On July 4, President Trump signed the One Big Beautiful Bill Act (OBBBA) into law. The OBBBA extends or makes permanent many significant provisions from the Tax Cuts and Jobs Act (TCJA) and significantly alters the tax code. Since the OBBBA brings significant changes to the tax landscape, professional services firms should be aware of the provisions that could impact their business.
Research and Experimentation (R&E) Expenses
Since 2022, domestic R&E expenses have been required to be capitalized and amortized over five years rather than being deducted immediately. The OBBBA permanently allows immediate deductibility of domestic R&E expenses beginning after Dec. 31, 2024, which is more favorable for many professional services firms than amortization over five years.
Businesses that are not tax shelters and that have average annual gross receipts of $31 million or less are allowed to apply this change retroactively for tax years beginning after Dec. 31, 2021, and amend prior years’ returns to claim refunds based on the new deductions. IRS guidance also allowed these companies to deduct the unamortized balance of capitalized expenses on their 2024 returns. Alternatively, for capitalized domestic R&E expenses incurred after Dec. 31, 2021, taxpayers may elect to accelerate the remaining deductions over the first one- or two-year period beginning after Dec. 31, 2024.
This will benefit many businesses by allowing them to invest in innovation. For professional services firms, eligible activities could include proprietary software, data analytics solutions, or cybersecurity enhancements.
Qualified Business Income (QBI) Deduction
The QBI deduction offers a valuable tax-saving opportunity for many qualifying professional services firms, especially smaller ones. The OBBBA makes the QBI deduction permanent at 20%, with minimal changes, giving businesses more stability and making year-to-year tax planning easier. Taxpayers are also expected to benefit from this deduction in future years due to the expansion of the phase-in range and minimum deduction.
This is a key win for the architecture and engineering (A&E) industries, specifically, as TCJA excluded A&E from the list of Specified Service Trade or Businesses, which encompass many professional services industries and which are ineligible for the QBI deduction. This exclusion was continued in the OBBBA.
Pass-Through Entity Tax (PTET) Deduction
This deduction was made permanent with no changes. PTET is a valuable tool for taxpayers who may be subject to the SALT deduction cap on their personal returns, as it allows them to deduct state income taxes through their interests in a partnership or S corporation.
Bonus Depreciation
The OBBBA reinstates permanently the first-year bonus depreciation provisions of section 168(k). The allowance is increased to 100% for property that is both acquired and placed in service after Jan. 19, 2025. This provides more certainty and incentives for businesses making capital investments.
Business Interest Expense Limitation
Before the OBBBA was signed into law, businesses were required to calculate interest expense limitations based on 30% of earnings before interest and taxes (EBIT), excluding depreciation and amortization. The OBBBA permanently returns to the original TCJA EBITDA-based calculation (earnings before interest, taxes, depreciation, and amortization), effective for taxable years beginning after Dec. 31, 2024. By eliminating these deductions from the formula, the base for calculating the 30% limitation is increased.
Professional services firms benefit from this provision because it offers greater flexibility and simplifies compliance. It is better for taxpayers in the long term because it provides certainty regarding business interest limitations, potentially allowing for a larger deduction beginning Jan. 1, 2025.
Looking Forward
Overall, the OBBBA positions professional services firms to maximize tax benefits, invest in operations, and drive future growth. Staying informed and leveraging these opportunities will be essential for firms seeking to remain agile and competitive under the new law.
CBIZ is here to help professional services firms navigate the complexities of tax reform. Connect with an industry expert to get started.
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