• 100% bonus depreciation is back, and real estate owners and developers should act quickly to maximize deductions based on timing and qualified property use.

• Permanent Section 199A and 163(j) changes offer increased planning certainty and expanded benefits for REITs and other real estate businesses.

• New rules for residential condo developers and REIT subsidiaries provide you with targeted relief and flexibility, but only for contracts and tax years moving forward.

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The reconciliation tax bill signed into law by President Trump on July 4 sets out sweeping tax changes, with many provisions of interest to the real estate industry. This Alert highlights the most important changes for the industry to focus on in tax planning.

With the legislation now final and generally in effect, taxpayers in the real estate industry should evaluate the implications of the new legislation for their business and work with tax advisors to assess the impact of the provisions, especially those noted below, and identify planning opportunities and challenges.

Bonus Depreciation

The legislation permanently restores 100% bonus depreciation for property acquired and placed in service after January 19, 2025, for which there was no written binding agreement in effect before January 20, 2025. It also creates a new elective 100% depreciation allowance under Section 168(n) for any portion of nonresidential real property that is considered “qualified production property” (the QPP election). The QPP election is available if construction on the property began after January 19, 2025, and before January 1, 2029, and the property is placed in service by the end of 2030.

A qualified production activity includes the manufacturing of tangible personal property, agricultural production, chemical production, or refining. Qualified production property does not include property located outside the U.S. or U.S. possessions or any portion of building property that is used for offices, administrative services, lodging, parking, sales activities, research activities, software engineering activities, or other functions unrelated to qualified production activities. Property with respect to which the taxpayer is a lessor is not considered to be used by the taxpayer as part of a qualified production activity even if the property is used by a lessee in a qualified production activity.

There is an exception from the original use requirement if acquired property was not used in a qualified production activity between January 1, 2021, and May 12, 2025. Special recapture rules apply if the property is disposed of within 10 years after it is placed in service.

Insights

The restoration of 100% bonus depreciation is a welcome provision of the new legislation.  Qualified improvement property will continue to qualify for bonus depreciation, as will land improvements and other MACRS recovery property with a recovery period of 20 years or less. The placed-in-service date will be important, as property placed in service in 2024 will qualify only for 60% bonus depreciation and property placed in service between January 1, 2025, and January 19, 2025, will qualify only for 40% bonus depreciation.

Additionally, allowing producers, refiners, and manufacturers to fully expense buildings rather than depreciate them over 39 or 15 years is a substantial benefit. The definition of “production” will be important, and generally requires “a substantial transformation of the property comprising the product.” Taxpayers with buildings that house both qualified production activities and other administrative, office, or research functions will also likely need to perform an analysis to allocate costs between functions.

Section 199A

The legislation makes permanent the 20% deduction for qualified business income under Section 199A and favorably adjusts the phaseout of the deduction for taxpayers who do not meet the wage expense and capital investment requirements or who participate in a “specified service trade or business.”

Insights

The permanency of this provision provides welcome certainty for real estate investment trusts (REITs) and other real estate businesses. The safe harbor for rental activity to qualify as a Section 199A trade or business under Rev. Proc. 2019-38 remains in effect.

Section 163(j) Interest Deduction Limit

The legislation permanently restores the exclusion of amortization, depreciation, and depletion deductions from the calculation of adjusted taxable income for purposes of Section 163(j), which generally limits interest deductions to 30% of adjusted taxable income. The change is effective for tax years beginning after 2024.

Insights

This provision should allow many taxpayers in the real estate industry to reduce or eliminate their Section 163(j) interest expense limitation without making a real property trade or business election, which will preserve their ability to take bonus depreciation on qualified leasehold improvement property.

Taxable REIT Subsidiary Asset Test

The legislation raises from 20% to 25% the portion of the gross asset value of a REIT that may be attributable to equity and debt securities of taxable REIT subsidiaries, effective for tax years beginning after 2025.

High-Rise Residential Condominium Development, Construction and Sale

The legislation allows the completed contract method of accounting for many residential condominium, construction, and sale projects, effective for contracts entered into after July 4, 2025. For residential developers meeting the average annual gross receipts test under Section 448 ($31 million in 2025), the maximum estimated contract length is increased from two years to three years to qualify for the exception from the UNICAP rules under Section 263A.

Insights

This provision provides much needed tax relief to condo developers who often had to report income under the percentage of completion method, which often required the reporting of income before receiving payment. Allowing the use of the completed contract method of accounting allows better matching of reporting taxable income with the receipt of cash by the developer.

Unfortunately, the relief is provided prospectively, only for contracts entered into after the July 4, 2025, enactment date.  Therefore, taxpayers with contracts entered into prior to the enactment date will continue to be subject to the old rules. Moreover, reporting income for projects begun in prior years may be bound to the prior method of accounting.

SALT Cap

The legislation makes the state and local tax (SALT) cap permanent while raising the threshold for 2025-2029 before reverting to $10,000 in 2030. The cap is increased to $40,000 for 2025 but phases down to $10,000 once income exceeds $500,000. Both thresholds will increase by 1% for each year through 2029. The final version of the legislation does not include the provision in the earlier House bill that would have shut down taxpayers’ ability to use pass-through entity tax regimes to circumvent the SALT cap.

Other Important Provisions and Notable Omissions

There are many other significant changes in the legislation. Of particular interest to the real estate industry, the legislation:

• Makes permanent the qualified opportunity zone program, including the deferral of capital gains through investments in a qualified opportunity fund, and updates the rules for investments made after 2026; current QOZ designations will expire early at the end of 2026.
• Phases out many Inflation Reduction Act energy credits early and imposes new sourcing restrictions.
• Repeals the deduction for energy efficient improvements to commercial buildings under Section 179D for property beginning construction after June 30, 2026.
• Makes permanent the increases to the low-income housing tax credit.
• Makes permanent the new markets tax credit.

In addition, there were several provisions under discussion that would have affected the real estate industry but that were not ultimately included in the final legislation. The final legislation:

• Does not include the “revenge tax” or “retaliatory tax” under proposed new Section 899, which had been included in the initial House-passed version of the bill and would have increased tax and withholding rates on taxpayers resident in countries imposing “unfair foreign taxes.”
• Does not include a provision included in the earlier House bill that would have required disallowed losses to remain subject to the Section 461(l) active loss limitation in future carryover years.
• Does not eliminate the carried interest “loophole,” despite President Trump having expressed support for such a provision.
• Does not include a limit on state and local tax deductions for businesses.

For a broad discussion of the provisions in the legislation, see BDO’s Tax Alert, “Republicans Complete Sweeping Reconciliation Bill,” and Comparison Chart of Key Provisions in the 2025 Tax Legislation.

How MGO Can Help

Navigating the sweeping tax changes in this new legislation requires more than a surface-level understanding. It calls for strategic foresight, detailed analysis, and expert guidance. At MGO, our real estate tax professionals are here to help you assess the impact of these new rules, strengthen your tax positions, and uncover planning opportunities tailored to your portfolio or operations. Whether you’re a REIT, developer, investor, or owner-operator, we’re ready to provide clarity, confidence, and customized strategies to help you thrive under the new tax landscape. Contact us to learn more.

Written by Julie Robins and Robert Schachat. Copyright © 2025 BDO USA, P.C. All rights reserved. www.bdo.com

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• The One Big Beautiful Bill Act restores 100% bonus depreciation for qualified property placed in service after January 19, 2025.

• A new provision allows 100% expensing of qualified production property used directly in U.S.-based manufacturing, with strict eligibility criteria.

• Manufacturers should begin planning now to align construction timelines and tax strategy.

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The One Big Beautiful Bill Act (OBBBA) contains wide-reaching tax provisions that could reshape capital investment decisions for manufacturers and distributors. Two potentially impactful provisions are the return of 100% bonus depreciation and the introduction of a new incentive for qualified production property (QPP). For asset-intensive businesses, the new rules present significant planning opportunities.

This article outlines the OBBBA’s key bonus depreciation and QPP provisions, and how they apply to your manufacturing or distribution business.

100% Bonus Depreciation Returns in 2025

Bonus depreciation allows your business to immediately deduct a significant portion of the cost of qualifying property in the year it’s placed in service, rather than depreciating it over several years. Under prior law, bonus depreciation was gradually phasing down from 100% to 0% by 2027.

OBBBA resets that clock: For qualified property placed in service after January 19, 2025, 100% bonus depreciation is restored and made permanent. This applies to a wide range of capital investments — including machinery, equipment, and certain improvements to nonresidential real property.

However, for 2025, it’s crucial to keep the placed-in-service date in mind. Property placed in service on or before January 19, 2025, remains subject to the prior phase-down schedule (40% for 2025).

Bonus depreciation is generally automatic, meaning you need to elect out of it if you don’t want to take it. It’s available for both new and used property.

New: 100% Expensing for Qualified Production Property

In addition to bonus depreciation, OBBBA introduces a new, separate provision for 100% expensing of QPP with unique eligibility rules and timelines.

This is a major development if your manufacturing business is planning new facility construction, as bonus depreciation generally doesn’t apply to buildings (although it does apply to certain qualified improvements).

What Is Qualified Production Property?

Qualified production property includes a portion of nonresidential real property that is:

• Newly constructed in the United States

• Used as an integral part of manufacturing activities

• With construction beginning after January 19, 2025, and before January 1, 2029

• Placed in service before January 1, 2031

To qualify, the space must be used directly in the manufacturing process. The provision doesn’t apply to any square footage used for administrative offices, research and development, sales, or other ancillary functions.

Crucially, there is no de minimis exception — meaning there’s no threshold below which non-manufacturing space can be ignored. So even small areas used for offices or other non-manufacturing functions must be identified and excluded from the QPP calculation. This will likely drive demand for more detailed cost segregation studies to allocate building costs appropriately.

It’s also important to note that, unlike bonus depreciation, QPP expensing is not automatic. Taxpayers must affirmatively elect into this deduction. Final regulations will clarify how and when taxpayers must make the election and whether a single election applies across multi-year construction projects.

Who Qualifies?

This provision applies specifically to manufacturing businesses engaged in the production of tangible property involving “substantial transformation”. The IRS will issue regulations to define this standard more precisely, but the intent is to reward activities that significantly alter raw materials or components into finished goods.

Some exclusions apply. Lessors of the property and businesses preparing food and beverages on-site (such as a deli in a grocery store) are not eligible. Additionally, property subject to the alternative depreciation system (ADS) does not qualify.

A Word on Recapture

There’s also a 10-year recapture provision. If the use of the property changes during that period — such as converting a manufacturing area into administrative offices — the taxpayer may have to recapture the expensed depreciation as ordinary income under Section 1245.

Section 179: Increased Limits, but Strategic Considerations

OBBBA also raises Section 179 expensing limits. For 2025, your business can expense up to $1 million in qualifying property — with the deduction phasing out once total equipment placed in service exceeds $2.5 million. For assets placed in service after December 31, 2025, the expense limit increases to $2.5 million — with the deduction phasing out if total fixed assets placed in service exceed $4 million.

While small and mid-sized businesses often use Section 179 to write off qualifying property, it can be more limited in application than bonus depreciation (if available) since Section 179 is (a) limited to the amount of business taxable income; and (b) only available for assets used 50% or more for business purposes.

