A New Dawn for Business Tax: How the One Big Beautiful Bill Reshapes the Tax Landscape

At a glance:

• The main takeaway: The One Big Beautiful Bill introduces significant changes to business tax, extending, modifying, or making permanent many of the tax provisions enacted as part of the Tax Cuts and Jobs Act.
• Impact on your business: These changes will require businesses to adjust their tax strategies to comply with the new regulations, potentially affecting their financial operations and tax liabilities.
• Next steps: A tax advisors can proactively monitoring tax legislation developments and are prepared to help you navigate the potential changes.

On July 4^th the President signed into law H.R.1, the legislation commonly known as the One Big Beautiful Bill (OBBB). This legislation extended, modified, or made permanent many of the tax provisions which were initially enacted as part of the Tax Cuts and Jobs Act (TCJA) of 2017. For businesses, there are several provisions which are impacted by the enactment of this bill.

This article provides a thorough overview of key provisions in the OBBB and the impact to businesses.

Modifications to R&D and Section 174

The OBBB modifies the treatment of both domestic and foreign research and experimental (R&E) expenditures. Overall, the goal of these legislative changes, specifically related to the treatment of domestic R&E expenditures, is to encourage businesses to invest in domestic sources for R&E rather than foreign sources.

Under the TCJA, the treatment of R&E expenditures excluded immediate deductions and required taxpayers to capitalize and amortize them over a period of 60 months, if expenses were incurred domestically, or 180 months, if expenses were for foreign research. Prior to the passage of the TCJA, taxpayers generally had the option of immediately expensing both domestic and foreign R&E expenditures within the year that the expenses were incurred, or they could make the election to capitalize and amortize such expenditures over a specified period.

The amendments made by OBBB now allows for domestic R&E expenditures, which are paid or incurred in connection with the taxpayer’s trade or business during the taxable year, to be permitted as deductions. These provisions apply to tax years beginning after December 31, 2024, but do not apply to any R&E expenditures attributable to foreign research.

Since taxpayers were previously required to capitalize domestic R&E expenditures under the TCJA, this will be treated as a change in accounting method, which the taxpayer can elect. The changes will apply on a cut-off basis for taxable years starting after December 31, 2024, and no adjustments under IRC §481(a) shall be made.

Two Transition Rules to Capitalize Domestic R&E Expenditures

To alleviate the impact that the TCJA had on taxable income, the OBBB establishes two transition rules for taxpayers that previously capitalized domestic R&E expenditures for tax years beginning after December 31, 2021. Certain taxpayers are eligible to make elections based off these two transition rules.

Transitional Rule #1: Election for Retroactive Application by Certain Small Businesses

This election allows eligible taxpayers to retroactively apply the new rules for domestic R&E expenditures to taxable years beginning after December 31, 2021. Under this election, taxpayers are required to file amended returns for all applicable years. An eligible taxpayer is anyone (other than a tax shelter) who meets the gross receipts test under IRC §448(c) for the first taxable year after December 31, 2024. The gross receipts test is met if the entity’s average annual gross receipts for the three-taxable-year period ending with the previous taxable year does not exceed the IRC §448(c) threshold amount of $31,000,000 for the three years preceding 2025.

Additionally, if a taxpayer elects to receive the reduced R&D credit under IRC §280C(c)(2) on their amended return to comply with the OBBB changes to the R&D credit, the election will be treated as timely if it is made within the one year period beginning on the enactment date of this legislation. This election would be treated as an accounting method change initiated by the taxpayer for their first taxable year. The U.S. Secretary of State will publish additional guidance relating to this election within one year of the enactment of this bill.

Transitional Rule #2: Election to Deduct Certain Unamortized Amounts Paid or Incurred in Taxable Years Beginning Before January 1, 2025

This election, available to all taxpayers, allows for the deduction of certain unamortized amounts paid or incurred in taxable years beginning before January 1, 2025. It applies to all domestic R&E expenditures, which were paid or incurred after December 31, 2021 but before January 1, 2025, and capitalized as previously required under the TCJA. Taxpayers have the option to either deduct the remaining unamortized amounts of domestic R&E expenditures in the first taxable year beginning after December 31, 2024, or to deduct the amounts ratably over two years beginning in the first taxable year beginning after December 31, 2024. This election would be treated as an accounting method changed initiated by the taxpayer and applied on a cut-off basis with no IRC §481(a) adjustments required. The U.S. Secretary of State will also publish additional guidance relating to this election within one year of the enactment of this bill.

