Important Changes for Technology and Life Sciences Industries
Introduction
On July 4, 2025, President Trump signed H.R. 1, commonly known as the “One Big Beautiful Bill Act” (OBBB), into law.[1] OBBB was initially approved by the House of Representatives on May 22, 2025 (the House Bill),[2] followed by proposed changes that were released by the Senate Finance Committee on June 16, 2025 (the SFC Bill) and passed by the full Senate on July 1, 2025. OBBB permanently extends many of the tax provisions initially introduced by P.L. 115-97, commonly known as the “Tax Cuts and Jobs Act” (TCJA), and introduces significant U.S. federal income tax changes relevant to domestic and multinational businesses and their shareholders and investors. This alert summarizes the changes most relevant to companies in the technology and life sciences industries.
OBBB also materially impacts the energy and climate solutions sector. For more coverage, please see this Wilson Sonsini alert.
Highlights
General Business Provisions
- Expands qualified small business stock (QSBS) tax benefits
- Allows immediate deduction of domestic R&D expenses incurred in 2025 and beyond and accelerates expensing of domestic R&D expenses incurred in 2022-2024
- Permanently extends and expands deductions for qualified business income available to owners of pass-through businesses
- Permanently extends and expands bonus depreciation
- Increases the cap on deduction of business interest
- Increases the threshold for income reporting on IRS Forms 1099-MISC, 1099-NEC, and 1099-K
- Permanently extends the Qualified Opportunity Zone program
- Raises the cap on deductibility of state and local taxes for certain taxpayers through 2030
Provisions Impacting Multinational Companies
- Omits the Section 899 “revenge tax” proposed by the House Bill
- Eliminates downward attribution and introduces provisions directly targeting post-inversion tax planning
- Modifies the calculation of GILTI (now referred to as net CFC tested income) and FDII (now referred to as foreign-derived deduction eligible income) and fixes the applicable effective tax rate at 14 percent for both
- Fixes the base erosion anti-abuse effective tax rate at 10.5 percent of modified taxable income
General Business Provisions
- Expanded Qualified Small Business Stock Provisions
The SFC Bill proposed materially increasing the available tax benefits for “qualified small business stock” (QSBS) issued after the enactment date of the legislation. OBBB retains the SFC Bill’s proposed changes, which include 1) replacing the strict five-year holding period cliff for gain exclusion with a phase-in approach beginning after three years, 2) increasing the per-taxpayer gain exclusion threshold to $15 million from $10 million (increased to $10 million from $5 million for taxpayers who file married filing separately) and indexing the exclusion for inflation on an annual basis, and 3) increasing the aggregate gross assets threshold above which a company is not an eligible qualified small business to $75 million from $50 million, also indexed for inflation. These rules apply to stock acquired after July 4, 2025 (the date of enactment of OBBB). For more coverage of the SFC Bill’s changes with respect to QSBS, please see our prior client alert here.
- Permanent Expensing of Domestic R&D Costs
The TCJA required taxpayers to capitalize and amortize certain R&D expenses for amounts paid or incurred in tax years beginning on or after January 1, 2022, over five years for domestic expenses and over 15 years for foreign expenses. OBBB largely follows the changes proposed in the SFC Bill (see our prior coverage here) in allowing taxpayers to deduct (rather than capitalize) domestic R&D expenses paid or incurred in tax years beginning on or after January 1, 2025.
In addition, OBBB permits eligible small businesses to elect to retroactively expense domestic R&D costs paid or incurred beginning in tax years starting on or after January 1, 2022, effectively eliminating the TCJA changes to Section 174 for such businesses with respect to domestic R&D expenses. Small businesses generally include any corporation or partnership whose average annual gross receipts for the three tax years ending with the tax year beginning before January 1, 2025 (e.g., 2022-2024 for calendar year taxpayers), do not exceed $31 million.[3] The election must be made within one year of the bill’s enactment.
Finally, OBBB permits all taxpayers who paid or incurred domestic R&D expenses in tax years beginning on or after January 1, 2022, and before January 1, 2025, to elect to deduct any remaining unamortized amount over a one-period or ratably over a two-year period (at the taxpayer’s election), accelerating the benefit of such expenses.