However, it may still be worth considering when bonus depreciation isn’t available or when coordination with taxable income limitations makes Section 179 more beneficial. There also may be benefits at the state level, as some states conform with the federal 179 expensing provisions while decoupling from federal bonus depreciation rules.

Taxpayers should discuss their fixed asset strategy with their advisors to decide how and when to leverage bonus depreciation, Section 179, and QPP expensing.

Implications for Manufacturing and Distribution

The manufacturing sector can benefit from these provisions with careful planning and implementation. Here are some decisions and considerations to discuss with your tax advisor:

1. Facility construction and expansions: The QPP rules reward businesses that start new construction after January 19, 2025, but before January 1, 2029. Companies on the fence may want to move quickly to meet the deadline and qualify for 100% expensing.

2. Cost segregation studies: Because only certain portions of a facility count as “qualified production property”, taxpayers will need cost breakdowns to support their deductions if any part of the building is used for non-qualified activities.

3. State conformity is uncertain: Some states may decouple from the federal rules, particularly for QPP expensing, given its potentially large impact on revenue. Businesses with operations in multiple jurisdictions will need to monitor state responses.

4. Private equity and tax-exempt complications: The use of ADS, especially when tax-exempt entities are involved, could disqualify certain projects from QPP expensing. Additional analysis will be required in joint ownership scenarios.

5. Recapture risk: Planning should also account for potential changes in facility use within the 10-year recapture window.

Looking Ahead

Bonus depreciation has been part of the tax code in various forms since 2001, but this is the first time it’s been made permanent. Meanwhile, the addition of a new QPP expensing provision clearly shows that the federal government wants to incentivize domestic manufacturing investment.

As with any major tax law, the details matter — and many remain forthcoming. We expect the U.S. Treasury Department and the IRS to release additional regulations clarifying key definitions, election mechanics, and compliance requirements.

In the meantime, manufacturers and distributors should begin evaluating capital plans for the next five years — especially if you are contemplating large-scale facility construction.

How MGO Can Help

At MGO, we help manufacturing and distribution companies identify opportunities and understand the potential tax outcomes. From evaluating capital investments to coordinating cost segregation studies and modeling the effects of federal and state tax treatment, we work alongside clients to support informed decision-making.

If you’re planning to expand or modernize your operations, our team can help you assess how these provisions apply to your business and align your plans with the latest tax laws. Contact us today to start the conversation.

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• The new tax law permanently restores 100% bonus depreciation for qualified property placed in service after January 19, 2025.

• This change allows you to fully deduct eligible improvement costs upfront — improving cash flow and long-term planning.

• Real estate investors should watch for state-level differences and consider cost segregation studies to maximize the benefit.

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On July 4, President Donald Trump signed the One Big Beautiful Bill Act into law. Among the sweeping tax and spending provisions, one key change stands out for real estate investors: the return of 100% bonus depreciation.

Bonus depreciation is a powerful way to front-load deductions on qualifying property. Although it was first introduced in 2002 following the events of Sept. 11, the percentage deduction has varied over the years. Most recently, the 2017 Tax Cuts and Jobs Act (TCJA) increased bonus depreciation to a full 100% deduction. However, the TCJA also included a phasedown schedule — dropping the deduction to 40% in 2025 and eliminating it entirely by 2027.

Now, that phasedown has been reversed. The new law permanently restores 100% bonus depreciation for qualified property placed in service on or after January 20, 2025.

5 Ways the Return of 100% Bonus Depreciation Could Impact Your Strategy

If you’re investing in real estate, the return of 100% bonus depreciation creates new opportunities. Here are five ways it could affect your planning and cash flow moving forward:

1. You Can Plan Ahead With Certainty

For years, bonus depreciation rates have been a moving target. With this new law, you get consistency. Knowing that 100% bonus depreciation is now permanent gives you the ability to map out property improvements or acquisitions with a clear understanding of the tax impact. No more rushing projects to get ahead of a phase-down deadline. This is especially useful if you’re managing multiple properties or planning major capital expenditures.

2. Bigger Deductions Mean Better Cash Flow

Land improvements and qualified improvement property (QIP) — such as parking lots, landscaping, and interior upgrades to commercial buildings — are major expenses for real estate investors. With 100% bonus depreciation, you can deduct these costs in full the year they’re placed in service. That’s a non-cash expense generating real tax savings, freeing up cash you can reinvest into more properties, upgrades, or operations.

3. Bonus Depreciation Is Automatic — But You Still Have Options

The new law keeps the same framework: bonus depreciation is automatic unless you elect out. This means you don’t have to remember to file any special paperwork to claim the deduction. But if you’re planning to sell a property soon and want to avoid a large depreciation recapture, you still have the option to elect out of bonus depreciation for specific asset classes. That flexibility gives you more control over your long-term tax strategy.

4. Don’t Forget About State Taxes

While federal bonus depreciation is back at 100%, state treatment varies widely. Some states conform fully, others partially, and some not at all. Several states have flip-flopped in past years, some years complying with federal bonus depreciation rules and other years decoupling from the federal deduction, so it’s important to monitor changes over time. Failing to account for federal-to-state differences in depreciation can lead to surprises when filing your state returns. Work with a professional to stay ahead of shifting state policies.

5. Cost Segregation Studies Just Got More Valuable

With 100% bonus depreciation locked in, cost segregation studies are more useful than ever. These studies help you identify components of your property — like lighting, flooring, plumbing, land improvements and specialty electrical systems — that can be depreciated over five, seven, or 15 years instead of the standard 39 years or 27.5 years for residential real estate. That makes more of your investment eligible for immediate expensing. If you’re buying, renovating, or developing commercial or residential property, a cost segregation study could lead to substantial tax savings (use our cost segregation assessment tool to see if you could benefit).

Increased Opportunity and Complexity for Real Estate Investors

The return of 100% bonus depreciation is big news for real estate investors. It gives you stronger cash flow, more predictable planning, and powerful incentives to invest in and improve your properties. But it also adds complexity — from deciding when to elect out to understanding how state rules diverge from federal law.

How MGO Can Help

Our Real Estate team is ready to help you take full advantage of the new bonus depreciation rules. Whether you’re planning improvements, exploring a cost segregation study, or preparing for a property sale, we’ll work with you to uncover tax-saving opportunities and support your long-term investment strategy.

Reach out today to start planning your next move.

The post What New Bonus Depreciation Rules Mean for Real Estate Investors appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• Sweeping tax changes enacted through the reconciliation bill include permanent TCJA cuts and major reforms to business, individual, and international tax rules. 

• Taxpayers should begin modeling changes now, especially for bonus depreciation, research expensing, Section 163(j), and Opportunity Zones, to identify planning windows. 

• A wide range of industries including manufacturing, real estate, energy, and financial services will be affected, with varying opportunities and risks across sectors 

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The president signed into law a sweeping reconciliation tax bill in a July 4 signing ceremony, capping a furious sprint to finish the legislation before the self-imposed holiday deadline. The Senate approved the bill in a 51-50 vote on July 1 after making a number of last-minute changes following intense bicameral negotiations. The House voted 218-214 on July 3 to send the bill to the president’s desk. 

Notable late changes to the version of the tax title released by the Senate Finance Committee on June 16 include: 

• Cutting Section 899 from the bill after reaching an agreement on Pillar Two with G-7 countries; 

• Significantly amending the provisions on global intangible low-taxed income (GILTI), foreign-derived intangible income (FDII), and the base erosion and anti-abuse tax (BEAT); 

• Modifying the energy credits provisions; 

• Removing the shutdown of state pass-through entity workarounds to the cap on deducting state and local tax (SALT); 

• Removing an unfavorable expansion of the loss limit under Section 461(l); 

• Reducing the new tax on remittances; 

• Changing the opportunity zone provisions; 

• Expanding to all residential construction an exception to the long-term contract rules; and  

• Removing a new excise tax on litigation financing. 

Also, President Donald Trump reportedly promised House conservatives that he would strictly enforce the beginning of construction rules for wind and solar projects and potentially make the permitting process more difficult. 

With the legislation now final, taxpayers should focus on assessing its impact and identifying planning opportunities and challenges. The bill offers both tax cuts and increases that would affect nearly all businesses and investors. The Joint Committee on Taxation (JCT) scored the bill as a net tax cut of $4.5 trillion over 10 years using traditional scoring. Under the current policy baseline the Senate used for purposes of the reconciliation rules, that cost drops to just $715 billion. The Senate scored the provisions against a baseline that assumes temporary provisions have already been extended, essentially wiping out the cost of extending the tax cuts in the Tax Cuts and Jobs Act (TCJA). 

The bill not only makes the TCJA tax cuts permanent but amends them in important ways. The legislation also offers a mix of favorable and unfavorable new provisions. Key aspects of the bill include: 

• Making 100% bonus depreciation permanent while temporarily adding production facilities;  

• Permanently restoring domestic research expensing with optional transition rules; 

• Permanently restoring amortization and depreciation to the calculation of adjusted taxable income (ATI) under Section 163(j) while shutting down interest capitalization planning; 

• Increasing the FDII effective rate while changing the deduction allocations and other rules;  

• Increasing the GILTI effective rate while changing the foreign tax credit (FTC) haircut and expense allocation rules;  

• Increasing the effective rate on BEAT; 

• Phasing out many Inflation Reduction Act energy credits early and imposing new sourcing restrictions;  

• Creating new deductions for overtime, tips, seniors, and auto loan interest; 

• Imposing a 1% excise tax on remittances;  

• Increasing filing thresholds for Forms 1099-K, 1099-NEC, and 1099-MISC; 

• Extending opportunity zones with modifications; 

• Increasing transfer tax exemption thresholds; and 

• Increasing the endowment tax to a top rate of 8%. 

Takeaway

Now that the legislation is final, taxpayers should assess its impact carefully and consider planning opportunities. Several key provisions offer different options for implementation. The effective dates will be important, and there may be time-sensitive planning considerations.  

The following offers a more detailed discussion of the provisions. For a comparison of the tax provisions to current law and the campaign platform see BDO’s table. Join BDO July 10 for a webcast discussing the bill and its impact. 

Business Provisions 

Bonus Depreciation 

The bill permanently restores 100% bonus depreciation for property acquired and placed in service after January 19, 2025.  

The legislation also creates a new elective 100% depreciation allowance under Section 168(n) for any portion of nonresidential real property that is considered “qualified production property.” The election is available if construction on the property begins after January 19, 2025, and before January 1, 2029, and the property is placed in service by the end of 2030. 

A qualified production activity includes the manufacturing of tangible personal property, agricultural production, chemical production, or refining. Qualified production property does not include any portion of building property that is used for offices, administrative services, lodging, parking, sales activities, research activities, software engineering activities, or other functions unrelated to qualified production activities.  

There is an exception from the original use requirement if acquired property was not used in a qualified production activity between January 1, 2021, and May 12, 2025. Special recapture rules apply if the property is disposed of within 10 years after it is placed in service.  

The bill also increases the Section 179 deduction to $2.5 million with a phaseout threshold of $4 million for property placed in service after 2024, with both thresholds indexed to inflation in future years. 

Takeaway 

Allowing producers, refiners, and manufacturers to fully expense buildings rather than depreciate them over 39 or 15 years offers a significant benefit. The definition of “production” will be important, and generally requires “a substantial transformation of the property comprising the product.” Taxpayers with buildings that house both qualified production activities and other administrative, office, or research functions will also likely need to perform an analysis to allocate costs between functions. 

