19, 2025.
- Provides a new 100% deduction for the cost of “qualified production property” (generally, nonresidential real property used in manufacturing) placed into service after July 4, 2025, and before 2031.
- Increases the Section 179 expensing limit to $2.5 million and the Sec. 179 phaseout threshold to $4 million for 2025, with each amount adjusted annually for inflation.
These tax incentives may encourage companies to increase their investments in capital assets or buy items sooner than they might have under prior law. While businesses that take advantage of the first-year depreciation tax breaks will pay lower taxes in the years qualifying assets are placed in service, they’ll have fewer depreciation deductions in future years (unless they continue to invest in more qualifying assets). Valuators will have to adjust their cash flow projections accordingly.
3. Reinstatement of the domestic R&E deduction
Under the TCJA, companies were required to capitalize specified research and experimental (R&E) expenditures, rather than expensing them as incurred, starting in 2022. Capitalized R&E costs were amortized over five years if incurred in the United States or 15 years if incurred outside the country.
The OBBBA permanently allows the deduction of domestic R&E expenses in the year incurred, starting with the 2025 tax year. Small businesses (with average annual gross receipts of $31 million or less for the previous three tax years) can claim the deduction retroactively to 2022. Any business that incurred domestic R&E expenses in 2022 through 2024 can elect to accelerate the remaining deductions for those expenditures over a one- or two-year period.
Like the first-year depreciation tax breaks, immediate expensing of R&E costs lowers taxes in the year they’re paid. But because those expenses are fully deducted in the year incurred, they won’t provide deductions in future tax years. Valuators will need to adjust their cash flow projections to reflect the timing of tax obligations.
4. Revised formula for the business interest limit
Under the TCJA, business interest deductions are generally limited to 30% of adjusted taxable income (ATI) for the year. For 2018 through 2021, ATI excluded allowable deductions for depreciation, amortization and depletion. But after 2021, ATI was essentially calculated based on earnings before interest and taxes — so it included allowable deductions for depreciation, amortization and depletion.
The OBBBA increases the limit on the business interest deduction by, once again, excluding depreciation, amortization and depletion from the computation of ATI, starting in 2025. This will increase interest expense deductions for many businesses. However, it’s important to note that small businesses (with average annual gross receipts of $31 million or less for the three previous tax years) aren’t subject to the 30% of ATI limit.
From a business valuation perspective, this provision could affect expected cash flows and decrease the relative cost of debt because it increases the tax benefits of debt financing. In turn, this could affect a company’s cost of capital going forward.
Get it right
Taxes are a major expense for most companies — and many will adjust their daily operations and long-term strategies in response to the OBBBA’s sweeping tax law changes. We’ve only briefly covered some of the law’s most significant business provisions here. Additional rules apply to the breaks discussed and many others may come into play, depending on the situation. Our experienced business valuation professionals understand how tax law changes will affect the expected cash flows and capital costs of each unique subject company. Contact us to determine which provisions are relevant for your circumstances.
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