- Extending Tax Deductions for Owners of Certain Pass-Through Entities
Section 199A, which was introduced by the TCJA, allows owners of certain pass-through businesses to deduct domestic qualified business income (QBI) and was set to expire on December 31, 2025. The Act permanently extends the deduction under Section 199A but does not increase the deduction-eligible portion of QBI from 20 percent, as was proposed in the House Bill.
The QBI deduction is phased out for taxpayers over a certain income threshold to a percentage of W-2 wages paid as part of the business and eliminated entirely for professionals in SSTBs. Unlike the House Bill, OBBB does not modify the structure of the phase out.[4] Instead, OBBB adopts the SFC Bill’s approach of increasing the income threshold from $50,000 to $75,000 (or $100,000 to $150,000 in the case of a taxpayer filing a joint return). OBBB also includes a minimum $400 deduction-eligible amount for any taxpayer whose aggregate QBI for all active qualified trades or businesses of such taxpayer is at least $1,000, both adjusted for inflation beginning after 2026.
Finally, unlike the House Bill, OBBB does not make dividends from qualified “business development companies” (i.e., “regulated investment companies” or RICs) eligible for the QBI deduction.
- Extending and Expanding Bonus Depreciation
OBBB permanently extends “bonus depreciation” under Section 168(k) for qualified property placed in service on or after January 20, 2025, allowing taxpayers to immediately deduct 100 percent of the cost of qualified property for the tax year it is placed into service. OBBB also permits taxpayers to make a transitional election to claim 40 percent bonus depreciation (60 percent for certain property) for qualified property placed into service during the first tax year ending on or after January 20, 2025.
Further, OBBB adopts the House Bill provision allowing taxpayers to elect to immediately expense up to $2.5 million of the cost of qualifying property (subject to reduction to the extent the cost of such qualifying property exceeds $4 million) under Section 179. The current thresholds are $1.25 million and $3.13 million in 2025, respectively.
OBBB largely adopts 100-percent bonus depreciation on the full cost of “qualified production property” (e.g., property used in connection with the manufacturing, agriculture and chemical production, or refining of tangible personal property, and must result in “a substantial transformation of the property comprising the product”) that is newly acquired or the construction of which begins on or after January 1, 2025, and before January 1, 2029. However, OBBB now requires such property to be placed into service before January 1, 2031 (versus January 1, 2033, in the House Bill), with extensions possible due to special circumstances.
- Increased Limitation on Business Interest Deductions
Under prior law, Section 163(j) provided that the deduction for net business interest expense is disallowed to the extent it exceeds the sum of a taxpayer’s business interest income plus 30-percent of such taxpayer’s earnings before income taxes (EBIT). OBBB permanently increases the cap on business interest for tax years beginning on or after January 1, 2025, by replacing EBIT with earnings before income taxes, depreciation, and amortization (EBITDA), as was the case prior to January 1, 2022. However, under OBBB, adjusted taxable income is calculated for this purpose by excluding amounts included in gross income as Subpart F income, net CFC tested income (formerly, GILTI), and any associated gross-up amount under Section 78, along with the portion of deductions allowed under Sections 245A(a) and 250 by reason of such income inclusion. This change applies to tax years beginning on or after January 1, 2026.
OBBB also provides a coordinating rule providing that the cap on business interest is calculated prior to the application of any provision requiring interest to be capitalized, with certain exceptions. This change applies to tax years beginning on or after January 1, 2026.
- Increased Thresholds for Income Reporting on IRS Forms 1099
Under current law, anyone engaged in a trade or business and making payments of rent, salaries, wages, and other FDAP of $600 or more in a tax year to a person is required to report such payments on IRS Forms 1099-MISC or 1099-NEC (miscellaneous income and nonemployee compensation, respectively). The OBBB increases this threshold to $2,000 and indexes this amount to inflation.
