In depth

OBBBA provisions that encourage US investment

President Trump's campaign promises regarding tax reform focused on reducing tax burdens and fostering a pro-growth economic environment. Although the President's proposed 15% corporate rate for domestic manufacturers was not implemented, several other tax provisions floated by the President were enacted through the One Big Beautiful Bill Act, which became law on July 4, 2025. The OBBBA enacted significant tax reforms with the aim of creating a more favorable environment for US businesses and promoting domestic production.

The intent of the new provisions is to allow taxpayers to reduce their taxable income in the year an investment is made within the United States. This adjustment affects after-tax cash flow and may influence decisions regarding capital-intensive growth strategies. To achieve this goal, the OBBBA extends several provisions originally enacted by the TCJA and introduces additional temporary tax measures for the benefit of domestic business, which include:

• Depreciation deduction related provisions: 100% bonus depreciation deduction under section 168(k), the new 100% deduction for Qualified Production Property (QPP) (i.e., US factories) under section 168(n), increased limitation on depreciation deduction under section 179.
• Expensing related provisions: expensing of research and experimental (R&E) expenses under section 174A, and increase in business interest deduction limitation under section 163(j).
• Tax credits: enhancing existing Advanced Manufacturing Investment Credit under section 48D.
• Reduced tax rates for certain income: extension and enhancement of qualified business income (QBI) under section 199A, extension of qualified opportunity zone (QOZ) regime under section 1400Z, foreign-derived deduction eligible income (enhancement of former FDII regime) under section 250.

While most of these changes appear to provide tax benefits to US companies, taxpayers should model out and consider the interplay between these provisions and other international provisions. For example, while immediate expensing of domestic R&E amounts should in theory reduce a taxpayer's federal tax burden, in effect it could trigger the application of the corporate alternative minimum tax (CAMT) or the Base Erosion and Anti-Abuse Tax (BEAT) under section 59A. These issues should be carefully considered and modeled. Further, state tax laws may not always conform to the federal rules regarding these provisions, so businesses need to consider both federal and state impacts.

Permanent extension of 100% bonus depreciation

A popular provision in the TCJA was full, immediate expensing with respect to "qualified property" under section 168(k). Full expensing was available for property placed in service before January 1, 2023, and the benefit in the statute had been decreasing year over year, with a full phase-out slated for property placed in service starting in 2027. Congress permanently extended 100% bonus depreciation, and made this provision available for qualifying property acquired after January 19, 2025.

The OBBBA establishes a transition rule for fiscal year taxpayers. For qualified property placed in service during the first taxable year ending after January 19, 2025, taxpayers may elect to apply a 40% or 60% bonus depreciation, depending on the category of property.

The provision applies to both new and used property as property is treated as acquired on the date which a written binding contract for its acquisition is entered into.

This provision encourages taxpayers to invest more within the United States as it helps reduce taxable income during the year in which the investment is made by way of allowing immediate expensing of eligible property acquired, including computer software, certain plants, machinery, equipment, vehicles, and certain improvements to nonresidential real property.

New depreciation deduction rules for US factories

The OBBBA includes a new section 168(n) that allows for 100% bonus depreciation for certain property related to US-based manufacturing and production. This new bonus depreciation applies only to "qualified production property," which is defined as any nonresidential real property that meets the following criteria:

• Used by the taxpayer as an integral part of a "qualified production activity".
• Placed in service in the United States (or possession thereof).
• The original use of which commences with the taxpayer.
• The construction of which begins after January 19, 2025, and before January 1, 2029.
• Which is designated by the taxpayer in an election.
• Which is placed in service before January 1, 2031.

Leased property is excluded from this definition, as well as nonresidential real property used for offices, administrative services, lodging, parking, sales activities, research activities, software development or engineering activities, or other functions unrelated to the manufacturing, production, or refining of tangible personal property.

A "qualified production activity" is defined as the manufacturing, production, or refining of a "qualified product," which, in turn, is defined as "any tangible personal property if such property is not a food or beverage prepared in the same building as a retail establishment in which such property is sold." The statute clarifies that qualified production activity requires substantial transformation of the property comprising the product. Further, the statute clarifies that the term "production" does not include activities other than agricultural production and chemical production.

To elect to apply this provision, taxpayers must specify the nonresidential real property on their return (unless the Secretary designates that the election should be made in another manner). The new provision also includes a recapture mechanism that would apply if the property ceases to be used as a qualified production property.

New section 168(n) applies to property placed in service after the date of enactment of the OBBBA (July 4, 2025).

Like section 168(k), this provision encourages companies to expand US manufacturing by lowering the initial tax costs of long-term projects.

Increased limitation for section 179 depreciation

The OBBBA also increased the dollar limitations that apply to the election to treat the cost of section 179 property as an expense not chargeable to capital account. Pre-OBBBA, taxpayers could elect to treat up to USD 1,000,000 in section 179 property costs as expenses. The OBBBA increased this threshold to USD 2,500,000.

Further, section 179(b)(2) provides that the above limitation is reduced by the amount by which the cost of section 179 property placed in service during the taxable year exceeds USD 2,500,000. The OBBBA increased this amount to USD 4,000,000.