Amendments that Impact Section 174

For foreign R&E expenditures, the OBBB amends IRC §174 so that it only applies to foreign R&E expenditures. These are defined as any research conducted outside the U.S., the Commonwealth of Puerto Rico, or any possession of the U.S. With this change, foreign R&E expenditures will be the only ones that require capitalization under IRC §174 and will continue to be amortized over 180 months.

The OBBB also amended the rules pertaining to the R&D credit to align with the new IRC §174 and IRC §174A provisions. Previously, IRC §280C(1)(c) specified that if the R&D credit amount for the taxable year exceeded the yearly deduction for qualified research expenses, the capitalized R&E expenses would be reduced by the excess amount. However, the OBBB changes IRC §280C(1)(c) to state that any domestic R&E expenditures taken as a deduction or capitalized under IRC §174A(b) will be reduced by the amount of the R&D credit allowed under IRC §41(a). If the taxpayer elects to receive the reduced R&D credit under IRC §280C(2), then this rule will not apply. Moving forward, taxpayers should calculate whether it is more beneficial to elect the reduced R&D credit or to reduce domestic R&E expenditures deduction by the full R&D credit amount.

Qualified Business Income Deduction (§199A)

IRC §199A, which came into existence as part of the TCJA, was set to expire at the end of 2025. The OBBB makes the Qualified Business Income Deduction (QBID) permanent while also expanding the benefits under this provision. One of the changes to this section increases the phase-in threshold amount allowing individuals with higher taxable income to remain below the phase-in limitation and increase their benefit under this provision. As originally written, the phase-in limitation for a single filer was the “sum of the threshold amount plus $50,000.” The threshold amount is defined in the IRC as $157,500 adjusted by the cost of living for the taxable year. The new phase-in limitation is “the taxable income of a taxpayer for any taxable year exceeds the threshold amount but does not exceed the sum of the threshold amount plus $75,000 ($150,000 in the case of a joint return).”

The OBBB also implements a minimum Qualified Business Income (QBI) deduction for tax years beginning after December 31, 2025. The revised IRC §199A(i) stipulates that the QBI deduction allowed for any taxable year is greater than the deduction calculated as it normally would be in subsection (a) or $400. The minimum deduction requires that the taxpayer is an “applicable taxpayer,” meaning that they have an aggregate QBI of at least $1,000 from a qualified business or businesses in which they actively participate. These amounts are also subject to a cost-of-living adjustment for years beginning after 2026 and will always end in a multiple of $5. This added minimum deduction allows an increase in the deduction for any qualified business owner who would not have reached the $400 deduction in the years 2017 to 2025, provided that they were within the taxable income limits.

Excess Business Loss Limitation (Noncorporate)

Another provision initially enacted by the TCJA, which was set to expire at the end of 2025, is the limitation on excess business losses. This code section restricts the amount of business losses that a taxpayer can use to offset non-business income. In addition to being made permanent, IRC §461(l) now also applies to excess business losses of noncorporate taxpayers. The amount of business losses deductible in a given tax year are limited to the deductions, in excess of income, attributable to a taxpayer’s trades or businesses plus a threshold amount, adjusted for cost of living. For example, the threshold amount in the 2024 tax year was $305,000 ($610,000 for married filing jointly). Any excess business loss not utilized can be carried over to a future tax year.

Permanent Renewal and Enhancement of Opportunity Zones.

Opportunity Zones (OZs) are an economic development tool designed to revitalize distressed communities across the U.S. through private and public investment. Established by the TCJA, OZs consist of designated census tracts nominated by state governors and certified by the U.S. Department of the Treasury as eligible for qualified investments. Investments are made through qualified opportunity funds (QOFs). According to the U.S. Department of Housing and Urban Development, there are currently 8,764 designated opportunity zones across the U.S.

