One Big Beautiful Bill Act | Tax Changes Impacting U.S. Manufacturing & Distribution Companies

Sorry, I just want to back up one, sorry. 2025 has been a very interesting year, as you know for manufacturing and distribution companies with two significant events, one being the tariff liberation day and everything that's going on, even on a continuing basis as well as the one big beautiful act. These two sort of announcements by President Trump are to drive his administration and his policies to try and drive back manufacturing or strategic manufacturing back to the United States. And while we could expand on Terrace for a long time, the focus of today's presentation will be on the one big beautiful Bill act. And again, I'm thrilled that my colleagues in our tax department can provide guidance to you. So with that, I will throw it over to my colleague Kevin Harris to take it from here. Kevin.

Kevin Harris: Thanks, Travis. So the first section we're going to talk about is section 1 74, which is for the r and d research and development expenditures. So prior to 2022, companies could always expense any research and development expenses as they went, but with the tax cut and Jobs act that was passed in 2017, there was almost this throwaway comment as far as related to these r and d expenses that starting in 2022, they had to be capitalized and amortized over five years for research that happens within the US or 15 years for research that happens outside of the us. Well, when that happened, there was a lot of discussion amongst practitioners and sort of overall agreement like this isn't going to stay right, that before we get to 2022, there's going to be something to extend this because it's going to have some significant impact on companies that do r and d.

And so what we got to January of 22 and it hadn't changed. And so what had to happen is in 22 is companies had to start capitalizing these expenses instead of being able to deduct it. And unfortunately, 1 74 is actually more expansive than what with the r and d credit under section 41. And so there was backs to increase taxable income to these companies that maybe put them into an income position or increase their taxable income position. And so there was a real cash tax impact to this. So it was a significant impact to taxpayers along the way. And along the last couple of years, there's been several bills that have made it to Congress or some even through the house. There's been bipartisan support that this needs to be changed, but there's always something that gets tacked onto those bills that has made it to where it couldn't get through. So we're thankful that now we can go back to where we were pre 22 with the deduction because of the one big beautiful bill we're now allowed to be able to expense these RD expenses, again starting in 2025. There's three methods in order to be able to do this. The first one is that you can essentially continue to amortize those costs over the next few years.

The way that it's been doing the last couple of years, you clearly can start deducting your 25 expenses, but for expenses that were incurred in 22, 23, 24 that are on your balance sheet, you just let those amortize out over the next few years or you can choose to deduct them all on your 2025 tax return. Or option three is you can do it radically over 25 and 26. And there's some reasons why one of these might be more favorable than the other we'll get to in just a minute. But what I want to draw out too is there's one exception for small business taxpayers. And so the IRS defines a small, small business taxpayer is someone that has less than 31 million of an average gross receipts over the prior three years. And that 31 million is the number for 2025. It's indexed for inflation each year. So if your average gross receipts are less than that 31 million, then you've got a fourth option and you can choose to go back and amend prior your returns to be able to get refunds and expense these.

But of course, they didn't make it easy. Unfortunately, instead of just being able to amend 24 and be able to run all those through the 24 return, they're actually requiring you to go back and amend each year. So if you've had costs all throughout these three years, then that means you've got to go back and amend these three years. As I've had discussions with some of the manufacturing clients that are impacted by this, I really think the best approach may be just to do it in 25 instead of go back and amend. Clearly the situation may dictate differently, but not only do you have the administrative and time and cost to go back and amend tax returns, but you've also got timing of the IRS to process those. And so rather than trying to amend these prior three years, which by the way, that's got to be submitted by July 4th of 26, if you're going to amend those prior years, maybe we can accelerate the timing of your 25 return and try to get that filed a little sooner to maybe give, if you've got a refund coming to be able to help with that.

And that may be quicker than waiting for the IRS to process amended returns. So it's just a discussion to be had. But one thing that's been made clear to this point is even as a small business taxpayer, you cannot claim this on a 24 originally filed tax return. So right now we're still filing some 24 returns for clients that extended and not filed until September 15th or October 15th. But even if we haven't filed your 24 return, if you have r and d expenses, you still have to capitalize in 24 and then wait for 25 to then be able to recapture them back. It's just one of the stipulations within the bill.

So with that, let me, let's go to our next poll question. I want to ask, are you impacted by this election to immediately deduct the r and d expenditures? And while this is up, I want to talk a little bit about some tax planning considerations around this to think about. Some of 'em are a little bit intricate and there's a lot of thought that goes into it, but it's just for discussion purposes and things to think about. And so the first one is around the two 80 C election. So this is an election that's made with the r and d credit, and it can only be made on an originally filed return. So if you're thinking about going back and amending these returns, you may not be able to change, but essentially the election is you take a reduced credit and don't have to add back the expenses that were related to that RD credit.

