Select Tax Law Highlights from the One Big Beautiful Bill (H.R.1) for High-Net-Worth Taxpayers

Posted August 11, 2025 by

Category: Uncategorized

The One Big Beautiful Bill (H.R.1) is a sweeping tax and spending reform package signed into law on July 4, 2025. While many of its provisions target broad categories of taxpayers, a number of significant changes directly affect high-net-worth individuals, family offices, and closely held business owners. Below is a curated summary of the provisions most likely to impact this group, with accompanying planning considerations.

1. Estate, Gift, and Generation-Skipping Transfer (GST) Tax Exemption Increases

  • The unified exemption for estate, gift, and GST tax is permanently increased to $15 million per individual (or $30 million per couple) beginning in 2026, indexed for inflation.
  • This repeals the TCJA sunset that would have cut the exemption to around $7.4 million per person in 2026.
  • The step-up in basis at death is preserved, meaning heirs will continue to receive assets at their fair market value on the decedent’s date of death, avoiding embedded capital gains.

Example: A married couple who fully use their $27.2M exemption by 2025 can now transfer an additional $2.8M each beginning in 2026 without triggering transfer tax. At a 40% estate tax rate, that equates to $2.24M in avoided estate tax.

Planning Considerations:

  • Ultra-High-Net-Worth (UHNW) taxpayers should review current gifting strategies to take advantage of the new exemption before possible political shifts reduce the exemption again.
  • Beyond estate tax savings, residents in high-tax states, can combine the exemption increase with income tax savings by gifting to non-grantor trusts created and administered in states without an income tax (e.g. Nevada, South Dakota, Delaware). When properly structured:
    • The trust becomes a separate taxpayer, not tied to California residency or tax rates.
    • E.g. California does not tax the trust’s income if the trust has no:
      • California trustees
      • California resident discretionary beneficiaries, and
      • California source income
  • Dynasty trusts, SLATs (Spousal Lifetime Access Trusts), and GRATs (Grantor Retained Annuity Trusts) remain great tools for utilizing the new high exemption.
    • Example: A taxpayer gifts $15 million in marketable securities into a GST-exempt dynasty trust in 2026. If those assets double in value to $30 million over the next 10 years:
      • None of the appreciation is subject to estate, gift, or GST tax.
      • Assuming the taxpayer retained no interest, and the assets were outside the estate at death, this could avoid up to $12 million in transfer tax (40% x $30 million).

2. Charitable Giving Changes for High-Income Donors

  • Starting in 2026, individuals in the highest tax bracket will be subject to a 0.5% AGI floor on charitable deductions. This means only contributions in excess of 0.5% of AGI will be deductible.
  • The $1,000 universal charitable deduction is unlikely to benefit UHNW donors.
  • Universities and educational institutions with large endowments will now face an increase in tax, as the excise tax on net investment income rises from 1.4% to 8%.
  • Example: A taxpayer has AGI of $10 million and plans to donate $1 million to a qualified public charity, will lose a $50,000 deduction due to the AGI floor (0.5% x $10 million). That equates to $18,500 of lost tax benefit (37% rate).
    • Under the current law (through 2025):
      • The full $1 million is deductible
      • At a 37% federal tax rate, the donation reduces tax liability by $370,000
    • Under the new law (starting in 2026):
      • Only the amount above 0.5% of AGI is deductible
      • 0.5% x $10 million = $50,000 AGI floor
      • Deductible amount = $1 million – $50,000 = $950,000
      • Tax savings = $950,000 x 37% = $351,500
      • Lost tax benefit = $370,000 – $351,500 = $18,500

Planning Considerations:

  • Accelerating large charitable contributions into 2025 before the AGI floor applies, ensures the entire donation qualifies for the deduction, regardless of AGI..
  • Establishing or contributing to donor-advised funds (DAFs) in 2025, allows taxpayers to claim full deductions in 2025, while preserving flexibility to make the donations over time.
  • The increased 8% excise tax on university endowments may reduce the efficiency of donations to large institutions. UHNW taxpayers may wish to consider redirecting support to smaller colleges, DAFs, or direct scholarship programs.