A qualified opportunity fund is an investment vehicle organized as a corporation or a partnership for the purpose of investing in qualified opportunity zone property. Under the TCJA, investments in QOFs offered three key tax benefits:

1. Temporary deferral of the capital gains reinvested in the OZ (known as the “rollover gain”).
2. Permanent reduction by 10% or 15% in the amount of gain recognized if the investment is held for five or seven years, respectively.
3. Permanent exclusion of future gains from the OZ investment if held for at least 10 years.

To qualify, the TCJA required that the rollover gain be reinvested in a QOF within 180 days of the sale or exchange that generated the gain. The current round of OZ designations established by the TCJA is scheduled to expire on December 31, 2028.

The OBBB establishes a permanent QZ framework, building upon the original program by implementing a rolling 10-year designation process. Beginning July 1, 2026, governors will be able to nominate new OZs, which will take effect on January 1, 2027. New designations will occur every 10 years thereafter.

Under this revised framework, a new deferral schedule will apply to all QOF investments made after December 31, 2026. Specifically, investors will receive a five-year deferral beginning in the year of their initial investment. At the end of the five-year period, they will benefit from a 10% step-up in basis, effectively reducing the taxable portion of the original gain.

While the designation process remains largely consistent with the original TCJA approach, the OBBB tightens eligibility criteria. The definition of a Low-Income Community (LIC) is revised to include only census tracts with a poverty rate of at least 20% or a median family income that does not exceed 70% of the area median. Additionally, a guardrail excludes any tract where the median family income is 125% or more of the area median income. The legislation also eliminates the provision that previously allowed contiguous, non-LIC tracts to be designated as OZs.

In addition to modifying the prior requirements, the OBBB also establishes a type of QOF that invests solely in rural areas. Investment in these “qualified rural opportunity funds” will receive a 30% step-up in basis and creates a special rule that lowers the “substantial improvement” threshold of existing structures from 100% to 50% in rural areas.

One of the most attractive aspects of new OZ investment guidelines is the potential for permanent tax exclusion on capital gains, significantly enhancing long-term value for real estate investors.

Allowance for Payments to Certain Individuals Who Dye Fuel

Fuel excise taxes are indirect taxes applied to the sale or use of fuels like gasoline, diesel, and others, primarily to support transportation infrastructure. In the U.S., these taxes are imposed at both the federal and state levels and serve as a major funding source for the Highway Trust Fund and state transportation budgets. Funds collected help to finance the construction, maintenance, and repair of roads, highways, and related infrastructure. According to taxpolicycenter.org, gasoline and diesel taxes make up over 85% percent of total highway tax revenue.

IRC §4081 imposes federal excise taxes on the removal of diesel fuel and kerosene from any terminal. Tax may be imposed on the same gallon of diesel fuel or kerosene should multiple taxable events occur, or once the fuel leaves bulk transfer. If any person pays an excise tax on the removal of diesel fuel or kerosene and can establish that a prior tax was paid (and not credited or refunded), the tax paid by such person is treated as an overpayment.

Dyed fuel, commonly known as red diesel or off-road diesel, is a type of diesel specifically intended for non-highway use. It is primarily used in agricultural machinery (such as tractors), construction equipment (like bulldozers and cranes), and other off-road engines, including generators. It is illegal to use dyed fuel in vehicles registered for highway use. Ordinarily, dyed fuel is not taxed because it is sold for uses exempt from excise tax. If discovered to be misused, the Internal Revenue Service (IRS) may impose both a civil penalty under IRC §6715 and criminal penalties for tax evasion. In addition to federal enforcement, individual states may impose their own penalties for unauthorized use.

Complexities arise, however, when moving fuel via inter-terminal pipelines. Moving the dyed fuel does not cause fuel to leave bulk transfer, trucking fuel between terminals is considered to be a non-bulk transfer, resulting in the imposition of federal fuel excise taxes regardless of the actual use of the fuel. If a person removes dyed fuel from a terminal on which tax was previously paid (and not credited or refunded), the tax previously paid is not treated as an overpayment, and there is no mechanism by which the person can claim a refund of such tax paid.

To address this issue, the OBBB created a provision which would allow any federal excise tax paid on diesel fuel or kerosene to be refunded or credited if the fuel is subsequently dyed and removed from a terminal for tax-exempt use.