It depends on your fact pattern as to which one may be more favorable, but just something to make sure you're talking about with your CPA as far as this being one of the things considerations. Another one is if you expense all of these in 2025, does that create a loss position for you and create a net operating loss that will be carried forward into a future year? So from an NOL standpoint, they're limited to 80% of future taxable income. So for example, if you've deducted all these in 25, all these prior RD costs and had a $500 loss and in 26 you had a hundred dollars of taxable income, you'd only be able to use $80 of that NOL against that income in 26 and still have a little bit of taxable income that you've got to pay tax on. So you still have the $420 of NOL remaining that doesn't expire and continues to carry forward, but would you be better off splitting those expenses over 25 to 26 or letting them amortize over the next few years as originally scheduled?

Once again, just a scenario you've got to run through and just think about how that would work. Another implication is the interplay with 1 63 J interest expense limitation. Anthony will talk about more about that in just a little bit. But one of the things that's changed this year is the amortization being added back into that calculation. And so what's not clear yet, and hopefully some more guidance will come, is the amortization of these r and d expenses over the next couple of years, will that qualify to be part of that interest expense limitation calculation? And so that could impact your decision there. The centralized partnership audit regime, this only applies if you're a partnership, but essentially that if you are required to fall under this, there are some exceptions, but if you're required to fall under this, then you don't have the ability to be able to go back and amend.

There's a different process through an administrative adjustment request and a R, it can still be done, but there's a little more complexity to it and especially if that's some change in ownership, it's something to consider about it before you go back and amend state conformity. So as we know, states don't follow federal, right? Each state has their own set of rules. And so what's happened over the last couple of years is some states have followed federal with this 1 74 capitalization and you have the same treatment, but many have not. And so while you've had to add it back from a federal standpoint, you've still been able to deduct at the state level. So now when we come to 25 and want to deduct all those RD expenses for the states, you've already been able to deduct that. So you could end up with a loss from a federal position but have state taxable income.

So once again, just another thing to consider. And then the last one is around a MT, the alternative minimum tax. This actually requires RD expenses to be capitalized and amortized over 10 years. So it will create a difference in a MT. It may or may not put you in an A MT taxable deposition, but it's just another consideration around that. So in closing, around the r and d is for those that are impacted by this, this is very meaningful, something that's been long waited to get here. And so when we look at our poll results, it's about half and half here. About 44% said yes, they're impacted this, so you guys should be doing cartwheels. I'd really be happy about this. But what I would also say to the 55% that are not impacted by this is manufacturing companies. There's a lot that maybe don't think they're eligible for r and d, but maybe, and now with this favorable change in this, it's something to really explore. And so we'd be happy for you to reach out to us and talk to see if that's something that you might be eligible for going forward. So with that, I'll pass it over to Russell to talk about depreciation.

Russell Young: Thanks, Kevin. Yeah, the research cost was definitely a big win that came about this bill. One of the things I'm going to talk about is depreciation, which is arguably one of the biggest things to come out of the one big beautiful Bill Act. So kind of to set things off, initially, the bill was meant to stimulate domestic investment. That's a key component also to foster long-term planning and certainty for businesses. It accomplishes that by eliminating phase downs for bonus, it establishes 100% permanent bonus depreciation for a lot of eligible assets. In addition, it increases the section 1 79 limits, which is another form of depreciation also, and this is a really key component is it creates a new property class of assets called qualified production property, and it applies specifically to manufacturers and producers. So just some things that we want to highlight is this does reverse the trend of temporary tax incentives, which can help with estimates. It can help provide clarity and planning for capital expenditures. It's also meant to incentivize job creation and economic development in the us.

So focusing specifically on that bonus depreciation, for the most part, this is a 100% permanent change. So previously with the Tax Cuts and Jobs Act, it started off as a 100% bonus depreciation for eligible assets placed into service. Starting last year in 2020, it went down to 80%, and by 2027, it was supposed to phase down to zero. So with the one big beautiful Bill Act, it is now 100% indefinitely, and that is for property that is acquired after January 19th, 2025. So just want to highlight and make sure everyone is aware that if anything was placed into service between January 1st and January 19th, 2025, you can only take 40% bonus depreciation. For the most part, the classes of eligible assets for bonus didn't change. That's tangible personal property under 20 years, depending on the industry, there's some different lies for assets, but regardless of the industry, pretty much any tangible personal property is eligible for bonus.

