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February 18, 2026

Contributors: Anthony J. Licavoli Jr., CPA

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• The OBBB restores 100% bonus depreciation and makes the 20% QBI deduction permanent, providing long-term tax certainty for capital investments and pass-through entities.Ìý
• New legislation allows for the immediate expensing of domestic R&D costs and introduces a 100% deduction for U.S. manufacturing buildings, bypassing traditional multi-year depreciation schedules.Ìý
• 2026 marks the beginning of strict payroll reporting requirements for tips and overtime, while state-level “decoupling” from federal rules may create unexpected tax liabilities.Ìý

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OBBBÌýChanges and OpportunitiesÌýImpactingÌýYour Business’sÌý2026 FilingsÌý

TheÌýOne Big Beautiful Bill (OBBB)ÌýisÌýsignificantly shiftingÌýtheÌýtax landscape for American businesses. While much of the public focus hasÌýremainedÌýon individual tax breaks, the legislation provides aÌýsubstantial set of benefitsÌýfor businesses by restoring and making permanent several high-value incentives.Ìý

As the 2026 filing season gets underway,Ìýbusiness taxpayersÌýshould be aware ofÌýtheÌýcritical changes and strategic opportunitiesÌýoutlined below.ÌýÌý

100% Bonus DepreciationÌýReturnsÌý

One of the most impactful provisions of the OBBB is the restoration of 100% bonus depreciation. After several years of scheduled phasing down, the law now allows businesses to once againÌýimmediatelyÌýdeduct the full cost of eligible machinery, equipment, and certain property in the year of purchase. This change is permanent, providing long-term certainty for capital investment planning.Ìý

R&D Expensing: Ending theÌýCapitalizationÌýRequirementÌý

For the past several years, businessesÌýwereÌýfrustrated by a requirement to amortize domestic Research and Development (R&D) costs over five years. The OBBBÌýrepealsÌýthis requirement, allowing for full immediate expensing of domestic R&D costsÌýretroactive to Jan.Ìý1, 2025.Ìý

For costs previously capitalized between 2022 and 2024, the lawÌýprovidesÌýa flexible “catch-up” mechanism:Ìý

1. One-Year Election: Deduct the entire remaining balance in full on the 2025 tax return.Ìý
2. Two-Year Election:ÌýDeduct the remaining balance ratably (50% per year) over the 2025 and 2026 tax years.Ìý

New Incentives for U.S. ManufacturingÌý

In an effort toÌýbolster domestic production, the OBBB introducedÌýtheÌýQualified Production Property (QPP) deduction under Section 168(n).ÌýThis new provision offers a specificÌý100%Ìýdeduction for new,ÌýqualifiedÌýnonresidential real property or buildings used for manufacturing within the United States. ThisÌýrepresentsÌýa significant shift, as real estate typically requires much longer depreciation schedulesÌý(39 years).Ìý

Permanence for Pass-ThroughsÌýÌý

The legislation provides much-needed stability for “pass-through” entities (S corps, LLCs, and partnerships).ÌýSection 199A (QBI Deduction) The 20% Qualified Business Income deduction, which was originally set to expire, has been made permanent. This ensures that small business owners continue to pay an effective rate that is competitive with the corporate tax rate.Ìý

QualifiedÌýSmall BusinessÌýC-corporationÌýStockÌý(Section 1202)Ìý

The OBBB strengthens Section 1202 by expanding theÌýgainÌýexclusion available on the sale of Qualified Small Business Stock. This enhancement makes equity investment in qualifying C corporations more attractive and provides founders and early investors with increased opportunities to reduce capital gains on exit.Ìý

Section 163(j): Higher Interest DeductionsÌý

The OBBB permanently restores the EBITDA-based calculation for business interest limits,Ìýreplacing the more restrictive EBIT standard. Businesses can once again “add back” depreciation and amortization when calculating their deduction ceiling. This reversal significantly increases interest deductibility for capital-intensive firms.Ìý