This change would close a gap in current law by establishing a refund mechanism for previously taxed fuel that is later dyed for exempt use. The refund would apply to eligible fuel removed from terminals on or after 180 days following July 4, 2025.

Depreciation Provisions – Section 168(k) and Section 179

Several depreciation provisions are restored and enhanced under the OBBB provisions.

Section 168(k)

The first amongst these changes is the reinstatement of bonus depreciation at 100%. In order to be eligible for this reinstated tax benefit, the asset must be placed in service on or after January 19^th, 2025. The legislation also expands the definition of assets which may be eligible for bonus depreciation.

The OBBB adds a new subsection to IRC §168 to include the 100% expensing of qualified production property by way of an irrevocable election. Qualified production property is defined as nonresidential real property located in the U.S. and is used by the taxpayer as an integral part of a qualified production activity. A qualified production activity is one in which there is the manufacturing, production, or refining of a qualified product, and the result is a “substantial” transformation of that property. The qualified production property must be placed in service before January 1, 2031, and construction must have begun January 19, 2025 and before January 1, 2029.

Qualified production property does not include nonresidential real property used for offices, administrative services, lodging, etc. Qualified production property is a separate class of property and does not include property subject to the Alternative Depreciation System (ADS). If during the 10-year period, the property is no longer used for a qualified production activity, the property is subject to the recapture rules of IRC §1245. The Secretary of the Treasury will provide guidance for defining “substantial” transformation and the change in use when the property is no longer used for a qualified production activity. There is no adjustment for alternative minimum tax.

Section 179

The limitation for the expensing of certain eligible property under IRC §179 is being modified to increase the aggregate cost for the taxable year from $1,000,000 to $2,500,000. The threshold for the reduction in the limitation is increased from $2,500,000 to $4,000,000.

Energy-Related Depreciation Provisions

Taxpayers looking to put energy properties into service in their trade or business will face a new depreciation adjustment. Properties that fall under IRC §48(a)(3), which include green energy producing assets, recycling, and storage, will no longer be considered five-year properties for depreciation purposes. This means those assets will now be subject to depreciation using the general class lifetime rules. In general, it is anticipated that many of these properties will be required to depreciate over longer periods than in previous years. These changes will only affect the applicable assets that began construction after December 31, 2024. Any property placed in service prior to this date can still be depreciated over a five-year period.

This change will heavily reduce the applicable depreciation deductions available for the affected properties and result in less depreciation expenses in earlier years for properties put in service after December 31, 2024. Unlike many of the other related changes for energy, this provision has the potential to affect entities that have put assets in service earlier in the 2025 tax year before the bill was passed.

Modifications to Section 1202

The OBBB made changes to the benefits provided under IRC § 1202 by raising certain thresholders, shortening holding periods, and allowing for a bigger exclusion cap.

More specifically, the changes to §1202 made by the legislation including modifying the five-year holding period requirement to introduce percentage exclusions starting at three years. The per-taxpayer gain exclusion cap increases from $10 million to $15 million and includes an annual inflation-adjustment increase. The OBBB does not affect the 10X Cap for qualified small business stock (QSBS) issued before the effective date. Additionally, the “aggregate gross assets” test amount increases from $50 million to $75 million for QSBS issued after the effective date, along with future inflation adjustments.

New Rules for 163(j) Business Interest

New rules have been added to business interest limitations, also known as the 163(j) adjustment. The new provisions largely restrict businesses from capitalizing interest to avoid the impact of IRC §163(j). Under the new provisions, any interest that has been capitalized in the tax year will be considered first and disregarded, whether the interest would be expensed or capitalized. The entirety of the interest to be capitalized will be limited by IRC §163(j) before any other interest is limited.

To prevent repetition of this penalty in future years and avoid retroactive penalties for companies currently engaging in this practice, any interest that is carried forward is excluded from this rule. Therefore, only interest capitalized in tax years starting after December 31, 2025 will be affected by this provision.

Notably, there are some exceptions to the rule — the interest that is capitalized under IRC §263(g) and IRC §263A(f) are excluded from this rule. In other words, interest capitalized for certain structures involving straddles and interest capitalized for certain taxpayers producing inventory with a long production period and a cost of over $1,000,000 are not subject to the new limitations.