Also, software, which would include most internally developed and off the shelf software. In addition, qualified improvement property. So those are additions to buildings typically that's on the inside. So if there's an internal HVAC ceilings, drywall flooring, those would fall under that qualified improvement property category. So I wanted to specifically highlight this qualified production property because it is the biggest change. So the qualified production property or QPP, it's a temporary category of real property that's used in qualified production activities. So this applies mainly to manufacturers, but it's really focused on anyone who substantially transforms products that could include stuff like agriculture, it could even apply to restaurants. But I think the biggest benefits are going to be for those in the manufacturing and distribution business. So this applies to property where the construction begins between January 20th, 2025 and December 31st, 2028. And these need to be placed in service by December 31st, 2030.

And these qualify for 100% immediate expensing for qualified assets. So just talking about the eligibility, only the portion of the building that relates to the qualified production activity qualifies. And just as a further clarification, if a lessor leases to a less C and the less C is the manufacturer, it's the lessee that qualifies, not the lessor. I want everyone to pay special attention for mixed use buildings because a lot of times there are activities where there might be an office or an admin function that wouldn't qualify. But anything production related wood, there are minimus thresholds. For instance, Kevin mentioned that a lot of manufacturers do engage in research certain things like engineering and research support. If it's a di minimus activity within the total, it could still qualify. In addition, this needs to be a new construction or a substantial improvement. So one of the things we wanted to highlight, and I think it's a big benefit just in general if someone is placing a building in a service or engaging in a significant expansion, is to look into doing a segregation study.

So feel free to reach out if you have any questions. But prior to this, with the tax cuts and Jobs Act, with bonus depreciation phasing down, there was the opportunity to identify assets that would fall under that qualified improvement property, machinery and equipment. You can bonus those and it's generally a lot better than taking it over 39 years, which most real property is, I'd say one of the benefits now with the qualified production property is kind of getting granular and looking at what is this? What is the percentage use? Because a lot of buildings, they have both components. And also looking at that construction piece I mentioned it's construction between January 20th and December 31st. A lot of these projects take place over years. So kind of breaking out the components before and after is going to be really, really critical. So it will further accelerate depreciation under that and we could help identify the different components.

So I wanted to talk a little bit about section 1 79. The current cap under the Tax Cuts and Jobs Act is that you can expense up to 1.2 million and it begins to phase out at 3 million. With the one big beautiful bill act, you can elect to depreciate 2.5 million and the phase out starts at 4 million. And just kind of taking a step back, like I said earlier, section 1 79 is a very similar concept of bonus depreciation. Typically bonus depreciation is going to be a little bit more beneficial. Section 1 79, you typically can't take it if there's a loss. There are limits if you have a lot of additions. And I will say that in more recent years is the bonus has decreased below 100%, you're seeing a lot more people electing to take section 1 79. In addition, section 1 79 is available to external HVACs roofs. So even now that bonus depreciation is a little bit more beneficial. There are key and specific instances where we're going to want to do 1 79, and one of the benefits of section 1 79 is it can be used in conjunction with bonus depreciation. So if you have certain assets you can elect to take 1 79 first and then take bonus for the rest.

So I got a question about the lessee or the lesser that can deduct qualified production property. Just want to clarify that specific item. The lessee is the one, if they're having a significant expansion, the lesser the one that owns the building. If they're not the one actually engaged in that production activity, they're not going to be able to qualify for it. Just kind of going to our next polling question, the recently enacted one big beautiful bill act includes a new tax incentive for qualified production property. What is the main purpose of this section? A, to provide tax credits for businesses that build domestic facilities. B, to allow companies to immediately deduct the full cost of new or significantly improved US production facilities or C to offer tax breaks for all types of commercial real estate investments.

So kind of just going off, I can discuss a couple of other things. Kevin mentioned different planning opportunities. QPP is also applies to alternative minimum tax. So this isn't something that has a radically different treatment. There's also different state conformity consideration. So some states allow section 1 79, so there may be instances where it makes sense to take 1 79 so you can get that full deduction. Trying to see if there's any other questions. I'm not seeing too much. Yeah, I'll say just looking at the bill from my perspective for manufacturers, I think that qualified production property is going to be one of the biggest benefits and it's definitely something I'm trying to look at for any clients I have that manufacture. So I'm going to switch over and hand it over to Anthony and he's going to talk about qualified small business stock and interest expense limitations. Just everybody. The answer was B, it looks like pretty much, well, two thirds of the people got it right. And I'm going to hand it over to Anthony.