Section 174 Research Expensing 

The bill permanently restores the expensing of domestic research costs for tax years beginning after December 31, 2024. The permanent expensing rules are created under new Section 174A, while Section 174 is retained and amended to provide for the continued 15-year amortization of foreign research costs. Software development is statutorily included in the definition of research for purposes of Section 174A. Taxpayers retain the option of electing to capitalize domestic research costs and amortize such amounts over either 10 years or the useful life of the research (with a 60-month minimum).  

The bill will generally require taxpayers to implement the new treatment with an automatic accounting method change on a cut-off basis, but it offers two alternative transition rules. Taxpayers can elect to claim any unamortized amounts incurred in calendar years 2022, 2023, and 2024 in either the first tax year beginning after 2024 or ratably over the first two tax years beginning after 2024. Separate transition rules are available for eligible small business taxpayers meeting the gross receipts test under Section 448 ($31 million in 2025) for the first tax year beginning after 2024, allowing those taxpayers to file amended returns to claim expensing for tax years before 2025. Retroactivity is not available to small business taxpayers that are tax shelters, such as pass-throughs that allocate more than 35% of their losses to limited partners or limited entrepreneurs. 

The bill also amends Section 280C to again require taxpayers to reduce their deduction for research costs under Section 174A by the amount of any research credit (or reduce their credit by an equivalent amount), effective for tax years beginning after 2024. Under changes made by the TCJA, taxpayers were generally required to reduce their Section 174 capital account only to the extent the research credit exceeded their current-year amortization deduction. For most taxpayers, that meant that the amortization deductions and research credits were both allowed in full.  

Takeaway 

The restoration of domestic research expensing is somewhat retroactive, and taxpayers will have several options for recognizing unused research amortization and for recovering future research costs. Businesses should consider modeling their options to identify beneficial strategies because the timing of deductions can affect other calculations, including those for Section 163(j), net operating losses, FDII, and GILTI. 

Section 163(j) Interest Deduction Limit  

The bill permanently restores the exclusion of amortization, depreciation, and depletion from the calculation of ATI for purposes of Section 163(j), which generally limits interest deductions to 30% of ATI. The change is effective for tax years beginning after 2024. 

The bill also makes two unfavorable changes effective for tax years beginning after 2025:  

• Excluding income from Subpart F and GILTI inclusions and excluding Section 78 gross-up from ATI; and 

• Including interest capitalized to other assets in the limit under Section 163(j), except interest capitalized to straddles under Section 263(g) or to specified production property under Section 263A(f).  

The business interest allowed as a deduction up to the Section 163(j) limit will come first from any capitalized interest. Any disallowed capitalized interest exceeding the cap will be incorporated into the Section 163(j) carryforward and will not be treated as capitalized in future years.   

Takeaway

The ability to again exclude amortization and depreciation from ATI will provide welcome relief for many taxpayers, but others will be negatively affected by the changes. The JCT score indicates that the revenue raised from shutting down capitalization planning and excluding new categories of income will save more than one-third of the $60 billion cost of reinstating the exclusion of depreciation and amortization. Taxpayers should model the impact and consider tax attribute and accounting method planning. Although the bill essentially shuts down interest capitalization planning for years beginning in 2026 or later, those strategies remain viable for the 2024 and 2025 tax years. The legislation does not claw back any interest capitalized to other assets in tax years beginning before 2026, even if the capitalized interest has not been fully recovered with the asset.  

Section 199A 

The bill makes permanent the deduction for pass-through income under Section 199A and favorably adjusts the phaseout of the deduction for taxpayers who do not meet the wage expense and capital investment requirements or who participate in a “specified trade or business.” The legislation also creates a minimum deduction of $400 for taxpayers with at least $1,000 of qualifying income.  

Opportunity Zones 

The bill makes permanent the qualified opportunity zone (QOZ) program and updates the rules for investments made after 2026. As in the current program, taxpayers can defer capital gain by investing in a qualified opportunity fund. For investments made after 2026, taxpayers will be required to recognize the deferred gain five years after the date of the investment but will get a 10% increase in basis. Taxpayers can still receive a full basis step up to fair market value (FMV) for property held 10 years, but the bill adds a rule freezing the basis step up at the FMV 30 years after the date of the investment.  

Current QOZ designations will expire early at the end of 2026. New zones will be designated in rolling 10-year designation periods under new criteria that are expected to shrink the number of qualifying zones. A new category of rural opportunity zones is created. The 10% basis increase is tripled to 30% for investments in rural opportunity zones and the threshold for establishing the substantial improvement of qualifying property would be lowered to 50%. 

Both qualified opportunity funds (QOFs) and qualified opportunity zone businesses (QOZBs) will be required to comply with substantial new reporting requirements. 

Takeaway

The bill does not extend the mandatory recognition date of December 31, 2026, for investment made before 2027, as many taxpayers had hoped. But the program’s extension preserves one of the most powerful tax incentives ever offered by lawmakers. The timing of capital gains transactions may be particularly important. Delaying a capital gain transaction could allow taxpayers to make a deferral election in 2027 and defer recognizing the gain until well after the current 2026 recognition date. On the other hand, QOZ designations are likely to change in 2027. Taxpayers planning investments in geographic areas that are unlikely to be redesignated may need to make the investments before the end of 2026. Existing QOFs and QOZBs should consider their long-term capital needs because it is not clear whether any “grandfathering” relief will allow additional qualified investments into funds operating in QOZs that are not redesignated. The new reporting rules will apply to both new and existing QOZs and QOZBs for tax years beginning after the date of enactment, and those entities will need to collect and report substantial new information that has never before been required. 

Qualified Small Business Stock 

The bill enhances the exclusion of gain for qualified small business (QSB) stock under Section 1202 issued after the date of enactment in the following ways: 

• In addition to the existing 100% exclusion for qualified stock held for five years, taxpayers can qualify for a 50% exclusion after three years and a 75% exclusion after four years;  

• The current limit on the exclusion (the greater of $10 million or 10 times basis) is increased to $15 million, indexed to inflation beginning in 2027; and 

• The limit on gross assets at the time stock is issued is increased from $50 million to $75 million, indexed to inflation beginning in 2027. 

Takeaway

QSB stock is a powerful tax planning tool that can essentially erase gain of up to 10 times the initial basis. The changes make the structure more accessible and increase the size of potential investments. The bill does not change the expansive qualification requirements under Section 1202, and taxpayers should understand the rules clearly and document compliance throughout the holding period. 

Section 162(m) 

The bill amends the aggregation rules for applying the $1 million limit on deducting the compensation of a public company’s covered employees under Section 162(m). The current rules identify covered employees separately for each public entity but calculate compensation subject to the limitation on a controlled group basis. The number of covered employees is set to expand by five for tax years beginning in 2027 or later, and there has been some question whether such employees can come from the entire controlled group or only the public entity. 

The bill creates a new aggregation rule for tax years beginning after 2025 for identifying who is a covered employee and the amount of compensation subject to the limit. The aggregation rules are based on a controlled group as defined under the qualified plan rules in Section 414. The proposal also provides rules for allocating the $1 million deduction among members of a controlled group.   

Takeaway

The provision will have unfavorable consequences for many companies, including requiring the full amount of compensation from a related partnership in the calculation (rather than a pro-rata amount based on ownership percentage). It is estimated to raise almost $16 billion.  

Form 1099 Reporting 

The bill amends Section 6050W to reinstate the 200 transaction and $20,000 threshold for reporting third-party payment network transactions on Form 1099-K. The American Rescue Plan Act of 2021 repealed that threshold and required reporting when aggregate payments exceeded $600, regardless of the number of transactions. The IRS offered transition relief delaying the implementation of the change for two years and then provided a $5,000 threshold for payments made in 2024 and a $2,500 threshold for payments made in 2025. The bill restores the old threshold retroactively so that reporting is required only if aggregate transactions exceeded 200 and aggregate payments exceeded $20,000.  

The bill also increases the threshold for reporting payments under Sections 6041 and 6041A on the respective Forms 1099-MISC and 1099-NEC from $600 to $2,000 in 2026, indexing that figure to inflation in future years. 

Remittance Tax 

The bill imposes a new 1% excise tax on remittances of cash, money orders, cashier’s checks, or other similar physical instruments, with an exception for transfers from most financial institution accounts or debit cards. 

Takeaway

The tax in the final version affects a much narrower set of payments than the original 5% tax proposed in the House and the 3.5% tax in earlier House and Senate drafts.  

Exception for Percentage of Completion Method 

The bill expands exceptions to the percentage of completion method under the long-term contract rules under Section 460. The exception for home builders is expanded to include all residential construction. Further, the exception from the uniform capitalization rules for home builders meeting the gross receipts threshold under Section 448(c) ($31 million in 2025) is expanded to include all residential construction, and the allowable construction period is extended from two years to three. 

Employee Retention Credit 

The legislation makes several changes to the employee retention credit (ERC), including: 

• Barring ERC refunds after the date of enactment for claims filed after January 31, 2024; 

• Extending the statute of limitations on ERC claims to six years; and 

• Increasing preparer and promoter penalties on ERC claims.  

Takeaway

The provision presumably will affect only refund claims that have not been paid by the IRS. The legislative language provides that no credit or refund “shall be allowed or made after the date of enactment” unless the claim was filed on or before January 31, 2024. The IRS had been slow to process claims – potentially in anticipation of this provision, which had been included in a failed 2024 tax extenders bill. The provision is now estimated to raise only $1.6 billion, much less than the $77 billion estimated under the 2024 version. The difference may be the result of refunds that have already been paid, although it remains unclear how fast the IRS is processing claims filed after January 31, 2024. 

International Provisions 

Foreign-Derived Intangible Income 

The bill makes significant reforms to FDII, including raising the effective rate while making the calculation of income more generous. 

The bill permanently lowers the Section 250 deduction from 37.5% to 33.34%, still well above the 21.875% deduction rate that would take effect without legislation. The change will increase the FDII effective rate from 13.125% to 14% (compared to 16.4% absent legislation).  

The bill also repeals the reduction in FDII for the deemed return on qualified business asset investment (QBAI) and provides that interest and research and experimental (R&E) costs are not allocated eligible income. The final version modifies a change from an earlier draft that would have narrowed the allocation of deductions only to those “directly related” to such income. The final bill provides that the calculation includes “properly allocable” deductions. 

The changes are effective for tax years beginning after 2025, aside from a new exclusion from FDII-eligible income that would take effect after June 16, 2025. The bill would exclude income or gain from the Section 367(d) disposition of intangible property or property subject to depreciation, amortization, or depletion. The final bill omits a provision from an earlier draft that would have also excluded specified passive income subject to the high-tax kickout. 

Takeaway

The changes could expand the value of the deduction for many taxpayers despite the effective rate increase, particularly for industries with significant fixed assets and R&E costs. Taxpayers should assess the changes for potential planning and arbitrage opportunities, given the change in rates and rules. There may be accounting methods opportunities that could increase the benefit in current and future years. 

Global Intangible Low-Taxed Income 

The bill increases the GILTI effective rate while making both favorable and unfavorable changes to the underlying calculation effective for tax years beginning after 2025.   