While not retroactive, this provision will largely prevent any tax planning strategies for businesses to avoid the IRC §163(j) by means of capitalizing interest. This will limit the usefulness of capitalizing interest for businesses and individuals who are currently affected by IRC §163(j), including those that are over the gross receipts test threshold, considered a tax shelter, or eligible businesses that failed to elect out of IRC §163(j).

New Items Disregarded as Adjusted Taxable Income

In addition to the capitalization restriction, the OBBB adds new items that are disregarded when calculating adjusted taxable income under 163(j). In particular, the excluded amounts include any under IRC §951(a), IRC §951A(a), and IRC §78 as well as some of the associated deductions relating to those sections. These sections primarily deal with controlled foreign corps, foreign tax credits, and global intangible low-taxed income (GILTI).

Therefore, companies that derive income, dividends, or tax credits from foreign entities will have to calculate taxable income without those benefits. A reduction in taxable income for the purposes of IRC §163(j) will lead to a lower allowable deduction for any interest expense. In other words, companies with foreign holdings and income are likely to see lower allowable interest deductions starting in tax years beginning after December 31, 2025 and will consequently have higher taxable incomes for each tax year affected.

Combined, both sections will result in a significant number of taxpayers subject to IRC § 163(j) business interest limitations, an increase in the total interest that will be limited, and consequently less ability to deduct interest in future tax years. The affected entities and individuals will also have reduced recourse to mitigate these provisions through capitalization.

Low Income Housing Tax Credit

The OBBB makes two permanent changes to the Low-Income Housing Tax Credit (LIHTC) program that materially affect credit availability and project structuring.

1. First, it locks in a permanent 12% increase to each state’s annual LIHTC ceiling starting in 2026. Slightly below the temporary 12.5% boost in effect from 2018 to 2021, but now without an expiration date.
2. Second, and more significantly for developers using 4% credits, the bill lowers the minimum tax-exempt bond financing requirement from 50% to 25% of the aggregate project costs for projects placed in service after 2025. This means more projects will qualify for 4% credits with less reliance on scarce private activity bond volume, potentially unlocking a larger pipeline of feasible affordable housing developments.

The original LIHTC statute allowed each state to allocate a set amount of 9% credits annually, based on population, with the last permanent cap set at $2.75 per capita (indexed for inflation). From 2018 through 2021, states received a temporary 12.5% boost to this cap under prior legislation, which expired in 2022. The OBBB reinstates a similar but slightly smaller increase at 12% and makes the credit permanent, beginning in calendar year 2026. This is particularly relevant for states facing annual oversubscription of 9% credits and allows housing agencies more flexibility in supporting additional competitive projects each year.

The 4% credit has always been tied to projects financed with tax-exempt bonds. However, until now, at least 50% of a project’s aggregate basis had to be bond-financed to qualify. This threshold was often a deterring factor in states with limited private activity bond (PAB) volume, especially after demand surged in the post-pandemic housing market. By reducing the bond test to 25% on a permanent basis for buildings placed in service after 2025, the provisions of the OBBB effectively decouples the 4% credit from full-scale PAB dependency and expands eligibility to a broader range of mixed-finance developments. Developers and housing finance agencies will now have more flexibility to structure layered capital stacks without hitting PAB ceilings or sacrificing project feasibility.

Expanding Tax on Excess Compensation within Tax-Exempt Organizations

Another provision which was enacted under the TCJA is the Tax on Excess Compensation within Tax-Exempt Organizations. This provision imposes a 21% excise tax on compensation exceeding $1 million paid to the five highest-compensated employees (covered employees) of Applicable Tax-Exempt Organizations (ATEOs), and any employee who was a covered employee in a previous year after December 31, 2016. The stated purpose of this tax is to align the treatment of executive compensation at nonprofits with the limitations previously applied only to publicly traded companies.

With the enactment of the OBBB, the scope of the definition of a “covered employee” is broadened to include any employee of an ATEO who receives over $1 million in compensation, regardless of whether they are among the top five highest-paid. The salaries of these employees would be subject to the excise tax. This provision will apply for tax years beginning after December 31, 2025, and retains the inclusion of prior covered employees in subsequent years even after their compensation drops below the threshold.