3. SALT Deduction Cap Modification & Pass-Through Entity (PTE) Tax Elections

  • The State and Local Tax (SALT) deduction cap increases to $40,000 through 2029, but phases down by 30% of the excess AGI over $500,000, not to go below the floor of $10,000.
    • Example: AGI = $600,000
      • Excess AGI = $600,000 – $500,000 = $100,000
      • Reduction = 30% x $100,000 = $30,000
      • New SALT cap = $40,000 – $30,000 = $10,000.
      • Result: Taxpayer is allowed only $10,000 of SALT deductions.
    • Example: AGI = $700,000
      • Excess AGI = $700,000 – $500,000 = $200,000
      • Reduction = 30% x $200,000 = $60,000
      • New SALT cap = $40,000 – $60,000 = below $10,000, so floor applies
      • Result: Taxpayer is allowed $10,000 of SALT deductions
  • Though previously proposed in early versions of the bill, no new federal restrictions on state-level PTE elections made it into the final bill.
  • Entities may continue to use these elections to bypass the SALT cap by shifting state income tax payments to the entity level, where they are fully deductible for federal purposes.

Planning Considerations:

  • UHNW taxpayers in states like CA or NY with large pass-through income should analyze the interaction of PTE tax with federal and state treatment annually.
    • California governor just signed SB 132 into law extending the PTE elective tax for an additional 5 years, with an amendment.
    • The California amendment includes a change from the previous rule requiring entities to make a prepayment by June 15th to be eligible for the PTE election. Under the amended law, failure to make this prepayment, no longer prevents an entity from making the election, but instead reduces the amount of the credit that can be claimed by 12.5% of the qualified taxpayer’s pro rata share of the amount due.
  • Taxpayers should consider whether to bunch income or deductions around AGI cliffs to maintain partial access to the $40,000 cap.
  • Taxpayers should evaluate their ability to use PTE credits fully, and consider both current and future income with regards to carryforward rules.
  • Taxpayers need to continue to watch for state-specific election rules and estimated payment deadlines, that can disqualify a late election.

Illustration:

Facts for example:

  • Taxpayer – Married filing jointly (MFJ)
  • California resident (high-tax state with PTE regime)
  • AGI thresholds affecting SALT deduction: phase down begins at $500,000
  • PTE tax is deductible at the entity level for federal purposes, not subject to SALT cap
  • Effective federal marginal tax rate: 37%
  • California state tax rate: approximately 9.3% – 11.3% based on income
  • PTE credit is dollar-for-dollar but limited to California income tax due at individual level
  • Any unused PTE credit in CA carries forward for 5 years

Scenario 1: AGI = $480,000

  • State income tax $480,000 x 9.3% = $44,640
  • Property tax: $13,200
  • Total SALT paid = $57,840
  • SALT deduction cap = $40,000 (fully available)

Without PTE:

  • Can deduct $40,000 on Schedule A
  • Federal tax savings = $40,000 x 37% = $14,800

With PTE:

  • PTE tax paid at entity level: $44,640
  • Above the line federal deduction = $44,640 x 37% = $16,517
  • Schedule A deduction drops to property tax only: $13,200 x 37% = $4,884

Net benefit from PTE election:

  • $16,517 – $4,884 = $11,633

Conclusion:

  • PTE election is favorable, assuming full credit can be used. If credit utilization is uncertain or the taxpayer does not itemize, the benefits might be less.