The Section 250 deduction for GILTI decreases from 50% to 40%, still higher than the 37.5% deduction rate that would take effect without legislation. The effective rate before the FTC haircut will increase from 10.5% to 12.6% (compared to 13.125% absent legislation). The bill will also reduce the FTC haircut under GILTI from 20% to 10%, resulting in an equivalent top effective rate of 14% (up from the current 13.125% rate and the 16.4% rate that would take effect without legislation). It also provides that 10% of taxes (compared to 20% absent legislation) previously associated with Section 951A taxed earning and profits are not treated as deemed paid for purposes of Section 78. 

The deemed return for QBAI is repealed, increasing the amount of income subject to the tax. The provision also changes the allocation of expenses to GILTI for FTC purposes so that it includes only the Section 250 deduction, taxes, and deductions “directly allocable” to tested income. It also specifically excludes interest and R&E costs.  

Takeaway

The changes are significant and could affect GILTI calculations in both favorable and unfavorable ways. The legislation does not provide a definition of “directly allocable,” and guidance may be important in this area. Taxpayers should assess the impact and consider FTC and other planning strategies.  

Base Erosion and Anti-Abuse Tax 

The bill increases the BEAT rate from 10% to 10.5% for tax years beginning after 2025, lower than both the 14% rate in the previous Senate draft and the 12.5% rate that would take effect without legislation. The legislation also repeals an unfavorable change to the BEAT scheduled to take effect in 2026 that would effectively require taxpayers to increase their liability by the sum of all income tax credits. The final bill omits several provisions from an earlier draft that would have changed the base erosion percentage, created a high-tax exclusion, and shut down interest capitalization planning.  

Takeaway 

The final version removed several favorable changes from an earlier draft but potentially still allows for planning that capitalizes interest to other assets. 

Reciprocal Tax for ‘Unfair Foreign Taxes’ 

The final bill omits proposed Section 899, which would have imposed retaliatory taxes on residents of that impose “unfair foreign taxes.” The provision was removed from the legislation after the Trump administration announced an agreement with the G-7 countries to “exempt” the U.S. from Pillar Two taxes. The G-7 released a statement saying that the countries are committed to working toward an agreement that would create a side-by-side system to fully exclude U.S.-parented groups from the undertaxed profits rule and income inclusion rule while ensuring that risks related to base erosion and a level playing field are addressed. The group also agreed to work toward compliance simplification and consider treating nonrefundable tax credits similarly to refundable tax credits. 

Takeaway

The ability of G-7 countries to drive broader agreements — and the details emerging from any such agreements — will be critical for U.S. multinationals. The current announcements are largely just statements of intent on a common goal. No countries outside the G-7 were party to the commitments, and there may be resistance from some OECD and EU countries.  

Other International Provisions 

The bill includes several other international provisions effective for tax years beginning after December 31, 2025, including: 

• Making permanent the controlled foreign corporation (CFC) look-through under Section 954(c)(6); 

• Restoring the exception from downward attribution rules under Section 958(b)(4) that was repealed under the TCJA while adding a narrower rule under Section 951B that is more closely aligned with the TCJA’s intent; 

• Amending the FTC rules to treat inventory produced in the U.S. and sold through foreign branches as foreign-source income, capped at 50%, likely only for branch category purposes; and 

• Amending the pro-rata rules under GILTI and Subpart F. 

Takeaway

The changes are generally favorable. The permanent extension of the CFC look-through rule under Section 954(c)(6) preserves an important exception for Subpart F income that is scheduled to sunset at the end of 2025. The restoration of Section 958(b)(4) could simplify reporting obligations for some taxpayers. However, Section 951B gives Treasury the authority to provide guidance on reporting for foreign-controlled U.S. shareholders. The inventory sourcing rule could result in additional foreign-source income for FTC purposes when compared to the current rule, which sources based on production activities. Finally, the pro-rata share rules will require a U.S. shareholder of a CFC to include its pro-rata share of Subpart F or GILTI income if it owned stock in the CFC at any time during the foreign corporation’s tax year in which it was a CFC. That provision removes the requirement that the U.S. shareholder own the CFC’s stock on the last day the foreign corporation was a CFC. The proposal provides Treasury with the authority to issue regulations allowing taxpayers to make a closing of the tax year election if there is a disposition of a CFC.  

Energy Provisions 

Consumer and Vehicle Credits 

The bill repeals the following credits with varying effective dates: 

• Previously owned clean vehicle credit under Section 25E repealed for vehicles acquired after September 30, 2025; 

• Clean vehicle credit under Section 30D repealed for vehicles acquired after September 30, 2025; 

• Commercial clean vehicle credit under Section 45W repealed for vehicles acquired after September 30, 2025; 

• Alternative fuel refueling property credit under Section 30C repealed for property placed in service after June 30, 2026; 

• Energy-efficient home improvement credit under Section 25C repealed for property placed in service after December 31, 2025; 

• Residential clean energy credit under Section 25D repealed for expenditures made after December 31, 2025; and 

• New energy-efficient home credit under Section 45L repealed for property acquired after June 30, 2026. 

Depreciation 

The bill repeals the five-year depreciable life of qualified energy property. The Section 179D deduction is repealed for construction beginning after June 30, 2026.  

Sections 48E and 45Y 

The bill will generally begin to phase out the production tax credit under Section 45Y and the investment tax credit under Section 48E for projects beginning construction after 2033 except for solar and wind projects. Wind and solar projects beginning more than 12 months after the date of enactment must be placed in service by the end of 2027. 

The bill also creates restrictions related to prohibited foreign entities, most significantly adding limits on receiving material assistance from a prohibited entity for facilities that begin construction after December 31, 2025. Material assistance is based on a cost ratio for sourcing eligible components. The bill also tightens domestic sourcing requirements under Section 48E.   

Takeaway 

The final language was softened with a last-minute amendment that allows some continued runway for wind and solar projects. The change angered some House conservatives, who blocked a final vote in the House for hours before reportedly extracting a promise from the administration that it would vigorously enforce the beginning of construction rules. Treasury may have limited ability to change the guidance in this area because the statute itself provides that the beginning of construction for some credit purposes shall be determined under rules similar to existing IRS notices. 

Section 45X 

The advanced manufacturing credit under Section 45X is repealed for wind energy components sold after 2027 but will otherwise be extended to allow a 75% credit for components sold in 2031, 50% for 2032, 25% for 2033, and fully repealed for 2034 or later. The credit is expanded to cover metallurgical coal. Material assistance rules for prohibited foreign entities apply. 

Section 45Z 

The bill extends the Section 45Z clean fuel production credit through 2031 while reinstating a stackable small agri-biodiesel credit under Section 40A. A new restriction under Section 45Z disallows a credit unless the feedstock is produced or grown in the U.S., Mexico, or Canada. The calculation of greenhouse gas emissions is amended to exclude indirect land use changes and new prohibited foreign entity rules are imposed. 

Other Energy Provisions  

The bill makes several other changes, including: 

• Repealing the clean hydrogen production credit under Section 45V for construction beginning after 2027, two years later than earlier versions of the bill would have provided; 

• Increasing the rates for carbon capture under Section 45Q for carbon sequestered as a tertiary injectant or for productive use to provide parity with the rates for permanent geologic storage (also adding foreign entity of concern restrictions); 

• Expanding the publicly traded partnership rules to allow income from carbon capture facilities nuclear energy, hydropower, geothermal energy, and the transportation or storage of sustainable aviation fuel or hydrogen; and 

• Adding new restrictions for foreign entities of concern for the nuclear production credit under Section 45U. 

Tax-Exempt Entities 

The bill replaces the 1.4% endowment tax rate with graduated brackets based on the size of the endowment per student up to a top rate of 8%. The tax applies only to universities with at least 3,000 students, up from 500.   

The bill also expands the excise tax on executive compensation exceeding $1 million to include all current employees, as well as former employees employed in tax years beginning after 2016. 

Takeaway 

The final version of the bill removed provisions that would have increased the excise tax on private foundations and resurrected the “parking tax,” which included the value of transportation in fringe benefits in unrelated business taxable income.  

Individual Provisions 

Deduction for Tip Income 

The bill creates an annual deduction of up to $25,000 for qualified tips reported on Forms W-2, 1099-K, 1099-NEC, or 4317 for tax years 2025 through 2028. The deduction is available without regard to whether a taxpayer itemized deductions but begins to phase out once modified adjusted gross income exceeds $150,000 for single filers and $300,000 for joint filers. 

For tips to be deductible, they must be paid voluntarily in an occupation that “traditionally and customarily” received tips before 2025, as provided by the Secretary. The business in which the tips are earned cannot be a specified trade or business under Section 199A, and self-employed taxpayers, independent contractors, and business owners face additional limitations.  

Employers will be required to report qualifying tips to employees on Form W-2. The provision applies only to income taxes and generally does not affect the employer’s FICA tip credit except to extend it to specified beauty services businesses.   

The bill gives Treasury several explicit grants of authority to provide regulations on specific issues. The IRS is required to adjust withholding tables and provide guidance within 90 days to define which occupations “traditionally and customarily” received tips in the past. The IRS will also need to provide rules for determining when a tip is voluntary.   

Takeaway 

The provision will affect employers in important ways. Hospitality companies will face new reporting requirements that depend on how the business and worker occupations are characterized. Further, an employee’s ability to deduct tips could also depend on employer policies, such as mandatory tips, service charges, or other amounts that are not determined solely by customers.  

Deduction for Overtime Pay 

The bill creates a permanent deduction of up to $12,500 (single) and $25,000 (joint) of qualified overtime compensation for tax years 2025 through 2028. The deduction is available without regard to whether a taxpayer itemized deductions but begins to phase out once modified adjusted gross income exceeds $150,000 for single filers and $300,000 for joint filers. 

Qualified overtime compensation is defined as compensation paid to an individual required under Section 7 of the Fair Labor Standards Act (FLSA). Employers must perform new information reporting to separately report overtime pay. 

Takeaway 

Determining whether compensation is qualified overtime pay will not be made using tax rules but will instead depend on the employer’s characterization of the pay under the FLSA. 

Auto Loan Interest Deduction 

The bill will create a permanent deduction of up to $10,000 of interest on a qualified passenger vehicle loan for tax years 2025 through 2028. The deduction begins to phase out once modified adjusted gross income exceeds $100,000 for single filers and $200,000 for joint filers.  

The vehicle must be manufactured primarily for use on public streets, roads, and highways, and its final assembly must occur in the U.S. The deduction does not apply to lease financing and the loan cannot be to finance fleet sales, purchase a commercial vehicle, purchase a salvage title, purchase a vehicle for scrap or parts, or be a personal cash loan secured by a vehicle previously purchased by the taxpayer. 

Takeaway

Auto loan financing companies will face additional reporting requirements and be required to furnish a return with specific information on loans. 

Personal Exemption for Seniors 

The bill provides a new $6,000 personal exemption for individuals aged 65 and above for tax years 2025 through 2028. The deduction phases out for taxpayers with modified adjusted gross income exceeding $150,000 for joint filers and $75,000 for all other taxpayers.  

Takeaway

The personal exemption is meant to fulfill Trump’s pledge to remove tax on Social Security payments, which is not allowable under reconciliation rules. The legislation does not affect payroll taxes on Social Security payments. 

Individual TCJA Extensions 

The bill largely makes the individual TCJA provisions permanent, although with some important modifications. The individual rate cuts and bracket adjustments are made permanent while providing an extra year of inflation adjustment for the lower brackets. The bill also makes permanent: 

• The repeal of general personal exemptions;  

• The limits on the deductions for mortgage interest (while adding mortgage insurance premiums as qualified interest), personal casualty losses, and moving expenses; 

• The repeal of miscellaneous itemized deduction (with an exception for some educator expenses); and 

• The exclusion for bicycle commuting reimbursements. 

