Is the OBBB For Me?

You’ve seen the red-carpet rollout for President Trump’s One Big Beautiful Bill (OBBB), the flurry of articles, webinars and analysis that ensued, but are still wondering…what does this have to do with my business?  

The truth is that the OBBB may or may not have a material effect on how you structure or business, or how your business is operated. Our latest blogs will break down some of the key components of the bill, and with the facts in hand, you will be equipped to make the best decisions for maximizing your tax efficiencies. 

Bonus Depreciation is Back! 

One of the more popular items of the OBBB to digest is the reinstatement of bonus depreciation. 

The OBBB reinstated 100% bonus depreciation on fixed assets with class lives of 20 years or less. This is the ability to expense 100% of the purchase price of such assets in the year they are placed into service. While this sounds enticing, we need to see what issues may arise if we write everything off in year one, and whether we have other options. 

The key benefit of creating a massive deduction in year one of the asset is generating a net operating loss for active businesses, and a passive loss for passive operations such as rental real estate to shelter against future income. However, increasing losses for future use does have its pitfalls. For operating companies in particular, net operating losses are only available to offset up to 80% of taxable income, which means that in future years, such companies would still pay some federal tax, albeit at a much lower effective tax rate of 4.2%. 

For rental real estate operations, if an entity takes bonus depreciation, it would not be able to utilize a special election to avail itself of interest deductibility limitations for large businesses. This election can be particularly helpful for highly debt-leveraged operations, but it does come with the cost of being irrevocable, and of lower depreciation to shelter income. 

Lastly, when non-corporate taxpayers sell capital assets for a gain, such gain may be taxed at higher rates due to what is referred to as depreciation recapture. In general, non-corporate taxpayers are eligible for lower tax rates on long-term capital gains of 0-20%. However, gains from depreciable assets may be taxed in whole or in part at the individual’s applicable ordinary tax rate, which can be as high as 37%, based on how much accelerated and bonus depreciation was deducted in prior years in excess of straight-line depreciation. 

As you can see, while bonus depreciation might seem enticing at first glance, there are various considerations to be made when deciding whether to indulge. To see whether bonus depreciation is right for you and your business, you can apply separate depreciation forecasts against projected future income and compare tax results, one being with bonus depreciation, and the other without. You may find that the hidden cost of taking bonus depreciation outweighs the immediate benefit of the bigger deduction. 

At Zeifmans we are here to help you navigate this updated tax landscape to maximize on your tax efficiencies. Reach out using the details below or find us online at www.zeifmans.ca. 

By Howard Blumenfeld, US Tax Senior Manager at Zeifmans LLP
T: 647-256-7733 E: hb@zeifmans.ca