Breakeven Analysis:

  • If PTE tax paid = $35,000 and taxpayer is already deducting $40,000 in SALT through Schedule A, the incremental benefit of PTE is negligible or potentially negative due to lost Schedule A deductions.
  • Federal tax savings on $5,000 = $1,850
  • Cost to calculate and elect PTE might outweigh the federal tax savings

Scenario 2: AGI = $600,000

  • State income tax $600K x 10.3% = $61,800
  • Property tax: $22,000
  • Total SALT paid = $83,800
  • SALT deduction cap = $10,000
    • ($600K – $500K) x 30% = $30,000
    • $40,000 – $30,000 = $10,000 deduction cap

Without PTE:

  • Taxpayer can only deduct $10,000 on Schedule A
  • Federal tax savings = $10,000 x 37% = $3,700

With PTE election:

  • PTE tax paid at entity level: $61,800
  • Above the line federal deduction = $61,800 x 37% = $22,866
  • Schedule A deduction remains $10,000 (property tax alone is more than the floor)
  • In addition to PTE tax benefit, taxpayer continues to receive the $3,700 federal tax savings of deducting $10,000 of SALT deductions on Schedule A.

Net benefit of PTE election:

  • $22,866 + $3,700 = $26,566  Total benefit with PTE election
  • $26,566 – $3,700 = $22,866   Additional benefit of making PTE election
  • Therefore, making the PTE election is favorable.

Scenario 3: AGI = $1.2 Million

  • State income tax $1.2M x 11.3% = $135,600
  • Property tax: $33,000
  • Total SALT paid = $168,600
  • SALT deduction capped at floor = $10,000

Without PTE:

  • Can deduct $10,000 on Schedule A
  • Federal tax savings = $10,000 x 37% = $3,700

With PTE election:

  • PTE tax paid at entity level: $135,600
  • Above the line federal deduction = $135,600 x 37% = $50,172
  • Schedule A deduction remains $10,000 (property tax alone is more than the floor)
  • In addition to PTE tax benefit, taxpayer continues to receive the $3,700 federal tax savings of deducting $10,000 of SALT deductions on Schedule A.

Net benefit of PTE election:

  • $50,172 + $3,700 = $53,872  Total benefit with PTE election
  • $53,872 – $3,700 = $50,172  Additional benefit of making PTE election
  • Therefore, making the PTE election is favorable

When PTE Might Not be Beneficial

  • If a taxpayer is able to fully deduct their entire SALT through Schedule A. Or if the cost of calculating the PTE and making the election is more than the tax savings of claiming the credit.
  • If the taxpayer has insufficient individual state tax liability to use the credit.

4. Qualified Business Income (QBI) Deduction – IRC §199A

  • The 20% deduction for Qualified Business Income (QBI) under IRC §199A is made permanent.
  • The deduction generally equals 20% of qualified business income from pass-through entities such as S-corporations, partnerships, and sole proprietorships.
  • For high-income taxpayers, the deductions is subject to limitations based on the W-2 wages paid by the business and the unadjusted basis of qualified property held by the business.
  • Specified service trades or businesses (SSTBs) such as law, accounting, financial services, and consulting face phase-out rules that can reduce or eliminate the deduction above certain income levels.

