Pause Before Acting on Business-Friendly Changes in New Tax Law

Business tax strategies are shifting due to the new $3.4 trillion tax law’s business-friendly modifications to the federal tax code for accelerated cost recovery (Section 168), expensing certain depreciable business assets (Section 179), and research and experimental expenditures (Section 174).

Before embracing these enhanced provisions, however, businesses and their tax advisers should carefully review all requirements of each relevant provision and identify any need for Treasury Department guidance. Taxpayers should also be aware that many states may not conform to these provisions.

The full expensing of qualified property, and the special depreciation allowance for qualified production property provisions, illustrate the need for careful analysis before shifting business strategy.

‘In Pocket’ Cash

The leading provision for many taxpayers will be the accelerated depreciation in Section 168. These immediate tax benefits mean more cash “in pocket” to offset operating costs. The right fact pattern may allow for significant capital expenditures at a lower after-tax cost than what would have been possible before the tax law’s passage.

An example of such a pattern would be a construction company that normally replaces trucks and other equipment as necessary. With accelerated depreciation, it now could buy new equipment that costs less to operate and increases its margins—with less after-tax costs than a piecemeal approach. This benefits the equipment manufacturers as well as the construction company.

For 100% bonus depreciation, qualified property is tangible personal property with a recovery period of 20 years or less, which includes qualified improvement property for real estate purposes. Businesses may also proactively purchase property they were considering holding off on.

But they need to work closely with their accounting team and advisers to understand any ramifications of expanding in the second half of the year—or the implications of hesitating for another year or longer. Notably, assets placed in service before Jan. 20, 2025, are only eligible for a 40% bonus depreciation.

Additionally, taxpayers may now deduct 100% of the adjusted basis of qualified production property in the year such property is placed in service. This new special depreciation allowance for qualified production property, subject to six key requirements, is useful for new factories and certain improvements to existing factories under the new Section 168(n) created by the new tax law.

Taxpayers in the manufacturing and agriculture industries may be able to deduct costs that previously would have made expansion too costly to contemplate. Generally, a qualified production activity—one of the required factors—means the manufacturing, production, or refining of tangible personal property.

If a company falls within these industries, it may want to consider special depreciation as qualified property for new factory production. But construction of these properties must have begun after Jan. 19, 2025, and before Jan. 1, 2029, and the property must be placed in service before Jan. 1, 2031. Notably, certain used property may qualify if it hasn’t been used in a production activity between the period of Jan. 1, 2021, and May 12, 2025.

Businesses recalibrating their business strategy for fall must consider those dates. The new law further requires a “substantial transformation of property” to qualify. Not surprisingly, businesses may be waiting to hear how Treasury defines this before moving forward.

Modernizing Operations

Small and mid-sized businesses may consider modernizing their equipment and software in the near future using Section 179 expensing to reap the benefits of immediate tax savings up to $2.5 million. Qualified expenses could include anything from machinery and computers to certain building improvements.

However, the expense must be new to that particular business and, in many cases, the legal definition of what constitutes “qualified business use” can be counterintuitive. There also may be a significant overlap between purchases that are eligible for accelerated depreciation under Section 168 and for expensing under Section 179.

Some key considerations are the business income expected during the year, the ability to generate net operating losses for future years, and what the overall plan is for the asset because of differences in the recapture.

Research Expenses

Many businesses are optimistic about the restoration of the deduction for domestic research and experimental expenditures under Section 174, including those related to software. The new tax law permanently, and in some cases retroactively, restores full expensing for domestic research expenditures, providing welcome certainty for research-intensive businesses so they can plan for long-term costs.

Taxpayers will see favorable changes to Section 174(d) for domestic research costs and flexibility to accelerate the deduction of unamortized domestic research costs capitalized under the 2017 Tax Cuts and Jobs Act. Small business taxpayers will be able to retroactively deduct domestic research costs.

Timing and implementation of certain variables will require additional IRS guidance. For now, businesses should map out how the rules will affect their R&E credit—and how the change in taxable income may affect other deductions. Businesses that plan ahead will be able to move quickly and maximize their benefits once the IRS tells taxpayers how to implement these provisions.

Businesses considering R&E expenditures deductibility must work with their tax professionals to ensure increased research deductions don’t adversely impact other tax areas, such as the Section 163(j) interest deduction limit and foreign tax liabilities under the foreign-derived intangible income and base erosion and anti-abuse tax rules.

Next Steps

The new tax law favors action over waiting and may push some businesses to make investments more quickly than they had previously contemplated. But although most of the provisions have quick effective dates, businesses must be careful when reviewing their new tax strategy to ensure the date of the expense or start of a business activity qualifies.

Documentation remains as important as ever, and many businesses are focusing renewed efforts on meticulous recordkeeping in the near term.

The devil is in the details, and businesses that rush to take advantage of certain provisions in the new law may come up dry if they don’t adequately strategize with their tax advisers and read the fine print.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Jessica Jeane is the director of tax policy, national tax practice, at Baker Tilly.

James Creech is a principal with Baker Tilly’s national tax team.

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