With the House Ways and Means Committee debating the tax portion of a reconciliation bill, tax professionals discussed key provisions for businesses and manufacturers.
From the “large corporation, international tax side of things,” the House draft “looks more like a conventional extenders bill,” Josh Odintz, a partner at Holland & Knight, told Checkpoint. “There are some improvements,” he added, “but by and large, it’s mostly date changes.”
To Odintz, what is most interesting is what’s not in the bill. That includes a cap on the deduction for businesses’ state and local taxes (C-SALT) and an increase in the stock buyback excise tax.
But experts also took note of some provisions, old and new, that would benefit businesses.
Qualified production property deduction.
Odintz highlighted one provision that he described as Ways and Means’ interpretation of President Donald Trump’s tax promise to American manufacturers. Leading up to the election, Trump said he planned to reduce the corporate tax rate to 15% for companies that manufacture products domestically.
The way that promise was “reduced to writing” in the House bill, said Odintz, is the qualified production property deduction proposal. Under that provision, taxpayers may claim a 100% depreciation allowance for qualified production property — including property used in manufacturing, production, or refining.
“This is basically 100% expensing for a new building or plant,” said Odintz. “And this allows for immediate expensing,” he added. He views the provision as Ways and Means take on “getting more businesses to expand manufacturing, production, and refining in the United States.”
In terms of the actual impact on a company’s effective tax rate, Odintz said the results will vary. “for some companies, it might take them below 15%.” But overall, it’ll be a “company-specific” calculation, and depend partially on whether a company is “cash rich,” he added. “But it is a nice incentive, and I would expect companies will take advantage of it.”
National Association of Manufacturers President and CEO Jay Timmons seemed to agree, saying the bill “brings us closer to the vision of a 15% effective tax rate for manufacturers.”
Dustin Stamper, managing director of tax legislative affairs at BDO USA, told Checkpoint that the “ability to fully expense buildings is a fairly novel change,” as businesses “would normally be recovering” expenses over 40 years.
Even so, Stamper expects this provision “could create some administrative headaches” for both taxpayers and the IRS in terms of figuring out “what fits under the umbrella” of qualified production property. “There are some helpful definitions in the statutory language, but there will always be fact patterns that don’t fit nicely within the lines.”
He also pointed to the carve out applicable to portions of buildings used for purposes other than qualified activities. “Most buildings have some level of mixed use with other functions such as offices, administrative services, sales, or software engineering,” he explained. “The provision would certainly keep accounting firms busy providing cost segregation studies.”
Three sisters’ extenders.
But “three major provisions that had cliff-effects” in the Tax Cuts and Jobs Act did not get the treatment many had desired, said Odintz. Those include current expensing for certain property under Code Sec. 168(k), the deduction for research and experimental (R&E) expenses under Code Sec. 174, and the interest deduction limitation under Code Sec. 163(j).
Bonus depreciation. Under the TCJA, a first-year depreciation deduction of 100% of the basis of qualified property was allowed. To qualify, property generally must have been acquired after September 27, 2017, and placed in service before January 1, 2023. The applicable percentage for this “bonus depreciation” has been phasing down by 20% since 2023, and is set to drop to 0 in 2027.
The House bill would increase the depreciation deduction rate to 100% for property acquired and placed in service after January 19, 2025, and before January 1, 2030.
R&E expenses. Another TCJA provision revised the deduction for domestic R&E expenses beginning in 2022. Previously, R&E expenses could be deducted as they were incurred — but the TCJA required such expenses to be capitalized and amortized ratably over a five-year period (or a 15-year period where expense are attributable to research conducted outside the U.S.)
The House bill would temporarily suspend the requirement to capitalize domestic R&E expenses incurred in the 2025 – 2029 tax years.
Business interest deduction limit. Finally, the TCJA changed how businesses compute their adjusted taxable income in 2022, for purposes of the limitation on deduction of business interest expenses. Pre-2022, businesses used earnings before interest, taxes, depreciation, and amortization, or “EBITDA.” But since 2022, they’ve been required to use earnings before interest and taxes, or “EBIT.”
The House bill reinstates the EBITDA limitation for the 2025 – 2029 tax years.
“I think there was a lot of hope that [the three provisions] would be permanently addressed,” said Odintz. “They were not. They received a five-year extension going back to the beginning of the year, or in the case of current expensing, for property going back to Inauguration Day.”
Stamper said that while businesses “are going to be delighted with the return of expensing domestic research costs,” expenses for foreign research remain “stuck at 15-year amortization.” But he welcomed the inclusion of a “fix” under Code Sec. 280G so taxpayers may no longer “double dip” benefits. Taxpayers have been allowed to claim “their full research credit without reducing amortization deductions,” said Stamper.
Odintz called Ways and Means’ decision to only temporarily extend the business-friendly provisions “unfortunate.” But to him, House bill provisions are better than nothing. “I think everyone in the business community would love to have permanency, but we’ll take this,” he said.
NAM’s Timmons also welcomed the revised and extended provisions, which he said would “incentivize investment and innovation in the United States.”
What’s next?
Ways and Means Chair Jason Smith (R-MO) stated in his opening remarks at the markup that the tax bill will “jumpstart a revival of manufacturing” for companies “who make the smart choice to build new factories in America.” The R&D, expensing, and interest deductibility provisions will bring businesses a windfall, said Smith, ” creating jobs here at home and helping America compete abroad.”
Going into Ways and Means’ Tuesday afternoon markup of the House draft, Odintz said he didn’t expect to see any amendments pass. “Scrivener’s errors” will likely get corrected when the House Budget Committee considers the bill, said Odintz, but even then, he doesn’t expect to see “substantial changes.”
The Joint Committee on Taxation scored for the House bill as costing $3.8 trillion over 10 years — well under the $4.5 trillion budget resolution target. Odintz posited that Ways and Means is considering this “skinnier” bill under the assumption that other House committees, namely Energy and Commerce, will not necessarily meet their spending cut targets.
Changes, however, are likely in the Senate bill. “The Senate will have a different vision of what it wants to do in tax,” said Odintz. He noted that Senate Finance Committee Chair Mike Crapo (R-ID) “wants permanency for the TCJA extensions.” But beyond that, the Senate also has “different revenue targets” and that “creates a different philosophy in how one approaches the bill.” Odintz expects the Senate to unveil its own bill, and then “the two bills will have to be reconciled, either in a conference, or they can keep ping-ponging the bill back and forth.”
“With several TCJA provisions nearing expiration, the stakes are high,” Baker Tilly Director of Tax Policy, Washington Tax Council Jessica Jeane told Checkpoint. “Whether this bill advances quickly or moves through a longer negotiation process, the decisions made now will shape the tax landscape for years to come.”
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