Phase-In Thresholds and Limitations

  • The income thresholds for which wage and property limitations begin to phase in are increased to $150,000 for joint filers ($75,000 for single filers).
  • The limitations are fully phased in when taxable income reaches $250,000 for joint filers ($125,000 for single filers).
  • A minimum deduction of $400 is added for taxpayers with modest QBI amounts, though this is generally has minimal impact on UHNW taxpayers.
  • Within the phase-in range ($150,000 – $250,000 for joint filers), a formula applies that gradually limits the deduction if W-2 wages or qualifies property are insufficient.
    • Once taxable income exceeds the phase-in range, the deduction is limited to the lesser of:
      • 20% of QBI, or
      • The greater of:
        • 50% of W-2 wages, or
        • 25% of W-2 wages plus 2.5% of the unadjusted basis of qualified property
  • As a reminder QBI generally includes ordinary trade or business income from pass-through entities (sole proprietorships, S-corporations, partnerships) and excludes capital gains, dividends, guaranteed payments, and investment income.
  • Example 1: A married taxpayer earns $1 million of QBI and has taxable income of $140,000 (below the $150,000 threshold for joint filers). W-2 wages or property levels are irrelevant in this example.
    • QBI deduction = 20% x $1,000,000 = $200,000
    • Federal tax savings: $200,000 x  37% = $74,000
  • Example 2: A married taxpayer earns $800,000 in QBI and $100,000 of W-2 wages. Taxable income is $200,000 (within the phase-in range for joint filers).
    • Full QBI deduction (if limits didn’t apply) = 20% x $800,000 = $160,000
    • Wage limit = 50% x $100,000 = $50,000
    • Phase-in percentage = ($200,000 – $150,000) / ($250,000 – $150,000) = 50%
    • Amount above the wage limit = $160,000 – $50,000 = $110,000
    • Reduction = 50% x $110,000 = $55,000
    • Allowed deduction = $160,000 – $55,000 = $105,000
    • Federal tax savings = $105,000 x 37% = $38,850
  • Example 3: A married taxpayer earns $1.2 million in QBI, has no W-2 wages, and holds 3 million in qualified property. Taxable income is $500,000 (above the phase-in range).
    • Full QBI deduction (if limits didn’t apply) = 20% x $1,200,000 = $240,000
    • Wage/property limit = 25% x $0 + 2.5% x $3,000,000 = $75,000
    • QBI deduction limited to $75,000
    • Federal tax savings = $75,000 x 37% = $27,750

Planning Considerations:

  • Similar to pre OBBB, for taxpayers above the phase-in range, the QBI deduction may be significantly reduced if the business lacks sufficient wages or qualified property.
  • Structuring or increasing W-2 wages is a common strategy to maximize the deduction above the threshold.
  • Business owners should evaluate their compensation mix and consider shifting from guaranteed payments, which reduce QBI, to W-2 wages, which support the deduction.
  • For those with multiple pass-through entities, aggregation may allow grouping of wages and property, increasing the allowable deduction.

5. Bonus Depreciation & Capital Investment – IRC §168

  • 100% bonus depreciation is reinstated and made permanent for qualifying property placed in service after January 19, 2025, reversing the phase-down schedule under prior law. Prior to OBBB, bonus depreciation was set to decline to 40% in 2025, 20% in 2026, and fully expire by 2027.
  • The law also expands the definition of qualified property to include certain nonresidential real estate used in production industries.
  • Bonus depreciation continues to apply to both new and used property, as long as it is new to the taxpayer and not acquired from a related party.
  • Reminder on Eligibility Requirements:
    • Must be MACRS property with a recovery period of 20 years or less.
    • Includes machinery, equipment, computer systems, vehicles, off-the-shelf software, and Qualified Improvement Property (QIP).
    • Excludes land, buildings, and assets subject to the Alternative Depreciation System (ADS), unless specifically carved out.

Planning Considerations:

  • Taxpayers should time purchases to ensure eligible assets are placed in service after January 19, 2025 to qualify for the reinstated 100% bonus.
  • Taxpayers should consider cost segregation, especially for real estate, segregating components can dramatically increase year-one deductions.
  • Bonus depreciation can be used to coordinate offsetting large gains from business sales or other liquidity events.
  • Accelerated deductions may reduce inside basis, affecting sale price or negotiation leverage.
  • Taxpayers should consider deferring bonus or using IRC §179 in years with low taxable income.
  • Many high-tax states such as California and New York do not confirm to federal bonus depreciation, so taxpayers should pay attention to states with nonconformity.

6. Qualified Small Business Stock (QSBS) – IRC §1202 Modernization

  • The OBBB revises IRC §1202 for QSBS acquired after July 4, 2025, by introducing tiered exclusion percentages based on holding periods and increasing key thresholds for eligibility and gain exclusion.
  • The gain exclusion percentages are now tiered as follows:
    • 50% exclusion for QSBS held more than 3 years,
    • 75% exclusion for QSBS held more than 4 years,
    • 100% exclusion for QSBS held more than 5 years.
  • The per-taxpayer lifetime cap on the gain exclusion is increased from $10 million to $15 million, indexed annually for inflation.
  • The gross asset limit for qualified corporations is raised from $50 million to $75 million, increasing access for larger startups and emerging growth companies.
  • Tacking of holding periods in certain rollover transactions is disallowed, limiting the ability to combine pre and post acquisition holding periods to meet the exclusion thresholds.
  • Example: A taxpayer acquires $15 million of QSBS in August 2025 from a qualifying U.S. C-corporation. In September 2030, the stock is sold for $40 million. The holding period exceeds 5 years, so 100% of the $25 million gain is excluded. The federal tax savings = $25 million x 23.8% = $5.95 million in avoided tax.