Implications of this change could result in:

• Organizations could now be taxed on compensation paid to a broader group of highly paid employees.
• Tracking compensation across multiple related entities and employees outside the original top-five threshold would create new administrative burdens and potential compliance risks.
• Increased tax liability and compliance costs may divert funds from an organization’s mission-critical programs and services.
• Disclosure of excise taxes and excess compensation will be made publicly available on IRS Form 4720, increasing transparency with how donated funds are allocated.

1% Income Floor on Deduction of Charitable Contributions Made by Corporations

Under IRC §170, corporate taxpayers may currently deduct charitable contributions up to 10% of their taxable income in a given tax year. Contributions exceeding this limit can be carried forward for up to five years.

The OBBB modifies this framework by introducing a 1% income floor. Under this provision, corporations may only deduct charitable contributions to the extent that their total donations exceed 1% of taxable income. This limitation is scheduled to take effect for tax years beginning after December 31, 2025, and the existing 10% cap remains unchanged.

Contributions that are either disallowed due to the 10% cap or fall below the 1% floor may still be carried forward for up to five years. However, carryforwards related to the 1% floor are only allowed in tax years where total contributions exceed the 10% threshold. For purposes of determining both the 1% floor and the 10% cap, current-year contributions are applied first. Additionally, any carryforward amounts must be reduced if applying it would lower taxable income and result in, or increase, a net operating loss carryover to future years.

Modification of Excise Tax on Investment Income of Certain Private Colleges and Universities

Endowments, typically established through generous contributions from alumni, individuals, corporations, and other organizations, generate investment income that enhances a university’s financial foundation. This income generally supplements tuition, state appropriations, and other funding sources, helping to support undergraduate and graduate education, research, public service, and a wide range of institutional initiatives. By providing a stable and enduring source of revenue, endowments also serve as a financial buffer, protecting the institution from economic fluctuations, unexpected enrollment shifts, and other short-term disruptions.

Provisions of the TCJA imposed a 1.4% annual excise tax on the net investment income of certain educational institutions. The OBBB replaces the flat 1.4% rate with a tiered excise tax structure based on an institution’s student-adjusted endowment, calculated by dividing total endowment assets by the number of “eligible students.” Students who do not meet the eligibility requirements in Section 484(a)(5) of the Higher Education Act of 1965 are excluded from this count.

Under this revised approach, the excise tax rate varies according to the student-adjusted endowment value:

• 1.4% for Student-Adjusted Endowment of: $500,000 – $749,999
• 4.0% for Student-Adjusted Endowment of: $750,000 – $1,999,999
• 8.0% for Student-Adjusted Endowment of: $2,000,000 or more

Additionally, the new law modifies the term “applicable educational institution” to mean an eligible education institution (as defined in Section 25A(f)(2)) that meets the following criteria:

• Had at least 3,000 tuition-paying students during the preceding taxable year
• More than 50% of those tuition-paying students are located in the U.S.
• Is not described in the first sentence of Section 511(a)(2)(B) of the Internal Revenue Code
• Has a student adjusted endowment of at least $500,000.

Student loan interest income and certain royalty income is included when calculating a school’s net investment income. The most direct impact of increased excise taxes is a reduction in the net investment income available to universities.

Medical Provider Taxes

The OBBB introduces new limits for states when imposing taxes on medical providers. In general, states have imposed taxes on medical providers to recuperate the cost associated with Medicare. These taxes, which may be flat or proportional, are generally called provider taxes. While not all states engage in refunding providers, many states impose provider taxes to generate revenue for Medicaid, which the federal government would then match. Participating states would then refund some or a portion of these taxes as a credit back to the providers to fulfill the states obligation for Medicaid while not heavily penalizing the medical provider.

To prevent abuse of this structure, the federal government imposed a series of limits on provider taxes. These limits generally restrict what tax revenues are eligible for the federal Medicaid matching. First the provider taxes would be any taxes that at least 85% of the tax burden falls on health care items. The taxes must be broad based and uniform. Under these criteria the state taxes and reimbursements must be for taxes generally imposed on all health care facilities including hospitals, nursing homes, and private clinics. While the Federal law does not specify how the rules are put in place, some common state methods to impose provider taxes include percentages of revenues based on industry, number of beds used, or any other broad-based rule.