In addition, under OBBB, third-party settlement organizations are only required to report payments on IRS Form 1099-K (payment card and third-party transactions) if the payments to any one person exceed $20,000 and 200 transactions in one tax year, an increased reporting threshold from payments of $2,500 or more (for 2025) and $600 or more (beginning in 2026) in a tax year under current law. In addition, backup withholding only applies to amounts in excess of the reporting threshold.
- Temporary Increase in SALT Deduction Cap and No Limit on Pass-Through Entity Tax Workaround
OBBB temporarily increases the cap on deductions for state and local taxes (SALT) for tax years beginning on or after January 1, 2025, and before January 1, 2030, to $40,000 annually, which increases by one percent annually beginning in 2027 before reverting back to $10,000 in calendar year 2030.
However, the benefit of this increase is phased out for taxpayers with a modified adjusted gross income over $500,000 ($505,000 in 2026 and increasing by one percent annually thereafter) (cut in half for taxpayers that file married filing separately). Such taxpayer’s SALT deduction is limited to the greater of i) $10,000 or ii) the cap, as described above, reduced by 30-percent of the taxpayer’s modified adjusted gross income (as specially defined) over the threshold amount.
Many states have permitted owners in pass-through entities, such as partnerships and S-corporations, to bypass the SALT cap through the so-called pass-through entity tax (PTET) workaround, thereby allowing these owners to claim a deduction for SALT in excess of the $10,000 cap. While the House Bill proposed to eliminate the PTET workaround for businesses engaged in specified service trades or businesses (SSTBs) (generally, trades or businesses in connection with the performance of services), OBBB does not adopt this limitation, meaning that the PTET workaround is still available.
- Permanent Extension of Qualified Opportunity Zones
OBBB permanently extends the Qualified Opportunity Zones benefit of Section 1400Z, creates rolling 10-year Opportunity Zones designations beginning on January 1, 2027, updates the definition of low-income community and provides that no tax is imposed on gain realized on the disposition of a Qualified Opportunity Fund investment held for at least 10 years and up to 30 years.
- Other General Tax Provisions
OBBB follows the House Bill by providing that Section 707(a)(2) (relating to guaranteed payments and other transactions between a partnership and a partner that should be treated as occurring between a partnership and someone other than a partner) is self-executing and does not require additional guidance from the U.S. Department of the Treasury to be effective.
OBBB also permanently extends a TCJA restriction on the ability of noncorporate taxpayers to deduct excess business losses (generally, losses attributable to a trade or business of the taxpayer that exceed certain income thresholds). However, unlike the House Bill, OBBB continues to treat losses carried forward as a net operating loss, rather than being subject to the excess business loss limitations.
Provisions Impacting Multinational Companies
- No Section 899 Revenge Tax
Unlike both the House Bill and the SFC Bill, OBBB does not include Section 899 (the so-called revenge tax), which would have introduced a new income tax regime that targeted certain taxpayers associated with a “discriminatory foreign country” that imposes an “unfair foreign tax.” This provision was removed at the request of Treasury Secretary Scott Bessent after an agreement was reached with the G7 countries to exempt U.S. multinational corporations from the Organisation of Economic Co-operation and Development’s Pillar Two initiative.
- Modified Rules for Determining CFC Status and Subpart F Income
OBBB includes a number of changes to the “controlled foreign corporation” (CFC) regime, following the SFC Bill. Notably, OBBB restores Section 958(b)(4), which had been previously repealed by the TCJA. Prior to the TCJA, the Code prohibited downward attribution of stock ownership from foreign corporations to U.S. persons for purposes of determining when a foreign corporation is a CFC. The rule was repealed by TCJA in an effort to address certain post-inversion tax planning strategies, but ultimately impacted far more companies than expected.
OBBB addresses this by restoring Section 958(b)(4) and introducing a more targeted approach with new Section 951B, which applies to “foreign controlled U.S. shareholders” of “foreign controlled CFCs.” A foreign controlled U.S. shareholder is a U.S. person that owns more than 50 percent of a foreign corporation (the foreign controlled CFC) by vote or value, specifically taking into account downward attribution. This change appears targeted at U.S. subsidiaries of a foreign-parented group that have a direct or indirect interest in a foreign subsidiary of that group, thereby subjecting them to the CFC income inclusion rules.