Planning Considerations:

  • Taxpayers should track acquisition dates and holding periods closely to determine which tiered exclusion level will apply. Delaying a sale by even a few months could materially impact tax savings.
  • Equity issuances after July 4, 2025, should be structured to meet the revised eligibility rules. Consider delaying stock grants or capital raises to qualify under the higher exclusion tiers.
  • Gifting strategies using non-grantor trusts, SLATs, or other irrevocable vehicles can be used to multiply the $15 million per-taxpayer exclusion across multiple family members or beneficiaries.

7. Full Expensing of Domestic R&E Costs – IRC §174A Reform

  • The One Big Beautiful Bill introduces new IRC §174A, which restores the pre-TCJA rule allowing full immediate expensing of domestic research and experimental (R&E) costs.
  • This new default treatment applies to taxable years beginning after December 31, 2024.
    • No election is needed to apply this treatment, it will automatically apply to 2025 calendar year taxpayers (or 2024 fiscal year filers).
    • The change applies only to domestic R&E expenditures. Foreign research must still be capitalized and amortized over 15 years.
  • Taxpayers who prefer to capitalize and amortize domestic R&E expenses may elect to do so. However, this election must be affirmatively made each year and must include a statement titled “FILED PURSUANT TO SECTION 6.02 OF REV. PROC. 2025-28”.
  • Adopting the new expensing method is treated as a change in method of accounting:
    • However, no IRC §481(a) adjustment is required.
    • The change is applied on a cut-off basis, meaning only prospectively, not retroactively.

Optional Retroactive Election

  • Eligible taxpayers may elect to apply full expensing retroactively to amounts paid or incurred in taxable years beginning after December 31, 2021.
  • This election must be made:
    • No later than July 4, 2026 (one year after enactment),
    • By filing amended returns of AARs for each affected year (i.e. 2022, 2023, and 2024 if already filed), with an election statement titled “FILED PURSUANT TO SECTION 3.03 OF REV. PROC. 2025-28”, or
    • By making the election on a timely filed 2024 return (including one deemed timely under Rev. Proc. 2025-28).
  • For taxpayers who deduct research expenses on a timely filed 2024 return, the election is deemed made automatically (even without attaching a statement). However, if R&E was incurred in 2022 and 2023, those prior returns must also be amended, because the election applies to all retroactive years.
  • A 2024 return will be considered “timely filed” for purposes of making (or being deemed to have made) the retroactive §174A election if it is filed on or before the taxpayer’s extended due date for 2024. For taxpayers who did not request an extension and filed their 2024 return before September 15, 2025, Rev. Proc. 2025-28 grants an antomatic six-month extension to file a superseding return solely to make the election. This means the latest possible filing date under the relief is:
    • September 15, 2025 (partnerships and S-corporations)
    • October 15, 2025 (C-corporations, individuals, trusts, estates), or
    • November 15, 2025 (calendar year exempt organizations filing Form 990-T).
  • This extended superseding-return relief applies only for making the small business retroactive election. For returns filed without the election, the extended date relief does not apply.

Example 1: Applying Default Rule Prospectively

  • A taxpayer amortized R&E expenses on their 2022 through 2024 returns. In 2025, the taxpayer switches to full expensing under IRC §174A.
  • No election is needed.
  • No amended returns are required.
  • No IRC §481(a) adjustment is triggered.
  • Result: For a taxpayer incurring $2 million of R&E costs in 2025, the full $2 million is deducted in 2025, saving up to $740,000 in federal tax at the 37% marginal rate.

