One Big Beautiful Bill Act

Subject: Accounting methods summary and observations

Introduction

The “One Big Beautiful Bill Act” (OBBBA) enacted on July 4, 2025, makes several statutory changes that will impact accounting methods and elections.For financial reporting purposes, ASC 740 requires companies to recognize the impact of tax law changes in the period in which the bill is enacted (July 4, 2025) as a component of the income tax provision related to continuing operations.Thus, companies will need to quickly determine the impact that the changes will have on their financial statement positions and disclosures to account for the changes in the period of enactment.The following provides a summary of the most significant changes the OBBBA makes to accounting periods and elections.

Interest expense limitation – section 163(j)

For taxable years that begin after December 31, 2025, the bill provides that interest expense that is electively capitalized (e.g.,to inventory, machinery and other fixed assets under section 266 or 263(a)) is considered interest expense subject to the 30 percent limitation.However, this change does not apply to taxable years before the effective date, leaving in place a potentially beneficial planning opportunity for 2024 and 2025 federal returns.Interest expense that is electively capitalized becomes part of the basis of acquired or produced property (i.e., is no longer considered interest expense) and is recovered more quickly (e.g.,inventory turns) than under the carry over provisions of section 163(j).

For calendar year 2024 returns filed on extension, this is a time sensitive and potentially beneficial opportunity to eliminate or reduce the interest expense limitation under section 163(j) (in certain situations the opportunity may be available for prior year returns). In addition to the timing benefit, other benefits may include the removal of interest expense from base erosion payments (BEAT) under section 59A, increasing foreign source income for foreign tax credit utilization under section 861, reduction in expenses allocated to foreign derived intangible income (FDII), and state margin tax benefits by reducing net margin subject to tax.

The implementation of the strategy requires careful analysis, particularly with multi-national corporations and intercompany loan arrangements. The most significant benefits have been achieved by highly leveraged companies that produce or sell inventory though the strategy has proven to be very useful in other contexts as well.

The bill also reinstates the add back of depreciation and amortization to adjusted taxable income for taxable years that begin after December 31, 2024.While this change will increase the deduction limitation under section 163(j), it does not take effect until 2025, making interest capitalization planning critical for 2024.

Research and experimental expenditures – section 174

For tax years that begin after December 2024, the OBBBA creates new section 174A that permits domestic research and experimental (R&E) expenditures to be deducted in the year incurred. As an alternative, a taxpayer may elect to capitalize and amortize domestic R&E costs over a period of not less than 60 months, beginning in the year that the taxpayer first realizes a benefit from the expenditures. Additional details include the following:

• Foreign R&E costs must continue to be amortized over 15 years. Foreign research providers should carefully review the terms of their contracts with research recipients to determine whether the foreign research provider bears financial risk or has obtained the rights to use the results of the research through sale, lease, or license.

• Software development costs are considered R&E costs.

• Eligible small businesses (those that satisfy the average annual gross receipts test of $31 million or less) may retroactively apply full expensing of domestic R&E costs to tax years beginning after December 31, 2021. Small businesses may amend prior year tax returns or file an accounting method change with a modified section 481 adjustment (unamortized balance of R&E costs as of the beginning of the year change). Small businesses should analyze the most beneficial year to expense R&E costs in deciding whether to amend or file the method change.

• The transition rules allow taxpayers that are not eligible small businesses to deduct any remaining unamortized R&E expenditures that were incurred after December 31, 2021, over one or two years beginning with the first taxable year beginning after December 31, 2024. The transition rule states that a taxpayer that makes this election is treated as initiating a change in accounting method made with the consent of the Secretary.Effective August 28, 2025, Rev. Proc. 2025-28 provides the IRS procedures for changing a taxpayer’s accounting method or amending tax returns to comply with the new rules for R&E expenditures.

• Taxpayers should carefully model the collateral impacts of deducting domestic R&E expenditures in addition to any unamortized balance from prior years.Taking such a large deduction may subject those taxpayers to the corporate alternative minimum tax (CAMT); higher BEAT taxes; NOL limitations; or reduced foreign tax credit limitations under section 904.Those taxpayers may want to consider elections to capitalize R&E expenditures under section 174A(c) or section 59(e).An election to capitalize R&E may also be beneficial in calculating ATI under section 163(j) in that amortization deductions will be added back beginning in 2025.

• The OBBBA amends section 280C(c)(1) to clarify that domestic R&E expenditures that are either deducted or capitalized and amortized are reduced by the amount of the research credit under section 41(a) (unless the taxpayer elects a reduced research credit in lieu of making such a reduction).