The bill restores an itemized deduction for up to 90% wagering losses, capped at the amount of wagering income.  

The bill makes permanent the increased alternative minimum tax exemption and phaseout thresholds but would claw back inflation adjustments to the phaseout thresholds by resetting them to 2018 levels. The actual phaseout of the exemptions based on the amount of income exceeding the thresholds is slowed by half.  

The bill permanently repeals the Pease limitation on itemized deductions that the TCJA suspended through 2025, but it would create a new limit. The new provision would essentially cap the value of itemized deductions so that the maximum benefit achievable for the deductions is equivalent to offsetting income taxed at a top rate of 35% rather than offsetting income taxed at the higher individual marginal rate of 37%.  

The bill creates a 0.5% haircut on individual itemized charitable deductions but also adds a permanent charitable deduction for non-itemizers of up to $2,000 for joint filers and $1,000 for other taxpayers. 

SALT Cap 

The bill makes the SALT cap permanent while raising the threshold for five years and then reverting it to $10,000 in 2030. The cap is set at $40,000 for 2025 but phases down to $10,000 once income exceeds $500,000. Both thresholds will increase by 1% for each year through 2029.  

Takeaway

Earlier drafts of the bill would have shut down taxpayers’ ability to use pass-through entity tax regimes to circumvent the SALT cap; the final version eliminated those provisions.  

Transfer Taxes 

The bill permanently sets the lifetime exemptions for the gift, estate, and generation-skipping transfer taxes at $15 million for 2026 and indexes them for inflation thereafter. The change represents a modest increase from the exemptions under the TCJA, which were initially set at $10 million but reached $13.99 million in 2025 with inflation adjustments. 

Active Business Losses 

The legislation makes the active loss limit under Section 461(l) permanent but reverses recent inflation adjustments in the $250,000 threshold.  

Takeaway

The final bill struck an unfavorable provision in earlier drafts that would have required disallowed losses to remain in the Section 461(l) calculation in future years. Under the final bill, disallowed losses still become net operating losses in subsequent years and can offset other source of income.  

Other Provisions 

The bill contains a number of other meaningful tax changes, including: 

• Creating a 1% floor for charitable deductions for corporations by providing that a deduction is allowed only to the extent it exceeds 1% of taxable income (up to the current 10% cap) for tax years beginning after 2025; 

• Changing the explicit regulatory mandate for disguised sale rules under Section 707(a)(2) to clarify that the rules are self-executing without regulations, effective after the date of enactment; 

• Raising the percentage of allowable assets a real estate investment trust (REIT) may have in a qualified REIT subsidiary from 20% to 25% effective for tax years beginning after 2025; 

• Making permanent the increases to the low-income housing tax credit;  

• Increasing the Section 48D credit for semiconductor manufacturing facilities from 25% to 35% for property placed in service after 2025; 

• Making permanent the new markets tax credit; 

• Treating spaceports like airports for the private activity bond rules, effective for obligations issued after the date of enactment; 

• Increasing the limit on the “cover over” to Puerto Rico and the U.S. Virgin Islands for excise taxes on distilled spirits effective for imports after 2025; 

• Allowing the liability from gain on the sale of qualified farmland property to be paid in 10-year installments for sales after the date of enactment; and 

• Creating tax-preferred accounts for children, with a pilot program offering a $1,000 contributory credit for qualifying children for tax years beginning after 2025. 

Takeaway

The inclusion of the new markets tax credit and the CFC look-through rule, which are both scheduled to expire at the end of 2025, indicates that Republicans do not have much hope for another tax bill this year. House Ways and Means Committee Chair Jason Smith, R-Mo., originally left those provisions off the House bill, saying he hoped to address them in a bipartisan extenders bill. Republicans have also discussed moving a second reconciliation bill, although that may have been a negotiating ploy to appease members whose priorities are not addressed in this bill. 

Next Steps 

Taxpayers should assess the potential impact of major provisions when considering the tax efficiency of transactions and investments. There may be planning opportunities that should be considered now, such as accelerating or abandoning energy credit projects or investments and modeling the impact of changes to the limit on the interest deduction under Section 163(j), bonus depreciation, and research expensing under Section 174. Changes to opportunity zone rules could affect the timing for triggering capital gains and making investments. International changes may present arbitrage opportunities to capitalize on favorable changes or mitigate the impact of unfavorable changes. 

Written by Dustin Stamper. Copyright © 2025 BDO USA, P.C. All rights reserved. www.bdo.com 

Navigating What’s Next: Industry-Specific Tax Strategies 

This reconciliation bill marks one of the most consequential shifts in tax policy in recent years —impacting businesses across nearly every sector. At MGO, we’re helping clients in manufacturing, real estate, financial services, energy, and emerging technology interpret the changes and respond with purpose.

From bonus depreciation and research expensing under Section 174 to the evolving rules around Section 163(j), Opportunity Zones, and global tax alignment, our professionals bring deep technical insight and practical industry knowledge to every engagement. Whether you’re modeling tax scenarios, rethinking compliance, or reevaluating deal timing, MGO’s team is ready to help. Contact us to learn more.  

The post Republicans Complete Sweeping Reconciliation Bill  appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• OBBBA tax changes signed July 2025 affect Q2 ASC 740 tax provision and valuation allowance disclosures for calendar-year companies. 

• GILTI and FDII rule changes may increase tax rates and impact deferred tax assets and international tax strategies in 2025. 

• New bonus depreciation rules and state nonconformity create challenges in 2025 tax modeling and ASC 740 reporting. 

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President Donald Trump signed the reconciliation tax bill, commonly known as the “One Big Beautiful Bill Act” (OBBBA) into law July 4, 2025, which is considered the enactment date under U.S. Generally Accepted Accounting Principles (GAAP). The legislative changes will affect income tax accounting in accordance with Accounting Standards Codification (ASC) 740, Income Taxes. Notable corporate provisions include the restoration of 100% bonus depreciation; the creation of Section 174A, which reinstates expensing for domestic research and experimental (R&E) expenditures; modifications to Section 163(j) interest limitations; updates to the rules for global intangible low-taxed income (GILTI) and foreign-derived intangible income (FDII); amendments to the rules for energy credits; and the expansion of Section 162(m) aggregation requirements. Refer to BDO’s tax legislative alert for additional analysis. 

Those provisions could have important implications for the calculation of current and deferred taxes, including the assessment of valuation allowances. However, because the bill was signed after the June 30 period-end and its provisions have varying effective dates, only some changes – such as those affecting valuation allowance assessments – might affect the current year’s financial statements. For calendar-year filers, there are specific disclosure considerations for their Q2 10-Q filings, as discussed below. 

Changes in Tax Laws 

Under ASC 740, the impact of tax law changes on taxes payable or receivable for the current year is reflected in the estimated annual effective tax rate (AETR) in the period that includes the enactment date. Adjustments to prior years’ income taxes resulting from new legislation are recognized as discrete items in income tax expense from continuing operations in the period of enactment. 

For deferred taxes, the effects of tax law changes on temporary differences and related deferred taxes existing as of the enactment date are recognized as discrete items in the period of enactment as a component of income tax expense from continuing operations. Companies must make a reasonable effort to estimate temporary differences and related deferred tax amounts, including related valuation allowances, as of the enactment date. For temporary differences arising after the enactment date within the current year, the impact of the tax law change is incorporated into the AETR beginning in the first period that includes the enactment date.  

Insights: Accounting for Tax Law Changes in an Interim Period 

We are aware of an alternative policy that allows companies to use beginning-of-year temporary differences and related deferred tax balances when evaluating the impact of tax law changes during an interim period. Companies should discuss the approach with their auditors and tax advisors. 

For companies that have elected to recognize deferred taxes on GILTI, any changes in the tax law that affect GILTI deferred tax accounting must be reflected in the interim period that includes the enactment date, as discussed below. Also, companies may need to assess the impact of the expanded Section 162(m) aggregation rules on the recognition of deferred tax assets (DTAs) related to share-based compensation for covered employees. 

Insights: Accounting for Retroactive Changes in Tax Laws 

If a tax law change is retroactive, the accounting treatment depends on whether the impact relates to prior periods or the current year. For prior-period deferred taxes and taxes payable or receivable, the effect is recognized discretely in the period of enactment. However, if the retroactive change affects current-year taxes payable or receivable – when the effective date is before the enactment date but still within the current year – the impact is recognized through an adjustment to the AETR. The updated AETR is then applied to year-to-date ordinary income, resulting in a catch-up adjustment for taxes payable or receivable in earlier interim periods.  

Companies should consider that rule when assessing the financial reporting implications of some provisions enacted in July 2025 that are retroactive to the beginning of 2025. That includes provisions such as R&E expensing, Section 163(j) limitation on interest deductions, and 100% bonus depreciation (for property acquired and placed in service after January 19, 2025). 

Valuation Allowance Considerations 

Adjustments to valuation allowances for DTAs existing as of the enactment date are recorded as discrete items and allocated to income tax expense from continuing operations. Conversely, the expected adjustment to the valuation allowance at year-end for deductible temporary differences originating after the enactment date and related to current-year ordinary income must be incorporated into the estimated AETR.  

The corporate provisions – such as the permanent restoration of 100% bonus depreciation, R&E expensing, changes to the GILTI and FDII rules, and the more favorable calculation of the interest limit under Section 163(j) – could have important effects on the determination of valuation allowances for many companies. Specifically, the updates could affect projections of future taxable income, including adjusted taxable income under Section 163(j), potentially triggering a change in judgment about the realizability of DTAs. 

If tax law changes are enacted after the period ends but before financial statements are issued, changes to the valuation allowance are not recognized until the period that includes the enactment date. However, disclosure may be required, as discussed below. 

Insights: Reassess the Realizability of Deferred Tax Assets 

Before, companies might have recorded a full valuation allowance on their Section 163(j) DTA as a result of the interest deduction limitation being based on 30% of adjusted taxable income, which included amortization, depreciation, and depletion (that is, the earnings before income and taxes limitation). The reinstatement of the earnings before income, taxes, depreciation, and amortization limitation under Section 163(j) for tax years beginning after December 31, 2024, might require a reassessment of the realizability of the current-year disallowed interest deduction and Section 163(j) carryforward DTAs from prior years that were previously subject to a full valuation allowance. 

International Provisions 

The OBBBA includes several major changes to international tax provisions. Further, it renames the FDII and GILTI provisions to “foreign-derived deduction-eligible income” (FDDEI) and net controlled foreign corporation tested income (NCTI), respectively. In this Alert, we use the terms “FDII” and “GILTI.”  

The OBBBA introduces major changes to the FDII regime by increasing the effective tax rate from 13.125% to 14% through a permanent reduction of the Section 250 deduction from 37.5% to 33.34% – a rate still higher than what would have applied without the legislation. It also makes the FDII calculation more favorable by eliminating the reduction for qualified business asset investment (QBAI) and specifying that interest and R&E costs are not allocated to eligible income. Most FDII changes in the OBBBA are effective for tax years beginning after 2025. 