Example 2: Electing Retroactive Expensing

  • A company incurred $2 million of domestic R&E costs in each of 2022, 2023, and 2024 previously amortized these amounts over 5 years. The taxpayer elects retroactive expensing under OBBBA §70302(f)(1)(A).
  • The taxpayer must:
    • File amended returns for 2022, 2023, and 2024 (if previously filed under the amortization method).
    • Reflect the full deduction in each of those years.
  • Result: Each amended return generates a $2 million deduction, which ignoring other factors, at a 37% tax rate results in $740,000 per year in refunds. Across three years, the taxpayer receives $2.22 million in cash tax refunds.

IRS Guidance on Deducting Research Expenses (Rev. Proc. 2025-28)

On August 28, 2025, the IRS issued Revenue Procedure 2025-28, clarifying how taxpayers can deduct domestic research expenses under the new law. The guidance addresses both when an election statement is required and an alternative deduction method for unamortized 2022-2024 costs.

Election Statement Requirements:

  • Retroactive elections generally require attaching a statement marked “FILED PURSUANT TO SECTION 3.03 OF REV. PROC. 2025-28” to each amended return (or AAR for partnerships).
  • For taxpayers who have not yet filed their 2024 return, deducting research expenses on a timely filed return (under Rev. Proc. 2025-28) is considered a deemed 2024 election even without attaching a statement.
  • For purposes of the deemed 2024 election, a 2024 return will be considered timely filed if submitted on or before the extended due date, even if an extension was not actually filed.
  • Caution: If a taxpayer makes this deemed election for 2024 and also had research expenses in 2022 and 2023, they must also amend those years, because the election applies to all retroactive years.

Alternative Deduction Method for Unamortized Research Expenses

In lieu of amending prior returns, taxpayers may elect to deduct any remaining unamortized domestic research expenses from 2022, 2023, and 2024 on their 2025 return or spread those deductions between their 2025 and 2026 returns. This election is made directly on the 2025 return.

Another option that also bypasses the need to amend prior returns, is taxpayers may choose to make a §481(a) adjustment on their 2024 originally filed return. This approach allows the taxpayer to recover the previously unamortized R&E costs as a single adjustment on the 2024 return, rather that waiting until 2025 to claim the deduction.

Example 3: Alternative Deduction Method (2025 Adjustment):

A taxpayer incurred $1.5 million of domestic research expenses in each of 2022, 2023, and 2024 and amortized them. As of January 1, 2025, $3.6 million remains unamortized.

  • Option A – Immediate Deduction on 2025 Return: The taxpayer deducts the full $3.6 million in 2025, producing a $1.33 million tax savings at the 37% rate.
  • Option B – Spread Deduction Over 2025 and 2026. The taxpayer deducts $1.8 million in each year, aligning deductions with projected higher income in 2026.

Example 4: Alternative Deduction Method (2024 Adjustment):

A taxpayer incurred $1.5 million of domestic research expenses in each of 2022, 2023 and amortized them. In 2024, the taxpayer also incurs $1.5 million of new R&E costs, and as of 2024 there is $2.4 million of previously unamortized 2022 and 2023 expenses.

By making the §174A election on the originally filed 2024 return, the taxpayer:

  • Deducts the full $1.5 million of 2024 R&E costs in 2024, and
  • Claims a §481(a) adjustment for the $2.4 million of previously unamortized 2022 and 2023 expenses, reducing 2024 taxable income.

In total, the taxpayer deducts $3.9 million on the 2024 return ($1.5 million current-year deduction + $2.4 million §481(a) adjustment). At a 37% rate, this produces a $1.44 million tax savings in 2024 without amending prior returns or waiting until 2025.