Second, OBBB makes permanent the look-through rule for related CFCs, which was scheduled to sunset in 2026. The look-through rule allows payments by CFCs to related CFCs of dividends, interest, rents, and royalties to be disregarded for purposes of calculating subpart F income if certain requirements are met.
Finally, OBBB revises the methodology for determining a U.S. shareholder’s pro rata share of a CFC’s subpart F income. Under current law, only U.S. shareholders who own stock in a foreign corporation on the last day of a year in which such corporation is a CFC are required to take into account subpart F income. OBBB provides for a more equitable apportionment of subpart F income by allocating income to any U.S. shareholder who held stock in the CFC during the year on a pro rata basis. This change is effective for the tax years of foreign corporations beginning on or after January 1, 2026 (and the tax year of U.S. shareholders within which or with which such tax year ends).
- Changes to Calculation of Net CFC Tested Income and Foreign-Derived Deduction Eligible Income (Formerly GILTI and FDII)
OBBB modifies and renames the global intangible low-taxed income (GILTI) and foreign-derived intangible income (FDII) regime established by TCJA, replacing GILTI with “net CFC tested income,” and FDII with “foreign-derived deduction eligible income” (FDDEI). For purposes of calculating net CFC tested income, OBBB removes the deduction for “net deemed tangible income return,” and, unlike the House Bill, does not exempt qualified U.S. Virgin Islands services income for purposes of calculating the net CFC tested income inclusion amount for U.S. shareholders. OBBB also modifies and simplifies the calculation of FDDEI compared to FDII, including by introducing limitations on expense apportionment and excluding from deduction eligible income any gain from the sale of certain intangible property and property that is depreciable or amortizable.
OBBB also makes permanent a deduction of 40 percent of net CFC tested income and 33.34 percent of FDDEI for tax years beginning after December 31, 2025. This raises the effective tax rate on net CFC tested income and FDDEI to 14 percent from 13.125 percent under current law. Notably, this change moves the U.S. international tax regime into closer alignment with Pillar Two.
Finally, OBBB increases deemed paid foreign tax credits under Section 960 from 80 percent to 90 percent (and correspondingly disallows foreign tax credits on 10 percent of foreign taxes relating to distributions of previously taxed income derived from net CFC tested income), which applies to distributions made on or after June 28, 2025. This means that a larger portion of foreign taxes paid on foreign earnings will be eligible for a credit against U.S. taxes.
The base erosion anti-abuse tax (BEAT) applies to U.S. corporations with annual gross receipts exceeding $500 million who have made certain “base erosion payments” (i.e., deductible payments to related parties that exceed three percent of all deductible payments). OBBB permanently increases the BEAT rate on modified taxable income from 10 percent to 10.5 percent. This is higher than the 10.1 percent proposed by the House Bill but lower than the scheduled increase to 12.5 percent under prior law. This change is effective for tax years beginning on or after January 1, 2026.
Rob Sherrill and Jackie Au contributed to the preparation of this alert.
[1] Text - H.R.1 - 119th Congress (2025-2026): One Big Beautiful Bill Act, H.R.1, 119th Cong. (2025), https://www.congress.gov/bill/119th-congress/house-bill/1/text, as amended by the Amendment to Rules Committee Print 119-3.
[2] For prior coverage of the House Bill, see https://www.wsgr.com/en/insights/the-one-big-beautiful-bill-tax-provisions-impacting-domestic-and-multinational-businesses.html.
[3] An “eligible taxpayer” is defined as any taxpayer who is not a tax shelter and who meets the gross receipts test described in Section 448(c) for the first tax year beginning after December 31, 2024.
[4] The House Bill would have allowed a taxpayer over the income threshold approach to deduct the greater of i) a percentage of W-2 wages paid or ii) the QBI deduction reduced by 75 percent of the excess of taxable income over the threshold amount.