The act raises the effective tax rate on GILTI by reducing the Section 250 deduction from 50% to 40%, resulting in a pre-foreign tax credit (FTC) effective rate increase from 10.5% to 12.6%. That is still lower than the rate that would apply without the act. The FTC haircut under GILTI is reduced from 20% to 10%. The OBBBA also repeals the QBAI deemed return, increasing the amount of income subject to GILTI, and narrows expense allocations for FTC purposes. Those changes are effective for tax years beginning after 2025. 

The OBBBA raises the base erosion and anti-abuse tax (BEAT) rate from 10% to 10.5% for tax years beginning after 2025, which is lower than the 12.5% rate that would have applied absent the legislation. It also repeals a scheduled 2026 change that would have increased BEAT liability by the sum of all income tax credits. 

For tax accounting purposes, FDII and BEAT are treated as period costs, and most companies also account for GILTI as a period cost. Because most of the OBBBA international provisions do not take effect until tax years beginning after December 31, 2025, companies will likely see an immediate accounting impact at enactment only if the law change affects their valuation allowance assessments – for example, if the changes affect future income projections used in the valuation allowance analysis.  

However, companies that recognize deferred taxes for GILTI-related basis differences must remeasure those deferred tax balances at enactment if they are expected to reverse after the new law becomes effective. Further, if a company factors BEAT into its assessment of deferred tax asset realizability, it must evaluate how changes to the BEAT calculation affect its valuation allowance and recognize any impacts in the period of enactment. 

Energy Credit Provisions 

The OBBBA significantly curtails and modifies a broad range of Inflation Reduction Act (IRA) energy tax incentives, imposes new domestic content and foreign entity restrictions, and phases out or repeals many credits in the coming years. The changes effective in 2025 could affect financial statements if companies had anticipated the impact of IRA credits in their 2025 AETR calculations for interim periods.  

Accounting Considerations for Uncertainty in Income Taxes 

Companies must assess the act’s impact, particularly in areas where the interpretation of new rules is uncertain. If a tax position expected to be taken on a tax return is not more likely than not to be sustained upon examination based on its technical merits, it must be evaluated under the recognition and measurement requirements of ASC 740 to determine the appropriate amount of tax benefit to recognize. 

State Income Tax Considerations 

Companies must assess the state and local tax effects of the OBBBA; the impact will depend on whether and how states conform to the federal tax code. State tax implications may be significant for bonus depreciation, R&E expensing, FDII, GILTI, and interest deductibility. Companies must review state conformity rules to determine the appropriate state tax effect and related tax accounting and may need to adjust state current and deferred tax balances in addition to federal balances. 

Financial Statement Disclosures 

Companies need to consider disclosing the expected effects of new tax laws in the notes to the financial statements, management’s discussion and analysis, and risk factors. 

If a law is enacted after the interim balance sheet date but before financial statements are issued, the tax law change would be considered a Type II nonrecognized subsequent event under ASC 855, Subsequent Events. In that case, companies must disclose the nature of the event and either estimate its effect (if material) or state that an estimate cannot be made. If a law is enacted during an interim period, major variations in the relationship between income tax expense and pretax income must be explained.  

For annual financial statement reporting, ASC 740-10-50-9(g) requires companies to disclose the tax effects of adjustments to deferred tax liabilities or assets resulting from enacted changes in tax laws or rates in their annual financial statements. Public business entities in the U.S. need to separately disclose the effect of tax law changes in the annual effective tax rate reconciliation.  

Next Steps 

Companies must assess the impact of the tax legislation on their income tax provision calculations, including current and deferred tax balances, the AETR, valuation allowances, and related financial statement disclosures. The analysis will likely require extensive modeling and planning because the provisions are highly interconnected. While this Alert highlights selected areas of income tax accounting that might be affected by the OBBBA, it is important to consider how the changes apply to specific facts and circumstances.  

Written by Daniel Newton and Bella Verdiyan. Copyright © 2025 BDO USA, P.C. All rights reserved. www.bdo.com 

How MGO Helps You Navigate the New Tax Landscape 

The OBBBA brings a wave of corporate tax changes that present both risk and opportunity, especially around deferred tax assets, valuation allowances, and interim reporting under ASC 740. MGO’s Tax team works with tax and finance leaders to adapt provision models to reflect the latest federal and international updates. We support companies in life sciences, manufacturing, and technology by turning legislative changes into practical, forward-looking strategies. From addressing Q2 financial statement impacts to modeling future effects of GILTI, interest limits, and bonus depreciation, we serve as a resource for navigating complex tax reporting with accuracy and speed. Contact us to learn more.  

The post One Big Beautiful Bill Act: Implications for Accounting for Income Taxes  appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• Strategic fixed asset planning can accelerate your tax deductions and unlock immediate cash savings that can be reinvested in the business. 

• A detailed review can uncover overlooked tax benefits, such as Qualified Improvement Property (QIP) and deductible repairs, especially valuable as bonus depreciation phases out.  

• For companies with extensive fixed asset portfolios, statistical sampling can streamline the review process while maximizing potential tax saving.  

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Tax Strategist Insight 

Is your business looking to preserve cash flow? Strategic fixed asset planning can unlock valuable tax benefits, providing companies with immediate cash that can be reinvested in the business or used to help improve financial performance. This article explores key strategies in fixed asset planning — including opportunities surrounding shorter-lived qualified improvement property (QIP) and repairs and maintenance costs, as well as dealing with the phase-out of bonus depreciation. Additionally, it highlights the advantages of using statistical sampling methodologies when undertaking fixed asset planning. 

Why Engage in Fixed Asset Planning? 

Fixed asset planning is the process of enhancing the tax treatment of a company’s depreciable assets. As most tax-basis fixed asset systems are linked to financial reporting, when capital spending is entered into the fixed asset system, asset categories are generally assigned by the financial reporting team. These asset designations are then used to automatically assign tax lives, tax recovery methods, and other tax depreciation rules. Unfortunately, this process often overlooks important tax incentives and can become outdated as tax rules or the company’s facts and circumstances change, creating the need for regular fixed asset tax reviews. 

The value of traditional fixed asset planning is the ability to accelerate tax deductions, thereby reducing current tax liabilities and resulting in current cash savings. For example, by performing a detailed review of nonresidential building property, which is recovered over 39 years, businesses might be able to reclassify a portion of that spending to a shorter tax life or even achieve an immediate tax deduction. 

Opportunities identified through fixed asset planning generally require the company to file for an accounting method change with the IRS. Revenue Procedure 2024-23 lists several automatic accounting method changes that allow businesses to adjust their tax treatment of fixed assets without extensive IRS involvement. These method changes often result in a Section 481(a) adjustment, which captures the cumulative effect of the change and can provide immediate tax benefits. Importantly, a Section 481(a) adjustment allows a true-up to be recognized on a current return without the need to amend prior year tax returns. To calculate a Section 481(a) adjustment, a company can go as far back as they have tax basis to make the depreciation changes, even if the asset was placed in service in a year now closed under the statute of limitations. 

Qualified Improvement Property (QIP) 

QIP refers to improvements made to the interior portion of a nonresidential building. Introduced by the Tax Cuts and Jobs Act (TCJA), Congress intended QIP to qualify for 100% bonus depreciation. However, due to a drafting error, the TCJA initially assigned a 39-year recovery period to QIP, making it ineligible for bonus depreciation. The CARES Act, enacted in March 2020, corrected this error retroactively to January 1, 2018. 

To qualify as QIP (eligible for a 15-year recovery period and bonus depreciation), the improvements must: 

• Be made by the taxpayer to the interior of a nonresidential building. 

• Be placed in service after the building was first placed in service. 

• Not include enlargements, elevators, escalators, or internal structural framework. 

The confusion around the TCJA drafting error caused many businesses to miss classifying large pockets of spending as QIP from 2018 through 2020. Companies have the opportunity to review spending from this period, reclassify qualified costs to 15-year QIP, and take bonus depreciation where allowable. These reviews can be completed as part of a fixed asset lookback study and savings can be captured through an automatic accounting method change with a Section 481(a) adjustment. 

Companies in the following situations also may want to undertake a fixed asset study to retroactively identify additional QIP: 

• Companies that do not complete an extensive QIP review each year and, instead, only classify as QIP the largest projects that clearly qualify.  

• Companies without sufficient time and other resources to properly identify their QIP deductions between year end and the filing of their return. 

It is important to note that QIP is qualified dollar-by-dollar and not project-by-project, so an extensive review is often required to increase deductions. QIP benefits currently remain available for future tax years and are most impactful when bonus depreciation rates are higher. 

Capital Expenditures vs. Deductible Repairs 

Regulations finalized in 2014 (the tangible property regulations) provide guidelines under IRC Section 263(a) for distinguishing between capital expenditures and deductible repairs. These regulations were a significant rule change and resulted in an extensive amount of work for companies to be compliant. However, many businesses have not diligently followed these regulations over the last several years, creating opportunities to revisit their fixed asset planning strategies.  

The tangible property regulations govern which expenditures can be deducted when incurred versus those that must be capitalized and depreciated. The rules are complex, heavily dependent on the taxpayer’s facts and circumstances, and, absent a few safe harbors, provide no bright-line tests. A fixed asset study can identify and support classification of costs as immediately deductible repairs, enhancing tax savings. 

Bonus Depreciation 

Another reason to consider a fixed asset study is for the sunsetting of full or partial expensing. Bonus depreciation under IRC Section 168(k) allows businesses to accelerate deductions for certain qualified property. The TCJA introduced 100% bonus depreciation for property placed in service on or after September 27, 2017. However, the TCJA also provides a phase-out, with bonus depreciation decreasing by 20% each year starting in 2023.  

Under the TCJA, the bonus depreciation percentages are as follows: 

• 80% for property placed in service in 2023. 

• 60% for property placed in service in 2024. 

• 40% for property placed in service in 2025. 

• 20% for property placed in service in 2026. 

• 0% for property placed in service after 2026. 

While many hope for an extension of bonus depreciation, in the current environment where bonus depreciation is phased out and eventually eliminated, businesses looking to be tax efficient should consider reviewing property that is otherwise eligible for bonus depreciation for opportunities to classify the costs as immediately deductible repairs and maintenance. The phase-out and elimination of bonus depreciation is one example of how a change in rules can shift the optimal tax treatment of certain regularly incurred expenditures, and how following the same year-over-year methodology for fixed asset planning is rarely the best answer. 

Statistical Sampling: Efficient Asset Review 

Statistical sampling is a valuable tool in fixed asset planning. For companies with a significant number of fixed assets, statistical sampling can limit the number of assets or projects that require detailed review while still enhancing potential tax benefits. By focusing on a representative sample, businesses can more efficiently identify areas for improvement and ensure compliance with tax regulations. This approach also allows companies to manage their resources effectively while uncovering opportunities for tax savings. 

Next Steps: Leveraging Detailed Asset Data 

To fully capitalize on fixed asset planning opportunities, companies must gather detailed tax basis and other fixed asset data on an asset-by-asset basis. By examining this data for historical spending, BDO can help identify potential opportunities for tax savings and improved asset management, such as QIP or repair deductions. A detailed analysis can uncover areas where businesses have not fully leveraged their accounting methods.  