Anthony DiGiacinto: All right, thank you Russell. And hello everyone. Today I'm going to be speaking about section 1202, which I think is the star of the show and 1 63 J, which deals with the interest expense limitation. Both of them have been amended in a pro taxpayer manner by the one big beautiful bill. And before I influence the answer to the next polling question, let's take a look at it. Do you know that section 1202 allows individuals to permanently exclude capital gains from taxable income realized from the sale of qualified stock investments? So I just want to get an idea of how popular is this section. We had a seminar, my firm hosted a seminar on Tuesday and it had over a thousand participants in it. So obviously a lot of people want to know about this section, and that's because it's such a great benefit if you could take advantage of it. So the people that presented that seminar, that group of people, they know more about this section than just about anybody else in our industry. And if you have a question and you don't have their contact information, you can certainly reach out to me and I'll get your question to the right person, I guess. Let's see what the, I have to click on how do we get the results from this?

Beautiful, thank you. All right, so roughly 50 50. So a bunch of you don't know about it, but we're going to learn about it. So I guess let's move on to this slide here. That's not the right, here we go. Okay, great. Alright, so let me just give you the background of basics of 1202. So if you make a qualified investment and a qualified small business and hold it for a requisite time period before selling it, you can exclude all or a portion of the gain from federal taxable income states may be a little different. In order to be a qualified investment, the stock has to be received in the original issuance from the C corporation. So obviously stock you buy in the stock market is not going to qualify for this exception. It has to be original issuance from the C corporation. Okay, and here are some other requirements that need to happen.

And this is before the changes in the what I call OV three, if you don't mind. This is before the changes. So you had to hold the stock for more than five years. So from the time you acquire it to the time you sell it, it had to be more than five years. If you didn't hold it for five years, this would not apply. The exclusion amount is the greater of $10 million or 10 times your basis. Now I know it says lifetime limit there, which makes it kind of confusing what that is all about. If your basis was less than a million dollars and a stock that you sold 10 times a million is 10 million. So if it's less than a million dollars, that 10 million limit would apply to you. And if you had a hundred million dollars gain, you'd only be able to exclude 10 million.

If your basis is more than a million dollars, then the 10 times limit is going to apply to you and you multiply your basis by 10, and that is the amount of gain that you'll be able to exclude. So if your basis was $10 million, you multiply times 10, that's a hundred million, you would be able to exclude a hundred million dollars of gain from your tax return, which is an incredible benefit. Some other things that you need to keep in mind, the gross assets of the business couldn't be more than $50 million before or immediately after you contribute property to the corporation. So for instance, if the asset basis of the existing corporation was $30 million and you made a direct investment of say, $30 million into that corporation, the basis would now be $60 million and none of that stock that you received would qualify. You'd have to keep it below to $50 million.

So you'd have to keep it $20 million or less in that situation. Alright, another disclaimer, other qualifying tests. What is where the complexity comes in? This is really a difficult section to navigate. There's many things that could trip you up in this section and I obviously don't have the time to go through all of 'em today, but I guess the main thing you should know is that if you're in a service business, the stock doesn't qualify. If you're attorneys, accountants, engineers, you can't create a corporation and contribute assets to that and get stock and return. That stock would not qualify. But obviously it does apply to all businesses that are in manufacturing or distribution. So those types of businesses would qualify for this section. And I guess this section has been around for quite some time. It started in 93, back in 93, the exclusion was only 50%.

So if you acquired the stock from 93 to 2009, your exclusion would be 50%. So say it was subject to that $10 million limitation and you sold it today, you acquired it in 94, you sold it today, you would get the $10 million exemption, but you'd only get 50% of that. So you'd have a $5 million exclusion and you'd pay tax on $5 million. And the effective tax rate we have here of 15.9%, that's because you basically, your total gain is 10 million, you exclude 50 and you pay tax on 50, but you paid tax at the collectibles rate, which is 28% plus the additional net investment income tax, another 3.8. So the total rate you would pay on that other $5 million is 31.8. And since your total gain, total deductible gain was 10 million, the effective rate is 15.9. And the reason I mentioned that because it comes back into play with the new law.

So these are all the old rules. And keep in mind these rules apply based upon when you acquired the stock, right? So these still apply depending on if you acquired the stock before 2009 in this small period in 2009, 2010, they raised up to 75% and then somebody thought, hey, what we might as well go up to a hundred percent. So if you acquired to stock after September 27th, 2010 and it qualifies, your exclusion percentage is a hundred percent, keep in mind the annual limitation is the greater of $10 million or 10 times your adjusted basis. To the extent that it's one of these numbers, you get a hundred percent exclusion.