Planning Considerations:

  • Taxpayers now have multiple ways to recover previously capitalized domestic R&E costs from 2022-2024:
    • Amend prior returns to fully deduct expenses in the original years. This can maximize refunds but comes with compliance burden and IRS processing delays, especially for amended returns filed close to the July 2026 deadline.
    • Elect the alternative deduction method on the 2025 return (or spread between 2025 and 2026). This avoids amended returns while still producing substantial near-term deductions.
    • Make a §481(a) adjustment on the 2024 originally filed return. This option deducts current year 2024 R&E costs outright and recovers unamortized 2022-2023 expenses through a §481(a) adjustment. It accelerates the benefit into 2024 without amended returns or waiting until 2025.
  • Additional considerations:
    • Taxpayers undecided about retroactive expensing should continue capitalizing on their 2024 return to preserve flexibility.
    • Rev. Proc. 2025-28 allows taxpayers who filed their 2024 return before September 15, 2025 without extension to be treated as if they had extended, solely for purposes of making or revoking elections under this procedure. This deemed extension does not affect other filing or payment obligations.
    • Taxpayers projecting uneven profitability may optimize by spreading deductions between 2025 and 2026.
    • Taxpayers anticipating higher income in later years may still benefit from amortization. For example, $2 million amortized over 5 years may produce larger total tax savings if deductions align with future higher brackets.
    • In a loss year, immediate expensing may only increase NOLs that are subject to the 80% limitation and cannot be carried back. Strategic amortization may better match deductions to taxable years.
    • Full expensing reduces the R&D credit base under IRC §41. In some cases, amortization can produce a larger net benefit when credits outweigh immediate deductions.
    • Ownership change or M&A planning: NOLs generated by expensing may be subject to §382 limitations. Predictable amortization deductions may be more attractive to potential buyers.
  • Example 5: A startup incurs $2 million of domestic research and experimental costs in 2025, which also qualify as QREs under IRC §41. It is not yet profitable and thus has no taxable income in 2025. The taxpayer is evaluating two strategies:
    • Scenario A: Full Expensing
      • The $2 million is fully deducted under IRC §174A in 2025.
      • This deduction generates a $2 million NOL, which may be carried forward but is subject to the 80% income limitation and may be restricted under IRC §382 in the event of an ownership change.
      • In the absence of taxable income, there is no current-year tax savings.
      • Additionally, because the deduction reduces the QRE base, the taxpayer may forfeit part or all of the R&D credit.
    • Scenario B: Amortization  + Preserved R&D Credit
    • The taxpayer amortizes the $2 million over 5 years, deducting $400,000 per year.
    • The full $2 million of QREs remains intact for credit purposes.
    • Using the alternative Simplified Credit method:
      • Prior 3-year average QREs = $1 million
      • 50% of prior 3-year average = $500,000
      • Excess QREs = $2 million – (50% of $1 million) = $1.5 million.
      • Calculating gross R&D credit (ASC method) = 14% x $1.5 million = $210,000.
    • Electing a reduced credit under IRC §280C: Reduced credit = $210,000 x (1-0.21 tax rate) à $210,000 x 0.79 results in a net credit of $165,900.
  • This credit can offset federal income tax or, if the taxpayer qualifies, may be used to offset employer payroll tax liability (up to $500,000 annually).
  • Conclusion: In this scenario, the $165,900 credit delivers immediate tax value, even though the company is not profitable. In contrast, the $2 million deduction under full expensing would generate no current-year savings and may result in a deferred benefit that is partially limited or lost. The net present value of the credit may therefore exceed that of the immediate deduction.
  • Taxpayers anticipating a sale or ownership change may want to avoid full expensing if it would generate NOLS that later become limited under IRC §382. In merger and acquisition scenarios, large pre-acquisition NOLs may be partially or wholly unusable. Predictable annual deductions from amortization are often more valuable to buyers and may result in a stronger valuation during negotiations.

