Preventing Harmful BEAT Changes to Take Effect
Enacted as part of the Tax Cuts and Jobs Act (TCJA), the Base Erosion Anti-Avoidance Tax (BEAT) was designed to discourage base erosion payments to low-tax jurisdictions. Harmful modifications were set to go into effect in 2026, including a rate increase, which would have disincentivized investment and weakened U.S. competitiveness.
Under the OBBBA, the BEAT rate will increase slightly in 2026 to 10.5 percent, avoiding an increase to a 12.5 percent rate that would have occurred in 2026 under TCJA. The three percent base erosion threshold is maintained, as is the treatment of general business credits, including R&D, used to reduce BEAT liability, which would have disappeared in 2026 without the OBBBA changes.
Unfortunately, the BEAT remains ill-targeted, failing to distinguish between payments to a low-tax jurisdiction and a high-tax jurisdiction, capturing payments well beyond those under the BEAT’s intent. Moreover, it imposes double taxation because foreign tax credits are disallowed for BEAT purposes. GBA remains focused on implementing a high-tax exception to the BEAT in future legislation.
Restoring the EBITDA Standard
GBA has long advocated to maintain the OECD international EBITDA (Earnings Before Interest, Taxes, Depreciation & Amortization) standard as the appropriate measure for an income based interest limitation such as Section 163(j).
While the TCJA changed the Section 163(j) interest limitation calculation, shifting from an EBITDA standard to an EBIT standard beginning in 2022, the recently adopted OBBBA permanently restores the EBITDA standard. This is a significant win for companies investing in America and growing the American economy.
The OBBBA also implements some tweaks to Section 163(j) that may negatively impact some companies. Section 163(j) will now apply before capitalization rules, which may increase disallowance of interest deductions despite the EBITDA change. The provision also now precludes the inclusion of certain foreign income in the calculation of adjusted taxable income, affecting those companies with foreign subsidiaries under their U.S. group.
Spurring American Innovation (Restoring Sec. 174)
International companies operating in the United States spend over $80 billion on U.S. research and development (R&D) activities each year. TCJA eliminated the ability of companies to deduct their R&D investments in the year they are made, starting in 2022. The former treatment of R&D had been allowed by the tax code for over 50 years, and this change put the U.S. out of step with many of its economic competitors.
With the passage of the OBBBA, Congress has made permanent the full expensing of domestic R&D expenses after 2024. Additionally, large taxpayers (and small businesses who have not elected out of capitalization for the years 2022-2024) are permitted to deduct unamortized costs over a period of 1-2 years. Foreign R&D expenditures must continue to be capitalized and amortized over 15 years.
Bonus Depreciation – Section 168(k)
Bonus depreciation reduces the cost of machinery, which encourages manufacturers to make larger investments in the U.S. Under TCJA, this benefit began to phase out in 2023. The OBBBA makes permanent 100 percent bonus depreciation for property acquired after January 19, 2025, and does not include a phase-down.
New Depreciation Provision- Section 168(n)
The OBBBA adds a new Section 168(n), which provides for elective 100 percent depreciation for “qualified production property.” Generally, qualified production property includes facilities used in the manufacturing of tangible personal property, agricultural production, chemical production, or refining. This provision applies to property with construction starting after January 19, 2025, and before January 1, 2029, and placed in service by December 31, 2030.