These increased amounts apply to property placed in service in taxable years beginning after December 31, 2024.

This provision, together with bonus depreciation deductions under sections 168(k) and 168(n), incentivizes US property investment by reducing taxable income in the year the investment is made.

Full expensing of domestic R&E expenditures

The OBBBA modifies the rules for expensing R&E expenditures. While foreign R&E expenses must be capitalized and amortized over a 15 year period, under new section 174A, domestic R&E expenses can be immediately and fully deducted. This generally makes treatment of domestic R&E expenses more favorable than foreign R&E expenses – encouraging research and development activities within the United States. As noted above, taxpayers should model the results under new section 174A to ascertain the impact of these accelerated deductions on other tax provisions, such as for purposes of determining CAMT liability

Increase in business interest deduction limitation

The OBBBA restored the Earnings Before Interest, Taxes, Depreciation, and Amortization-based (EBITDA) calculation of adjusted taxable income for purposes of the 30% cap on business interest deduction under section 163(j) for taxable years beginning after December 31, 2024. Pursuant to the TCJA, the full EBITDA-based calculation expired in 2022, leaving taxpayers with an EBIT-based calculation, essentially limiting the amount of interest expense deduction.

The restoration of EBITDA-based calculation allows taxpayers to deduct more interest expense each year, incentivizing companies to rely on debt to finance their future investments and operations. The OBBBA redefines adjusted taxable income to exclude subpart F and net CFC tested income, generally reducing allowable interest deductions. Since these amounts depend on foreign investment, their exclusion further incentivizes taxpayers to favor domestic over foreign investment.

For a detailed discussion of this and other major changes to section 163(j), please see our alert, "The One Big Beautiful Bill Act (OBBBA) changes the capitalized interest rules under section 163(j)."

Enhanced Advanced Manufacturing Investment Credit

The OBBBA enhanced the existing Advanced Manufacturing Investment Credit under section 48D, which incentivizes the manufacturing of semiconductors or semiconductor manufacturing equipment. Pre-OBBBA, taxpayers received a credit equal to 25% of the "qualified investment" with respect to any "advanced manufacturing facility" (i.e., any facility for which the primary purpose is the manufacturing of semiconductors or semiconductor manufacturing equipment). A "qualified investment" is generally the basis of any tangible, depreciable property which is constructed or acquired by the taxpayer and is integral to the operation of the advanced manufacturing facility.

The OBBBA increases the credit from 25% to 35%. The new rate is available for property placed in service after December 31, 2025.

Extension of qualified business income deduction

The TCJA created a deduction for non-corporate taxpayers with pass-through business income under section 199A. This deduction was meant to apply a rate of tax to non-corporate business owners that was more comparable to the reduced 21% corporate income tax rate. The deduction is equal to the lesser of (i) the taxpayer's qualified business income (QBI) amount; or (ii) 20% of the taxpayer's taxable income, calculated without regard to net capital gain.

This deduction was set to expire at the end of 2025. The OBBBA permanently extends the deduction. The OBBBA also modified various restrictions on the section 199A deduction. The section 199A calculation includes certain threshold amounts with respect to the gross income of non-corporate taxpayers. The OBBBA modifies the phase-in amounts for these thresholds by USD 25,000 (or USD 50,000 in the case of a joint return). The OBBBA also establishes a minimum deduction amount of USD 400 for taxpayers with at least USD 1000 of qualifying income (and adjusts these amounts for inflation).

These modifications benefit small US businesses and apply to taxable years beginning after December 31, 2025.

Extension of qualified opportunity zones

Another popular incentive under the TCJA was the qualified opportunity zone (QOZ) regime under section 1400Z, which deferred, reduced, and potentially eliminated capital gains taxes on investments in Qualified Opportunity Funds (QOFs) that, in turn, invest in businesses and property located within QOZs. The QOZ regime enacted under the TCJA was due to expire in 2026.

The OBBBA extends the QOZ regime and makes it permanent, but also substantially changes the program. For more information about the new QOZ regime, please see our alert, "'QOZ 2.0' - qualified opportunity zones are now permanent".

This regime incentives companies to make qualified investments in certain designated locations in the United States.

FDDEI, formerly known as FDII

The FDII regime enacted as part of the TCJA is meant to provide a beneficial tax rate for goods and services sold abroad from the United States, via a deduction against income derived from the sale of goods and the provision of services to foreign customers. The FDII benefit was set to be reduced at the end of 2025, with the deduction decreasing from 37.5% to 21.875%. The FDII deduction rate is now permanently set at 33.34%, which, while lower than the current rate, is an improvement on the 21.875% rate expected to apply starting in 2026.

In addition to modifying the deduction percentage, the OBBBA made other changes to the FDII regime. Further, the FDII calculation has been modified to remove the existing return on tangible property and increase the scope of income upon which the FDII deduction rate would apply. These changes effectively turn the former FDII regime into the FDDEI (foreign-derived deduction eligible income) regime and generally encourage investment in the United States.

For more details on these changes to the FDII incentive, please see our alert, "How the One Big Beautiful Bill Act (OBBBA)'s international tax rule changes impact MNEs."