Written by Ryan Bailey and Peter Pentland. Copyright © 2025 BDO USA, P.C. All rights reserved. www.bdo.com 

How MGO Can Help 

At MGO, our tax professionals bring deep technical experience and a hands-on approach to fixed asset planning. We help your business unearth missed opportunities, navigate complex accounting method changes, and improve your tax positions—especially amid shifting bonus depreciation rules. Whether you need a comprehensive fixed asset review, support in identifying QIP or repair deductions, or guidance on leveraging statistical sampling, we’re here to help you maximize your tax savings and improve financial performance. Contact us to work together to turn your fixed asset data into real value.  

The post Transforming Fixed Asset Management Into Cash Flow Opportunities  appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• Prepare for a cannabis tax audit by retaining 10 years of thorough financial records, using GAAP-compliant accounting methods, and staying current on all federal tax obligations.

• Work with experienced cannabis accountants to document tax positions, accurately track COGS, and respond quickly to any IRS audit notice.

• If faced with unfavorable audit results, consider appealing through the IRS Independent Office of Appeals or, if necessary, pursuing Tax Court.

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As a cannabis business owner, you operate in one of the most heavily scrutinized industries in America. With Section 280E hanging over all plant-touching activities and limiting business deductions, you’re already carrying a heavy tax burden. So adding a potential audit to the mix, it’s understandable why tax compliance might keep you up at night.

But here’s the good news: with proper preparation, you can significantly reduce both your audit risk and potential negative outcomes — and with professional support you may even be able to negotiate a reduction or amendment. Let’s walk through a comprehensive strategy to help you prepare for and survive during an IRS examination.

Your Four-Step Cannabis Audit Preparation Plan

Taking proactive steps now can save you significant headaches (and money) later. Here’s how to get your cannabis business audit-ready:

1. Retain Proper Documentation (For At Least 10 Years)

The foundation of audit defense is comprehensive documentation. In the event of an audit, you’ll need to provide evidence of every transaction under IRS review. These documents must be organized so they can be quickly retrieved and linked to general ledger entries.

Essential documents to preserve:

• Financial statements (trial balance, profit and loss, balance sheet, chart of accounts, etc.)
• Point of sale transaction data
• Invoices, receipts, and purchase orders
• Credit card statements
• Agreements (intercompany, licensing, management, etc.)
• Cash logs (especially important!)
• Payroll documentation and independent contractor agreements
• Rent payments, property tax bills, utilities bills, and other overhead documentation

Since the IRS can leverage an extended statute of limitations when income tax is “substantially understated”, you should save most documents for 10 years and critical formation documents indefinitely.

2. Establish Proper Accounting Methods

Your accounting and record-keeping should align with generally accepted accounting principles (GAAP) guidelines, particularly for inventory accounting — the key to managing 280E exposure.

Critical accounting practices:

• Accrual method of accounting: As a business that uses inventory accounting and reports cost of goods sold (COGS) expenses, you’re generally required to use accrual accounting. This means assigning values to inventory items based on acquisition and development costs.
• Understanding COGS: Your COGS must reflect actual costs of goods sold — not merely renamed ordinary expense deductions. Identify each expense and correctly categorize it as direct or indirect. When allocating selling, general and administrative (SG&A) expenses, they should specifically tie to production costs (not just be a generic percentage of overhead).
• Straight-line depreciation: Recent IRS cases and guidance establish that only straight-line depreciation methods (used for book purposes) are allowable for inclusion in COGS. Bonus depreciation and modified accelerated cost recovery system (MACRS) are not authorized.

3. Stay in Compliance with Federal Tax Law

This may seem obvious, but it bears repeating: the best way to stay off the IRS radar is to pay your taxes. Not paying is the reddest flag of all.

With limited access to banking services and capital, some cannabis operators are tempted to treat delinquent tax payments as a financing tool. While it may seem attractive for cash flow, it dramatically increases your audit risk.

This applies doubly for federal employment taxes (withholding, FICA, etc.), where penalties and interest are severe. The IRS imposes the Trust Fund Recovery Penalty against “responsible persons” in their individual capacity, at 100% of the underlying tax liability.

Remember, cannabis companies are not eligible for bankruptcy protection. If your business is structured as a pass-through entity (LLC or S-corporation), tax debts become your personal liability.

4. Proactively Document Accounting Policies and Tax Positions

If there’s any confusion about accounting practices or you lack back-office support, hire an experienced cannabis accountant to:

• Perform a 280E/COGS study to identify appropriate tax treatment
• Determine whether your “separate trade or business” truly qualifies as separate
• Address outstanding tax balances with an installment agreement or “offer in compromise”
• Review document creation/retention policies
• Ensure inventory accounting procedures align with GAAP/International Financial Reporting Standards (IFRS) rules

Receiving an IRS Audit Notice: Your Action Plan

If you receive an audit notice, don’t panic. Follow these steps:

1. Understand the Situation

The IRS conducts several types of audits — from relatively simple correspondence audits to intensive field audits where they visit your facility. Note that the IRS will first contact you via traditional mail (never by phone or email).

2. Act Immediately

Initial IRS contact letters typically require a response within 10-30 days. Don’t procrastinate. Reach out to a cannabis-specialized accountant immediately and execute a power of attorney so that your representative can contact the IRS auditor within the required timeframe.

3. Work With Qualified Professionals

An experienced representative will know cannabis accounting inside and out, have experience navigating audits, and may even have connections at the IRS. They’ll help minimize risk and potentially negotiate a reasonable outcome.

4. Set the Right Tone

From the outset, build rapport and credibility with the IRS auditor. Organize document production, establish a reasonable timeline, and follow through on commitments.

5. Be Transparent About Known Issues

The IRS examiner is trained to identify errors and problems. If you know there’s a glaring error in your tax return or a gap in record-keeping, consider presenting it upfront. Reluctance may be perceived as fraudulent intent, whereas transparency might earn goodwill from the auditor.

Challenging Unfavorable Audit Results: Your Options

If your audit doesn’t result in a manageable outcome, you have options:

1. Appeal

The IRS Independent Office of Appeals offers a path to resolving disputes without litigation. To successfully navigate this process, you’ll need to clearly present your case, provide all supporting documentation, and demonstrate where the IRS assessment went wrong.

2. Tax Court

As a last resort, you can take your case to U.S. Tax Court. While there have been some successes (Harborside reduced their tax bill from $29 million to $11 million), note that every attempt to overturn 280E has failed in Tax Court. Consider whether potential savings justify the resources invested in litigation.

Beyond the IRS: State and Local Tax Risks

Don’t forget that maintaining compliance with state and local tax laws is equally important. State and local regulators issue your licenses and are directly connected to tax enforcement. Even a minor tax infraction at the local level could lead to license revocation.

Types of audits to keep in mind:

• State income tax
• State sales and use tax
• State excise tax
• Local business tax

Take Control of Your Cannabis Tax Strategy Today

Being “audit-ready” not only helps you navigate an IRS examination but also implements financial best practices that benefit your business in numerous ways — from regulatory compliance to preparing for potential acquisition or initial public offering (IPO).

The cannabis industry presents tremendous opportunities for entrepreneurs ready to forge new paths. But significant risks await the unprepared. By following these guidelines, you’ll be positioned not just to survive an audit, but to thrive in this challenging regulatory environment.

How MGO Can Help

Our dedicated cannabis accounting, audit, tax, and consulting practice help organizations of all sizes — from multi-state operators to pre-revenue startups — establish optimal accounting processes, manage tax and regulatory compliance, perform audits to raise capital or engage in M&A, and everything else an operator needs to succeed.

We also offer tax advocacy and resolution services — including pre-audit readiness, audit representation, and guidance on obtaining penalty abatements and negotiating installment agreements.

Reach out to our Cannabis team today to find out how we can help support your business.

The post How to Prepare Your Cannabis Business for a Tax Audit appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• Tax planning is most effective when approached as an ongoing process rather than a year-end task.

• Changes to tax laws happen quickly (and sometimes retroactively), making regular reviews essential.

• Proactive, ongoing tax planning supports better cash flow, more informed decision-making, and alignment with broader financial and business goals.

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For many people, tax planning starts when deadlines loom. However, for businesses and individuals with large assets to protect, waiting until spring is a missed opportunity. The most effective strategies are proactive and sometimes take shape months — even years — in advance.

Year-round tax planning gives you more visibility into your overall tax situation, reduces risk, and helps you make sound financial decisions.

Why Proactive Tax Planning Matters More Than Ever

The tax code is constantly changing. Legislative agendas, economic pressures, and global events create ripple effects that reshape tax rules, rates, and opportunities.

For example, the Tax Cuts and Jobs Act (TCJA) of 2017 introduced 100% bonus depreciation for 2018 through 2022. Since then, this benefit has gradually reduced — to 80% in 2023, 60% in 2024, 40% in 2025, and so on until it’s scheduled to be phased out entirely by the 2027 tax year.

In his March 2025 address to Congress, President Trump indicated he wants to restore 100% expensing and make it retroactive to January 20, 2025.

Of course, presidential speeches aren’t legislation. We don’t yet know whether Congress will reinstate 100% bonus depreciation and, if they do, when it will take effect. Congress could act before year-end or pass a larger tax reform package in early 2026 and apply provisions retroactively.

So, how should small business owners and real estate investors approach tax planning for 2025? Working with tax professionals who monitor developments throughout the year and model different scenarios can better position you to adapt. This isn’t just about being prepared — it’s about making informed decisions while there’s still time to act.

Benefits of Ongoing Tax Planning

Bonus depreciation is just one example of the uncertainties you might face in planning taxes. Several other provisions of the TCJA are set to expire on January 1, 2026, which can impact other tax planning opportunities like accelerating or deferring income, planning for expenses, and investing.

Here’s how year-round tax planning can help:

• Informed decision-making: Strategic planning helps clarify a decision’s real cost (or benefit) before you finalize it. Whether you’re considering a major equipment purchase, expanding to a new location, or adjusting compensation strategies — federal, state, and local taxes can influence the outcome.

• Better cash flow management: Unexpected tax bills can disrupt operations or derail investment plans. Regular forecasting and mid-year check-ins help align tax liabilities with expected revenue — giving you more control over timing and payments.

• Flexibility to implement tax-efficient strategies: Many planning opportunities have calendar year-end deadlines. For example, opportunities to time income or expenses, make charitable contributions, fund certain retirement plans, and harvest tax losses expire on December 31. Addressing these well before the fourth quarter opens more possibilities and gives you more time to act on them.

• Preparing for regulatory scrutiny: Detailed recordkeeping, clean books, and consistent processes reduces the risk of errors and makes it easier to respond to inquiries or audits if they arise.

• Alignment with broader financial goals: Effective tax planning isn’t separate from financial planning; it’s a critical component. Evaluating trust structures, legacy planning, and investment strategies often involves coordinating with legal, finance, and operations teams. Planning throughout the year gives you more time to consider all areas of your business or life that these decisions might change.

Building a Thoughtful Tax Planning Calendar

The tax planning process doesn’t need to be complex or time-consuming. You just need a regular system of checkpoints throughout the year.

For example, your tax planning cadence might look like this:

• Q1: Review prior-year performance and find planning priorities for the year ahead.

• Q2: Reassess projections and make mid-year adjustments to withholding, estimated payments, or entity structure if necessary.

• Q3: Begin year-end planning and scenario modeling, considering any upcoming legislation.

• Q4: Execute your plan before December 31.

This structure allows for more prompt decisions and meaningful conversations, not rushed moves made under deadline pressure.

How MGO Can Help

Ultimately, tax planning is about clarity. It’s about understanding your current situation, preparing for what’s ahead, and making confident decisions rooted in reliable data.

