The One Big Beautiful Bill Act made some of the most significant federal business tax changes in years. Business owners may have heard about permanent 100% bonus depreciation, changes to the Qualified Business Income deduction, more favorable treatment of domestic research expenses, and changes to the deduction for business interest.
Those provisions can create real opportunities, but knowing that a tax law changed is only the beginning. The more useful question is whether any of those changes should affect the decisions you are making about your business today.
For some business owners, the new rules may change the timing of an equipment purchase, make a planned investment more attractive, affect the economics of research and development, or change how financing is evaluated. For California business owners, however, there is another layer to the analysis because California does not simply follow all of the new federal rules.
This is where tax planning becomes business planning. A deduction may improve the tax consequences of a transaction, but the transaction still has to make sense from a legal, financial, insurance, and long-term business perspective.
The Federal Tax Changes Business Owners Should Know About
Several provisions of the One Big Beautiful Bill Act are particularly relevant to closely held businesses.
One of the biggest changes is permanent 100% bonus depreciation. For qualifying property acquired after January 19, 2025, businesses can generally deduct 100% of the adjusted basis in the year the property is placed in service rather than recovering the cost over a longer depreciation period. The IRS issued additional guidance on the new rules in January 2026.
The law also made the Section 199A Qualified Business Income deduction permanent. For eligible owners of sole proprietorships and pass-through businesses, including S corporations and partnerships, the deduction can be worth up to 20% of qualified business income, subject to the applicable rules and limitations. Beginning in 2026, the law also expands certain phase-in ranges and adds a minimum deduction for taxpayers who meet the statutory requirements.
Businesses involved in research, technology, software development, product development, and other qualifying activities also received an important change. New Section 174A generally allows qualifying domestic research and experimental expenditures to be deducted currently for tax years beginning after December 31, 2024. Businesses can alternatively elect to capitalize and amortize those domestic expenditures, and transition rules may apply to amounts that were capitalized under the prior law.
The business interest limitation under Section 163(j) also changed. For tax years beginning after December 31, 2024, depreciation, amortization, and depletion are once again added back when calculating adjusted taxable income for purposes of the limitation. For businesses subject to Section 163(j), that can increase the amount of business interest that may be deductible. The IRS issued updated guidance on these rules in August 2026.
All of these provisions can affect business decisions. None of them should make the decision for you.
A Tax Deduction Does Not Turn a Bad Purchase Into a Good One
Suppose your business has been considering a $200,000 equipment purchase. Being able to deduct the qualifying cost immediately for federal tax purposes may make the timing more attractive, but you are still spending $200,000 or taking on an obligation to finance it.
Before making the purchase, I would want a business owner to look beyond the deduction. How much cash will remain in the company after the purchase? If you finance the equipment, what are the payment terms and interest costs? Are you personally guaranteeing the loan? Is the equipment being pledged as collateral? Does the purchase create new insurance needs, and how long do you realistically expect the equipment to remain useful to the business?
The tax treatment is part of that analysis, but it should not overwhelm the underlying economics. Saving a portion of a purchase price in taxes does not make the rest of the purchase free.
The same principle applies to borrowing. The more favorable Section 163(j) calculation may improve the deductibility of interest for some businesses, but deductible debt is still debt. The company must have sufficient cash flow to service it, and a personal guarantee may create potential exposure for the owner outside the business itself.
If the business is borrowing to fund an investment that makes sense independently, the tax rules may improve the economics. If the investment does not make sense without the tax deduction, I would want to look much more closely before moving forward.
California Business Owners Have to Run the Numbers Twice
For California business owners, one of the most important things to understand about the One Big Beautiful Bill Act is that federal tax treatment and California tax treatment may be very different.
California updated its general conformity date to the Internal Revenue Code as of January 1, 2025. The One Big Beautiful Bill Act, however, was enacted on July 4, 2025. The Franchise Tax Board states that California generally does not conform to the changes made by the OBBBA.
There were already important differences between California and federal tax law before the new legislation. California generally does not conform to federal bonus depreciation, and California does not provide the federal Section 199A Qualified Business Income deduction.
That can produce very different federal and California tax results from the same business transaction.
A business owner might see a substantial federal deduction from a qualifying equipment purchase while receiving a very different depreciation deduction for California purposes. A pass-through business owner may receive the Section 199A deduction on the federal return without receiving a comparable California deduction.
This does not necessarily make the federal tax benefit less valuable. It means you need to understand the complete tax result before making a decision based on the headline federal deduction.
For my California business-owner clients, I want the CPA or tax advisor modeling both sides rather than telling the owner only how much the transaction may save federally.
The Qualified Business Income Deduction Is Important, but It Should Not Drive Your Entity Choice
Making the Section 199A deduction permanent gives pass-through business owners more certainty than they had when the deduction was scheduled to expire.
That is useful for long-term planning, but it does not mean every business should be structured around maximizing Section 199A.
Your choice of entity affects much more than one tax deduction. It can affect how the business is managed, how owners are compensated, employment taxes, liability protection, ownership transfers, succession planning, the addition or departure of partners, and what happens if an owner dies or becomes incapacitated.
An S corporation may make sense for one business and be completely inappropriate for another. The same is true of an LLC taxed as a partnership, a sole proprietorship, or a corporation.
If the tax changes cause you to reconsider your entity structure, that can be a worthwhile conversation. I simply would not make the legal structure of the company turn on one section of the Internal Revenue Code.