Strategic Planning: Timing & Loss LimitationsÌý

While deductions are plentiful, taking aÌýlarge single-year deduction may be less efficient than it appears due to two critical “loss traps” reinforced by the OBBB:Ìý

• Net Operating Losses (NOLs): CurrentÌýrules limit NOLÌýcarryforwardsÌýtoÌýoffsettingÌýonly 80% of taxable income. Over-deductingÌýin a single year can lead to a large “paper loss” that you cannot fully use toÌýefficientlyÌýwipe out taxÌýin future profitable years.Ìý
• Excess Business Loss (EBL) Limit:ÌýThe OBBBÌýmadeÌýthe SectionÌý461(l) limitation permanent.ÌýNon-corporate taxpayers (SÌýcorpÌýandÌýpartnership owners) cannot use more than $313,000 ($626,000 for joint filers) of business losses to offset non-business income like capital gains or interest. Any loss above this cap is converted into an NOL and carried forward, delaying your tax relief.Ìý

Administrative Rigor: Qualified Tips and Overtime ReportingÌý

While the IRS offered penalty relief for 2025 and allowed “reasonable methods” (like separate year-end statements) for tracking tax-free tips and overtime, 2026 marks the start of strict enforcement.Ìý

To remain compliant, you must update payroll systems now to isolate and report:Ìý

• Qualified Overtime:ÌýSpecificallyÌýthe FLSA “half-time” premiumÌýportion.Ìý
• Qualified Tips:ÌýVoluntary gratuities only (not mandatory service charges).Ìý
• Occupation Codes: Mandatory Treasury Tipped Occupation Codes (TTOC) for each worker.Ìý

Important: While employees receive an income tax break, employersÌýremainÌýliable for FICA and FUTA taxes on the full amount of these wages.Ìý

The Multi-State Maze: Conformity and DecouplingÌý

A significant challenge for the upcoming season is the lack of uniformity between federal and state tax treatments. While the OBBB offers generous federal breaks, many states have begun toÌýdecouple fromÌýthese provisions to protect their own tax revenues. Because some states use “static” or “fixed-date” conformity, they do not automatically adopt federal changes like the tip and overtime exemptions or accelerated depreciation.Ìý

In theseÌýjurisdictions, businesses mayÌýbe requiredÌýto “add back” federal deductions on their state returns, effectivelyÌýmaintainingÌýtwo different sets of books. BeforeÌýfinalizingÌýan investment strategy, it is critical toÌýidentifyÌýwhere state lawÌýdiverges fromÌýthe OBBB to avoid unexpected state-level tax liabilities.Ìý

The OBBB offers a rare combination of expanded deductions, enhanced incentives, and long‑term certainty for business taxpayers. However,ÌýoptimizingÌýthese benefits requires deliberate coordination across federal, state, and operational considerations. As you prepare for the 2026 filing season, now is the time to evaluate your strategy, model your outcomes, and ensure your systems are ready for the new compliance requirements.ÌýÌý

Look for guidance and insights as you respond to the OBBB’s changes and work toÌýposition your business toÌýleverageÌýtheÌýopportunitiesÌýahead?ÌýLearn more and reach out to one of our advisorsÌýhere.ÌýÌý

Frequently Asked QuestionsÌý

Q: Can I deduct all R&D costs inÌý2025?
A: Yes, under the OBBB, businesses can fully expense domestic R&D costsÌýimmediately, retroactive to Jan.Ìý1, 2025.ÌýIn addition, forÌýcosts previously capitalized between 2022 and 2024, the lawÌýprovidesÌýflexibleÌý“catch-up”Ìýoptions.Ìý

Q: Does the OBBB affect state tax returns?
A: Yes, many states have “decoupled” from federal OBBB provisions, meaning businesses may need to add back federal deductions on state returns.Ìý

Q: What is the new depreciation schedule for manufacturing real estate?
A: Section 168(n) allows for a 100% deduction for qualified nonresidential real property used for U.S. manufacturing, replacing the standard 39-year schedule.Ìý