Key Tax Law Extensions and Updates for Businesses: Navigating Cost Segregation, Depreciation, and R&D Credits
On May 12, 2025, the House Ways and Means Committee unveiled a comprehensive legislative update on an earlier proposal by Chairman Jason Smith (R-MO) as part of the fiscal year 2025 budget reconciliation process. The proposed measures primarily address the expiring tax provisions of the 2017 Tax Cuts and Jobs Act (TCJA) that would significantly impact small and medium-sized businesses (SMBs). SMBs utilizing cost segregation strategies, accelerated depreciation deductions, Section 179 expensing, Section 45L credits, and R&D tax credits could benefit from these proposed updates.
To follow is a summary of the key proposed updates:
Bonus Depreciation Extended Through 2029
The proposal extends 100% bonus depreciation through the end of 2029, with certain provisions, long-production-period property and specified aircraft, extending further into 2030. Originally, bonus depreciation began to phase down in 2023. This extension will allow businesses to start immediately expensing 100% of qualifying capital expenditures acquired and placed in service after January 19, 2025.
Increased Section 179 Expensing Limits
Under the proposed changes, Section 179 expense provisions are significantly enhanced, directly benefiting SMBs:
- Maximum deduction limit: Increased to $2.5 million per tax year.
- Phase-out threshold: Raised to $4 million.
These enhancements provide SMBs greater flexibility to invest in equipment, machinery, and other qualifying tangible property, stimulating business growth and operational efficiency.
Section 45L Energy-Efficient Home Credits Updates
The proposed legislation maintains Section 45L credits will remain available through 2025. This provides SMBs and developers involved in residential construction a limited window to leverage these valuable credits, making timely action critical.
Temporary Reinstatement of Immediate R&D Expensing
R&D expenditures would be significantly relieved as the TCJA’s requirement for capitalization and five-year amortization of Research & Development expenses would be temporarily suspended.
- Applicable tax years: Starting after January 1, 2025, and before January 1, 2030.
This change enables immediate deduction of qualifying research expenses, promoting innovation and technological development among SMBs to enhance their competitive positioning.
Enhanced Qualified Business Income (QBI) Deduction
Under IRC Section 199A, the QBI deduction is proposed to increase greatly, benefiting pass-through entities:
- Deduction rate increase: From 20% to 23%.
- Inflation indexing: Starting in 2026, threshold amounts will be inflation-adjusted.
- New eligibility category: Inclusion of interest dividends from qualified Business Development Companies (BDCs).
These enhancements provide additional tax relief and incentives for growth among partnerships, LLCs, sole proprietorships, and S-corporations.
Ongoing Advantages of Cost Segregation Studies
Given the continued availability of extended bonus depreciation and enhanced Section 179 limits, cost segregation studies remain particularly advantageous. SMBs owning real estate can strategically accelerate depreciation deductions, thus significantly reducing taxable income and optimizing cash flow.
New Full Expensing for Industrial Facilities
A notable addition to the proposal is a provision allowing manufacturers to fully expense the costs associated with constructing nonresidential real estate used specifically for manufacturing, production, or refining tangible goods. To be eligible, construction must commence between January 19, 2025, and December 31, 2028, and the taxpayer must place the facility into its original use. This provision will present a significant incentive aimed at promoting domestic manufacturing and refining capabilities for U.S. based manufacturers.
Strategic Recommendations for SMBs and Advisors
To fully leverage these legislative proposals, businesses and their financial advisors should consider:
- Accelerating capital investment plans to benefit from the continued bonus depreciation and enhanced Section 179 deductions.
- Revisiting and potentially revising R&D investment timelines to maximize immediate deductibility during the temporary suspension period.
- Utilizing comprehensive cost segregation analyses to ensure depreciation benefits are fully optimized.
Conclusion
If enacted, this legislation would have extensive implications for SMBs, pass-through entities, and larger corporations. These proposed changes highlight the importance of proactive tax planning and strategic investment decisions. As developments unfold, SMBs and their professional advisors must remain vigilant to ensure optimal alignment with these evolving tax incentives.
For additional guidance or to discuss how these changes might specifically affect your business strategies, please contact Daniel Hurtado.