This is a situation where the attorney and CPA should be working together. The CPA can model the tax consequences while the attorney considers whether the structure also makes sense for the ownership, management, liability, and succession needs of the business.
The Research and Development Changes May Affect More Businesses Than You Think
The change to domestic research and experimental expenditures is not relevant only to large technology companies.
A closely held business may incur qualifying research expenditures while developing software, improving products, creating new manufacturing processes, experimenting with technology, or conducting other qualifying activities. Under the prior federal rules, affected domestic expenditures generally had to be capitalized and amortized rather than immediately deducted.
The ability to deduct qualifying domestic research expenditures currently may improve cash flow and change the economics of projects that businesses had delayed or scaled back. For some companies, that may make it worthwhile to revisit research or development plans that had become less attractive under the prior tax treatment.
The tax result should still follow the business case rather than replace it. Before increasing spending on a project, the owner should understand what is actually being developed, the expected return, how the project will be funded, who owns the resulting intellectual property, and whether the company has appropriate agreements with employees, contractors, or outside developers involved in creating it.
That is a good example of how a tax change can lead directly into legal and business planning.
Growth Often Exposes Planning That Has Not Kept Up
Tax incentives can also accelerate business growth, and growth has a way of exposing planning that was adequate for a smaller company but no longer fits.
Perhaps you formed an LLC five years ago when you were the only owner and the business had very little value. Today you have employees, substantial revenue, valuable equipment, intellectual property, debt, and another owner. If the operating agreement has not changed since the company was formed, it may no longer address the business you actually have.
The same can happen with insurance. A significant equipment purchase may require additional property coverage. Increased revenue and larger contracts may change the company’s liability exposure. A business that has become increasingly dependent on one owner or employee may need to consider key person coverage.
If there are multiple owners, growth can also make an old buy-sell agreement increasingly problematic. A purchase price or valuation method agreed upon when the business was worth $500,000 may not work when the company is worth several million dollars. If life insurance is intended to fund the buyout, the coverage needs to remain aligned with what the agreement is supposed to accomplish.
These are not tax problems, but a tax-driven business decision can expose them.
Look at What the Decision Does to Your Cash
One of the easiest traps in tax planning is focusing so heavily on taxable income that cash flow becomes an afterthought.
A deduction reduces taxable income. It does not necessarily put cash into the business.
If you spend $200,000 to obtain a deduction, your company still needs $200,000 of cash or financing. If you hire employees to expand a research program, those employees still need to be paid. If you borrow to fund growth, the loan payments continue whether the year goes according to plan or not.
Before acting on a tax opportunity, I want the business owner to understand what the company looks like after the transaction. How much liquidity remains? What are the new fixed obligations? Could the business continue comfortably if revenue slowed for several months? Have personal assets been pledged or personally guaranteed?
For a closely held business, those questions can also affect the owner’s family. If the family depends on distributions or income from the company, a highly leveraged expansion may change their financial exposure as well.
This is why business and personal planning cannot always be separated as neatly as they appear on paper.
Bring Your Advisors Into the Conversation Before You Make the Decision
One of the biggest mistakes business owners make with tax planning is waiting until tax-return preparation to have the conversation.
By then, the transaction has already happened.
If you are considering a major equipment purchase, new financing, an entity change, a significant research investment, or another transaction influenced by the new federal tax rules, involve the appropriate advisors before you commit to it.
Your CPA or tax advisor can determine how the federal and California tax rules apply to your specific facts. Your financial advisor can help evaluate the effect on liquidity and longer-term financial goals. Your insurance professional can determine whether coverage needs to change. Your attorney can review the legal structure, financing documents, personal guarantees, ownership agreements, contracts, and succession implications.
I use the LIFT: Legal, Insurance, Financial & Tax Systems™ framework when working with business owners because these decisions rarely fit into only one category. The framework is simply a way of making sure we are looking across the business rather than solving one problem while accidentally creating another.
The professionals do not need to do each other’s jobs. They do need to know enough about what the others are doing to make sure the advice works together.
Use the New Tax Law as a Reason to Review the Business You Have Today
The One Big Beautiful Bill Act creates meaningful federal tax opportunities for many business owners. It also creates a good reason to look at whether the rest of your business planning has kept up with the company you have built.
If you are considering new equipment, additional borrowing, expanded research and development, or another major investment because the tax treatment has changed, take the opportunity to look at the larger decision. Make sure your entity still makes sense, your agreements are current, your insurance reflects the risks you actually have, and the transaction does not create financial exposure you did not intend.
For California business owners, make sure you also understand where California does not follow the new federal rules. A deduction that looks significant when you read about it nationally may produce a different result once both federal and California taxes are taken into account.
Your business planning should evolve as your business does. Tax law changes are simply one more reason to make sure the legal, financial, insurance, tax, and succession pieces still work together.
I work with California business owners to look at the company as a whole, including its legal structure, ownership, agreements, succession planning, and how the business fits into the owner’s personal estate plan. When tax, financial, or insurance issues are part of that picture, I coordinate with the client’s other advisors so that we are working toward the same goals rather than giving advice in separate silos.
If the recent federal tax changes have you considering a significant business decision, or you have not reviewed your legal and succession planning as your company has grown, contact us or schedule a 15-minute introductory call. We can look at where your business is today and whether the planning around it still supports where you want it to go.