@baldridgecpa

ISSUE 34

"One Big Beautiful Bill" Tax Case Study

While the final version of the "One Big Beautiful Bill" that is making its way through Congress may differ from what we're seeing today, there is value in understanding the potential impact on your taxes.

This is not a prediction—simply a practical look at how these proposed changes might affect businesses if enacted as written today.

Let's dive into the numbers.

Meet Michael, an S-Corp Owner

Michael owns a precision manufacturing company that produces specialized components for aerospace and medical devices. His business has been growing steadily and he's planning to invest in new equipment and R&D to expand production capacity.

Business Financials:

Annual Revenue: $2.5M
Expenses: $1.7M (includes COGS, employee payroll, rent, utilities, etc.)
Profit Before Owner's Salary: $800k
Reasonable Owner's Salary: $170k
Remaining Business Profit (QBI): $630k
Filing Status: Single

Current 2025 Law

Total Income: $800k (Michael's $170k salary + $630k profit}
QBI Deduction: $126k (20% of $630k profit)
Equipment Purchase Bonus Depreciation: $120k deduction (only 40% of $300k allowed in year one)
R&D Costs: $16k deduction ($80k must be amortized over 5 years)
Interest Expense: $42k deduction ($60k loan interest with EBIT limitation)
Taxable Income: $496k

Total Tax Burden: $167,000

After the Bill

Total Income: $800k
QBI Deduction: $144.9k (up from 20% to 23%)
Equipment Purchase Bonus Depreciation: $300k deduction (100% allowed immediately)
R&D Costs: $80k deduction (full deduction in year one)
Interest Expense: $60k deduction (EBITDA-based calculation)
Taxable Income: $215k

Total Tax Burden: $84,900

Annual Tax Savings: $82,100 (49% reduction)

Strategic Planning Considerations

1. Capital Investment Timing

With 100% bonus depreciation available through 2029, Michael should:

Consider accelerating planned equipment purchases to maximize immediate deductions
Evaluate leasing vs. buying decisions based on the enhanced depreciation benefits
Look at replacing older, less efficient equipment that might not have been worth updating under prior tax rules

2. R&D Investment Strategy

With immediate R&D expensing returning, Michael should:

Review potential product improvements or manufacturing process innovations that were previously on hold
Consider moving forward with R&D projects in 2025 rather than waiting
Document all activities that could qualify as R&D to maximize this valuable deduction

3. Debt Financing Considerations

Review current loans and consider consolidation or refinancing
Evaluate debt-financed expansion that might not have been tax-efficient previously
Consider timing any major debt-financed projects to align with the 2025-2029 EBITDA-based limitation window

4. Business Structure Optimization

Optimize S-Corp reasonable compensation levels with the enhanced 23% pass-through deduction
Evaluate whether current legal structure maximizes the new tax benefits
Consider whether splitting certain business activities could provide additional tax advantages

Next Steps

The tax savings demonstrated in Michael's case are substantial—potentially reducing his tax burden by nearly 50%. However, maximizing these benefits requires planning and proper documentation.

Your specific situation will differ from the example shown. Want to make sure you are optimizing your tax savings? Schedule a call today and learn how our team can keep you on track no matter how the final bill shakes out.

Update: Tracking the Bill from Draft to Law

The "One Big Beautiful Bill" moves forward after a Sunday vote by the House Budget Committee. Speaker Johnson aims to hold a House vote before Memorial Day, but talks continue as they work out final details.

Take care,