Bonus Depreciation & Section 179 Expensing

The 2017 Tax Cuts and Jobs Act (TCJA) amended section 168(k) to allow 100 percent “bonus” depreciation, allowing taxpayers to write off the cost of eligible property placed in service after September 17, 2017, and before the end of 2022.After 2022, the 100 percent bonus depreciation rate phased down over the succeeding five years; to 80 percent for property placed in service in 2023, 60 percent for property placed in service in 2024, and 40 percent for property placed in service in 2025. The rate was scheduled to decrease to 20 percent for 2026 and expire in 2027. The OBBBA permanently extends 100 percent bonus depreciation for the cost of qualified property acquired after January 19, 2025.

The acquisition date of bonus eligible property is generally considered to be the date that a written binding contract is entered into for the acquisition.Regulations issued prior to the OBBBA provide that a “written binding contract” is the later of (1) the date on which the contract was entered into; (2) the date on which the contract is enforceable under State law; (3) if the contract has one or more cancellation periods, the date on which all cancellation periods end; or (4) if the contract has one or more contingency clauses, the date on which all conditions subject to such clauses are satisfied. For this purpose, a cancellation period is the number of days stated in the contract for any party to cancel the contract without penalty, and a contingency clause is one that provides for a condition (or conditions) or action (or actions) that is within the control of any party or a predecessor.SeeTreas. Reg. § 1.168(k)-2(b)(5)(ii).

The OBBBA also adds section 168(n) that provides 100 percent bonus depreciation for “qualified production property” construction of which begins after January 19, 2025, and before January 1, 2029, and is placed in service before January 1, 2031.Qualified production property is nonresidential real property that (1) is used by the taxpayer as an integral part of a qualified production activity; (2) is placed in service in the United States or any possession of the United States; (3) the original use of which commences with the taxpayer; (4) was not used in a qualified production activity at any time during the period beginning on January 1, 2021, and ending on May 12, 2025; (5) was not used by the taxpayer or a related party at any time prior to such acquisition; and (6) meets certain requirements under section 179(d).

The addition of qualified production property placed in service in the United States provides a significant incentive for investment in production facilities in the United States. States are not yet clear on whether taxpayers will be able use bonus depreciation on qualified production facilities for state tax purposes.

Section 179 Expensing.The OBBBA raises the section 179 expense deduction limit from $1 million to $2.5 million, with a phaseout threshold increase from $2.5 million to $4 million, effective for property placed in service after 2024.Both thresholds will be adjusted annually for inflation.With 100 percent bonus depreciation now in place, section 179 expensing election may have less applicability.However, section 179 expensing may provide flexibility if a taxpayer wants to expense a particular asset but doesn’t want to take bonus depreciation on the entire class of assets.Section 179 expensing may also be beneficial if a taxpayer chooses to elect out of bonus depreciation for a class of assets to minimize or avoid the section 461(l) loss limitation.

Residential construction contracts – section 460

Prior to the amendments made by the OBBBA, section 460 permitted home builders to account for eligible home construction contracts using any permissible method such as percentage of completion, completed contract, or an accrual method.A home construction contract was defined as any home construction contract if 80 percent of the estimated total contract costs were attributable to dwelling units contained in buildings with four or fewer dwelling units, and improvements to real property directly related to such dwelling units.Thus, residential construction contracts that involved greater than four dwelling units were generally subject to the requirement to recognize revenue from residential construction contracts under PCM (i.e.,as costs were incurred during the contract).

The OBBBA expands the exemption from the requirement to use PCM to all residential construction contracts, rather than those buildings that contain four for fewer dwelling units.The change applies to contracts entered into in taxable years beginning after the date of enactment, or 2026 for calendar year taxpayers.The change provides significant timing benefits for residential builders that can now use the completed contract method and defer paying tax until the completion of the contract.The IRS will likely treat the transition to the completed contract method as an accounting method change requiring commissioner consent.The automatic consent procedures will need to be modified to include this change otherwise it will require a change under the non-automatic consent procedures.

Summary

The permanency of 100% bonus depreciation coupled with the section 163(j) changes to EBITDA, and section 174A expensing for U.S. research expenditures, as well the impact on international tax rules such as FDII, GILTI, BEAT and foreign tax credit capacity makes planning and modeling of taxable income extremely important as the accounting method and election provisions of the OBBBA become effective.