If you’re managing complex finances or large-scale operations, contact MGO today. We’re happy to help you plan throughout the year. It’s not just a best practice — it’s an essential strategy for resilience, adaptability, and long-term success.

The post Beyond Tax Season: The Value of Year-Round Tax Planning appeared first on MGO CPA | Tax, Audit, and Consulting Services.

Key Takeaways:

• A cost segregation study helps accelerate depreciation on real estate assets, reducing taxable income and boosting cash flow. 

• This strategy is especially valuable for newly acquired or renovated properties that owners or investors plan to hold long term. 

• Bonus depreciation can significantly increase upfront tax savings.

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As a real estate investor, developer, or property owner, you’re always looking for ways to increase profits and reduce costs. One of the most effective strategies for doing so is leveraging a cost segregation study to accelerate depreciation deductions, reduce taxable income, and enhance cash flow.

What Is a Cost Segregation Study?

A cost segregation study is a detailed analysis that breaks down the various components of a property, identifying costs that can be depreciated over shorter periods — typically five, seven, or 15 years — rather than the standard 27.5 (residential) or 39 years (commercial). By reclassifying assets into these shorter depreciation categories, you can significantly increase your tax deductions in the early years of ownership.

Benefits of a Cost Segregation Study

A cost segregation study offers a range of financial advantages that can help you optimize your tax strategy and reinvest savings back into your business.

• Accelerated depreciation deductions: By identifying qualifying components of your property, you can move a significant portion of your investment into faster depreciation categories — leading to immediate tax savings.

• Reduced taxable income: A cost segregation study allows you to claim higher depreciation deductions upfront, lowering your taxable income and keeping more cash in your business.

• Improved cash flow: By deferring taxes and increasing deductions, you can reinvest your savings into new properties, renovations, or business growth.

• IRS compliance: Properly conducted cost segregation studies align with IRS guidelines and provide supporting documentation while maximizing your deductions.

When Are Cost Segregation Studies Most Valuable?

Cost segregation studies are generally most beneficial for nonresidential properties — though residential properties can still see some advantages. The value of a study depends on several factors:

• Best for long-term holds: If you plan to hold a property for at least five years, a cost segregation study can provide significant benefits. However, if you intend to sell within a year or two, the tax savings may be negated by depreciation recapture.

• More effective on newer properties: If you’ve owned a building for 20+ years, much of its depreciation has already been realized, limiting the benefit. However, if you’ve recently acquired the property or completed major renovations, a study can still unlock valuable tax savings.

• Renovations and improvements matter: Even if you’ve owned a property for a long time, substantial renovations or improvements can justify a cost segregation study to accelerate depreciation on those new expenditures.

The Power of Bonus Depreciation

Bonus depreciation allows you to deduct a significant portion of qualifying assets in the year they are placed in service. Under recent tax laws, bonus depreciation applies to assets with a useful life of 20 years or less, meaning many of the reclassified assets from a cost segregation study can be written off immediately. This creates an even greater upfront tax benefit, further enhancing your cash flow.

Claiming Missed Years of Depreciation Deductions

If you didn’t perform a cost segregation study in the year you placed the property in service, all is not lost. You can still complete a study later by filing a change in accounting method using IRS Form 3115.

This process allows you to claim a catch-up deduction — meaning you can take all the missed depreciation deductions you would have received if you had done the study in the first year. For example, if you bought a building in 2023 and filed your 2023 and 2024 returns without a cost segregation study, you could still perform a study in 2025 and claim a catch-up deduction on your 2025 return — significantly improving your cash flow.

While this approach typically works best for properties purchased, built, or renovated within the past few years, it provides a valuable second chance to unlock savings.

Case Study: How Cost Segregation and Land Reallocation Saved a Client Millions

A long-standing client approached us after purchasing a $10 million commercial property. We recommended a cost segregation study to accelerate their depreciation deductions and improve their tax position.

To help them enhance their tax savings, we reviewed the land/building allocation as part of our analysis. The client explored this allocation with a certified appraiser and the appraisal successfully revised the land allocation — unlocking additional depreciable assets.

Through our analysis, we were able to reclassify a significant amount of the building’s costs into five-, seven-, and 15-year property categories, making them eligible for bonus depreciation. Our analysis resulted in saving the client between $1.5 million and $1.6 million in taxes.

Beyond just performing the study, we took a proactive approach — reviewing land/building allocations, examining county assessor values, and exploring every opportunity for savings. This in-depth, strategic approach is what sets our cost segregation services apart.

Unlock the Full Financial Potential of Your Real Estate Investments

A cost segregation study is a powerful tool that can help you increase tax savings, enhance cash flow, and reinvest in future opportunities. If you’ve recently purchased or renovated a property, now is the time to explore how this strategy can benefit you.

How MGO Can Help

Our dedicated Real Estate team helps developers, property owners, investment firms, and family offices align tax, consulting, and assurance strategies with your business goals. We offer cost segregation services to help you accelerate depreciation deductions, reduce your taxable income, and unlock significant cash flow benefits. Reach out to our team today to discover how a cost segregation study can transform your tax strategy.

The post Unlock Real Estate Tax Savings with a Cost Segregation Study appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• Bonus depreciation is a tax provision that allows you to deduct a large portion of qualifying real estate costs upfront, but it is phasing down each year and may be eliminated after 2026 unless Congress takes action.

• Key assets that qualify include land improvements like parking lots and sidewalks, as well as qualified improvement property (QIP), which covers interior upgrades to commercial buildings such as flooring, lighting, and internal HVAC systems.

• A cost segregation study can help you identify and reclassify property components with shorter depreciation periods, making more of your investment eligible for accelerated deductions.

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As a real estate investor, bonus depreciation can be a powerful tool to reduce your tax liability and improve cash flow. But with recent changes — and the possibility of future adjustments — it’s important to understand how this tax provision works and how it affects your investments.

What Is Bonus Depreciation?

Bonus depreciation is a tax provision that allows businesses to immediately deduct a substantial percentage of the purchase price of eligible assets in the year they are placed in service, rather than spreading the deduction over the asset’s useful life. This accelerated depreciation is designed to encourage investment by improving cash flow and reducing tax liability.

Historically, bonus depreciation has been a tool used by Congress to stimulate economic growth. It was first introduced after the events of September 11, 2001, allowing a 30% immediate write-off for qualifying assets. Over the years, the percentage has fluctuated, with significant changes implemented through various legislative acts.

Evolution of Bonus Depreciation

The 2017 Tax Cuts and Jobs Act (TCJA) made a landmark change by increasing bonus depreciation to 100% for qualified property acquired and placed in service after September 27, 2017. This meant businesses could fully expense eligible assets upfront, providing a substantial tax benefit. However, the TCJA also outlined a phasedown schedule:

• 2023: 80% bonus depreciation

• 2024: 60% bonus depreciation

• 2025: 40% bonus depreciation

• 2026: 20% bonus depreciation

Absent further legislative action, bonus depreciation is set to phase out entirely after 2026.

Will 100% Bonus Depreciation Return?

In a March 2025 address to Congress, President Donald Trump stated:

“… as part of our tax cuts, we want to cut taxes on domestic production and all manufacturing. And just as we did before, we will provide 100 percent expensing. It will be retroactive to January 20th, 2025 …”

Although he didn’t explicitly mention bonus depreciation, this language alludes to the provision introduced in the 2017 TCJA (enacted under Trump’s previous administration). If reinstated, 100% bonus depreciation could offer substantial tax benefits for businesses — but, for now, it remains a proposal subject to Congressional approval.

What Qualifies for Bonus Depreciation?

Bonus depreciation applies to assets with a useful life of 20 years or less under the Modified Accelerated Cost Recovery System (MACRS), the depreciation method used in the United States.

For real estate investors, bonus depreciation is particularly beneficial for two categories of assets:

• Land improvements – Assets like parking lots, sidewalks, and landscaping typically qualify.

• Qualified improvement property (QIP) – Interior improvements to commercial (non-residential) buildings placed in service after the original structure.

QIP: A Key Opportunity for Real Estate

QIP is one of the most significant areas where you, as a real estate investor, can leverage bonus depreciation. If you’ve made interior improvements to your commercial buildings after they’ve been placed in service, you may be sitting on a valuable tax strategy.

Examples of QIP include:

• Interior partitions and walls (excluding structural framework)

• Ceilings

• Flooring

• Electrical, plumbing, and internal HVAC upgrades

• Cosmetic enhancements for tenants

QIP excludes:

• Structural framework modifications

• Building enlargements

• Additions like elevators or escalators

Without bonus depreciation, QIP would be depreciated over 15 years. With bonus depreciation, investors can immediately expense a portion of the cost (40% in 2025, potentially 100% if new tax legislation passes), with the remaining cost basis being depreciated over the assets’ useful life.

The Role of Cost Segregation Studies

Cost segregation is a strategic tax planning tool that allows property owners to identify and reclassify components of a building to shorter depreciation periods, accelerating depreciation deductions. Instead of treating the entire property as 39-year real property (for commercial buildings), a cost segregation study might reclassify components as five-, seven-, or 15-year assets, making them eligible for bonus depreciation.

For example, a study might identify:

• Five-year property: Carpet, decorative lighting, specialized electrical systems

• Seven-year property: Office furniture, equipment

• 15-year property: Landscaping, parking lots, fencing

Even as bonus depreciation phases down, cost segregation remains a valuable strategy — enabling you to identify assets that qualify for shorter depreciation lives, increasing tax benefits and improving cash flow. If bonus depreciation returns to 100%, cost segregation studies will likely increase as investors seek to maximize depreciation benefits for qualified improvements on newer properties.

Key Considerations for Real Estate Investors Moving Forward

As a real estate investor or professional, staying informed about these tax provisions is vital. Here are some key considerations:

• Legislative changes: While Trump has proposed restoring 100% bonus depreciation retroactively to January 2025, this is not yet law. Investors should plan for the current step-down schedule but stay alert for potential changes.

• Timing of asset acquisitions and improvements: If 100% bonus depreciation is reinstated, it could significantly impact investment strategies. Investors planning major renovations or acquisitions may benefit from waiting for legislative clarity.

• Election options: Bonus depreciation is automatic unless investors elect out, which can be done separately for each asset class life (five-year, seven-year, 15-year). Work with a tax professional to determine if long-term tax strategies favor traditional depreciation methods.

• State tax situations: Bonus depreciation treatment varies by state. Some states conform to federal rules, while others require alternative calculations. State policies can change annually, so knowing your state’s approach is crucial for accurate tax planning.

What’s Next for Bonus Depreciation?

If Congress reinstates 100% bonus depreciation, it could impact your tax planning for 2025 and beyond. Whether you’re acquiring new properties, making improvements, or considering a cost segregation study, understanding these changes can help you maximize deductions and optimize your real estate investments.

How MGO Can Help

Navigating bonus depreciation rules can be complex, but you don’t have to do it alone. Our Real Estate team has extensive experience helping businesses and investors navigate bonus depreciation — including determining qualifying assets and providing cost segregation services.

We can help you assess how bonus depreciation could impact your portfolio and identify opportunities to reduce your tax burden and increase your cash flow. Reach out to our team today to explore your options.

The post Bonus Depreciation: What Real Estate Investors Need to Know appeared first on MGO CPA | Tax, Audit, and Consulting Services.