Finally, the taxes must not hold the taxpayer harmless. In other words, the taxpayer cannot receive a refund or benefits directly or indirectly from the state in proportion to their contribution to provider taxes. However, there has historically been a safe harbor ruling whereby the taxpayer may have recourse to recuperate their taxes paid in excess so long as the taxes imposed on them were less than 6% of net patient revenue for the provider and only a certain percentage of the class of taxpayers in the state received 75% or more of their tax costs back from Medicaid. This limit is only imposed on states considered expansion states.

Expansion states are generally states that have decided to expand Medicaid under the Affordable Care Act to broader bases of individuals. The majority of states are considered expansion states. The OBBB adds a gradual phasing to lower the percentage of revenue these states are allowed to tax providers before the provider is no longer eligible to recuperate these taxes paid. The reduction of maximum percentage will be phased down through the 2032 tax year according to the following:

• Current Fiscal year until 2028: 6%
• Fiscal year 2028: 5.5%.
• Fiscal year 2029: 5%.
• Fiscal year 2030: 4.5%.
• Fiscal year 2031: 4%.
• Fiscal year 2032 and beyond: 3.5%.

This change of law will reduce the ability of states to pay back taxes to health care providers. If the states violate these provisions, they will lose some of their Medicaid match and will need to find other ways to pay the tax. While the specifics will depend on how each state addresses the situation, the continuing need to pay for Medicaid is likely to result in any state which imposes provider taxes to simply no longer offer credits or refunds related to such taxes to the affected taxpayers. This could result in significant state tax increases for a large variety of taxpayers in the medical fields, including small offices, hospitals, nursing homes, and specialists. The specifics of the effect will vary by state and in how each state taxes medical providers.

Extension And Enhancement of Paid Family and Medical Leave Credit

Originally, employers received tax credits only based on wages paid to employees while they were on family and medical leave. The new provision introduces an additional option, allowing employers to claim a credit based on premiums paid for qualifying insurance policies that provide paid family and medical leave. It offers employers greater flexibility to structure the tax credit benefits, allowing them to choose the approach that best aligns with their financial advantages.

The new rule also expands employee eligibility criteria for paid family and medical leave that qualifies for the tax credit. While the previous method of calculating compensation for part-time employees is removed, the required employment period is shortened from at least one year to no less than six months with a minimum of 20 hours per week.

There is an aggregation rule that works to ensure that an employer with multiple entities is unable to claim the credit for the same employee more than once. Any leave that’s paid by state/local government or required by state/local law also counts when determining how much paid family and medical leave the company provides. However, that same state/local leave does not count when calculating the federal tax credit amount. It prevents employers from claiming federal tax credits for benefits they are not actually paying for, while still giving them credit for having a comprehensive leave program.

Exceptions From Limitations on Deduction for Business Meals

The provisions of the OBBB makes modifications to certain limitations for the deduction of business meals. This new exception to the 50% limitation rule now allows 100% business meals deduction for meals provided on fishing vessels and at fish processing facilities located in the U.S., north of 50 degrees north latitude and is not located in a metropolitan statistical area. These provisions are aimed to benefit the fishing industry, specifically in remote areas and extreme fishing locations in places like Alaska.

Enhancement of the Employer-Provided Childcare Credit

Under the OBBB, the employer-provided childcare credit rate has been raised from 25% to 40% for qualified childcare expenditures and increases the annual credit cap to $500,000 for eligible small businesses. The determine whether a taxpayer meets the definition of an eligible small businesses, a taxpayer must use the gross receipts test from IRC §448(c), but with five-year averaging periods instead of three years.

The bottom line

The OBBB set forth significant changes to the world of business tax, extending, modifying, and in many cases making tax provisions initially enacted in the TCJA permanent. These changes will require business owners to carefully adjust their tax strategies to comply with the new regulations.

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This article was written by Aprio and originally appeared on 2025-07-07. Reprinted with permission from Aprio LLP.
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