8. International Tax Reforms – GILTI Repeal & BEAT Permanence

  • The Global Intangible Low-Taxed Income (GILTI) regime under IRC §951A is repealed for tax years beginning after December 31, 2025.
  • In its place, the “Net CFC Tested Income” regime is established under new IRC §951B, designed to more closely resemble Subpart F principles. Key features include:
    • U.S. shareholders of controlled foreign corporations (CFC)s must include their pro rata share of net tested income, defined as gross income less allocable deductions (excluding Subpart F income and certain other categories).
    • The previous Qualified Business Asset Investment (QBAI) exemption, which allowed a notional return on tangible foreign assets to be excluded from GILTI, is eliminated under the new regime.
  • A new inclusion rule under §951B applies to U.S. shareholders who directly or indirectly own at least 10% of a CFC, regardless of whether the entity is owned through partnerships or trusts.
  • The Base Erosion and Anti-Abuse Tax (BEAT) under IRC §59A is made permanent at a 10.5% rate on modified taxable income, including add-backs for deductible payments made to foreign affiliates.
  • IRC §250 deductions reduced, raising the effective U.S. tax on foreign income.
  • Example:
    • A U.S. corporation owns 100%j of a CFC that earns $5 million in net tested income in 2026. There is no Subpart F income, and the CFC has $1 million in allocable deductions.
    • The U.S. shareholder must include the full $5 million in income under §951B.
    • IRC §250 deduction = 25% × $5 million = $1.25 million
    • Net inclusion = $5 million − $1.25 million = $3.75 million
    • U.S. corporate tax = $3.75 million × 21% = $787,500
    • Effective U.S. tax rate on foreign income = $787,500 ÷ $5 million = 15.75%

Planning Considerations:

  • The elimination of the QBAI exclusion and reduction of the §250 deduction will increase the effective U.S. tax on foreign profits for many U.S. shareholders, including family-owned groups with foreign subsidiaries.
  • UHNW taxpayers, family offices, and private equity firms should:
    • Reassess the ownership and structure of foreign entities to evaluate whether CFC status is still optimal.
    • Consider whether to repatriate foreign earnings, especially if the U.S. effective tax rate is now closer to the foreign rate, potentially allowing for greater foreign tax credit utilization.
    • Re-evaluate foreign holding companies with large tangible asset bases that previously benefited from QBAI exclusions under the old GILTI rules.
    • Assess whether to unwind or restructure foreign blocker entities used to limit GILTI exposure under prior law.
  • The new inclusion rules under §951B may result in taxable income for indirect U.S. owners who were not previously exposed to GILTI, particularly when ownership is through pass-through entities or foreign trusts..
  • BEAT’s permanent status at 10.5% reinforces the need for multinational businesses to monitor deductible payments to foreign affiliates (e.g., interest, royalties, management fees). Strategies such as cost-sharing arrangements or revisiting transfer pricing policies may reduce exposure.

9. AMT Relief Made Permanent

  • The OBBB makes permanent the higher AMT exemption amounts that were previously set to expire after 2025.
  • Starting in 2026, the AMT exemption amounts are:
    • $1,000,000 for married filing jointly (MFJ)
    • $500,000 for single filers
  • The phase-out thresholds are also permanently set at:
    • $1,500,000 for MFJ
    • $750,000 for single filers
  • The AMT exemption begins to phase out at 25 cents per dollar of AMTI above the threshold.
  • The OBBB also adds a $40,000 cap on the total benefit from AMT preference items. However, this cap is gradually reduced by 5% of the amount that AGI exceeds $500,000 for all filers.

Planning Considerations:

  • This permanent increase in the AMT exemption significantly reduces the likelihood that high-income taxpayers, including those with large state tax deductions or ISO exercises, will be subject to AMT.
  • The phase-out of the new $40,000 AMT cap benefit based on AGI means that UHNW taxpayers with AGI significantly over $500,000 may see the benefit of some preference items limited or eliminated.
  • The exercise of incentive stock options (ISOs) is less likely to trigger AMT, creating more flexibility in equity compensation planning.
  • While the higher exemption and change to phase-out thresholds reduce AMT exposure for most taxpayers, those with substantial preference items may still face limitations due to the new $400,000 cap and its AGI based phase-out.

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