Okay? So here are the new rules. So you no longer have to hold the for five years to get an exclusion under the current rules. Now you can get an exclusion of 50% if you hold it for three years and not more than three. If you hold it for four years and not until the fifth year, you get a 75% exclusion. And just like a prior law, if you hold it for five years, get a hundred percent gain exclusion. And as I mentioned, the non-excludable gain is subject to 28% tax rate plus the 3.8 net investment income tax. So under the three year, 50% of your gain would be excluded. Say your basis is 3 million, 10 times that is 30 million, you could exclude $30 million, but you sold it in a third year. So you can only exclude 15 million. 15 million would be taxed at 0% and 15 million would be taxed at 31.8, a little bit higher than the normal capital gain rates.

So it kind of eats into your benefit, but you still make out in that situation. If you can't wait the five years at least you still get a benefit in a third or fourth year. Alright? That lifetime exclusion amount has also changed. It's going from 10 million to 15 million, right? So now your basis has to be less than $1.5 million for that to come into play. If it's 1.5 or greater, then you would take the basis times 1.5 and that would be your exclusion. If you file a married filing separate return, you have to split it with your spouse and you can only take 7.5 million each. And the aggregate gross asset test, the $50 million test under the old law is now 75 million. So under my example I gave before, if you started with $30 million of basis and put a $30 million in on July 4th, that transaction wouldn't qualify for a gain exclusion. But on July 5th it would. And since the president signed this on July 4th, this section is applicable to transactions that occur after July 4th. So if you're contemplating a transaction or did something on July 5th, these rules apply to you. Also, there's going to be an inflation adjustment for both the gain exclusion, the $15 million, and the gross asset test, 75 million. So starting in 2027, these two amounts are going to be adjusted for inflation, which is also good.

Okay, this is just a little timeline of the different aspects that the provision went through. And I mentioned these tax rates earlier, so let's not spend too much time on this slide. Some planning opportunities. And the one I really want to mention here is this bottom one on the first, I'm sorry, yeah, the bottom one on the first column here, increased exclusion. So the gain exclusion, the minimum you're going to get is 15 million, right? And that's per person, per issuer. So if you're able to gift your stock to other family members before you sell, they're going to get their own $15 million exclusions. So you can multiply that $15 million by however many people you can gift your shares to. So if you're expecting a large gain, say you're a founder of a corporation and your basis is low, you're going to be subject to a $15 million or to $10 million limitation.

You can gift your shares to whoever you want to gift it to and they will share in those exclusions. So you can really multiply the benefit here. And there's some other things on this page too, but time is limited. So I'm going to move on to 1 63 J, which is not as exciting in my book, but still good news for taxpayers. This is also a favorable, for the most part, favorable. There's really two provisions in a new law. The one is pretty basic. When this law first came into effect in 2018, there was a limitation on how much interest expense you can deduct. And basically it's 30% of tax ebitda, which is your earnings before interest, taxes, depreciation, and amortization, right? So from 2017 to 2021, the limitation was 30% of EBITDA from 2022 to 2024, the limitation was now 30% of ebit, they got rid of depreciation and amortization, which obviously reduced the amount of interest expense that you could deduct because it reduced the base of the computation.

So what the new law is done is for 2025, tax year is beginning on or after January 1st, 2025, the limitation has been replaced to back to ebitda. So now we can add back depreciation, amortization, and then take 30% of that number and that's our interest deduction for the year. So somebody who's in the manufacturing or distribution space, obviously you have a lot of capital assets, you have a lot of depreciation. This is a very favorable provision. Section 2 66, I want to mention real quick, this is a section that has an elective section that allows you to capitalize interest expense into other assets basically. And the benefit of doing that is if you capitalize it into another asset, it escapes the 1 62 day 30% limitation. So by doing this, you'll be able to deduct your interest expenses, something else. So if you capitalize it into your inventory, you'll get a cost of good sold deduction instead of interest deduction.

And you don't have to run it through to 30% gambit. The new law says that you can no longer do this, you can no longer capitalize interest under 2 66 or these other code sections, but it's only for tax beginning honorary after January 1st, 2026. So the IRS, or I should say Congress in a way kind of blessed what we were doing. It was kind of an aggressive tax position, but they kind of blessed it here by saying, Hey, listen, after 2025, you can't do this anymore. So it kind of gives us the go ahead to really be aggressive with that section. And we've spoken to many of our clients about how this might benefit them, and if you think it might benefit you, please reach out to me and we'll have a conversation about it. I think that's all I got guys. It's been a pleasure being with you and I'm handing it off to Dean Peterson.

Dean Peterson: Oops.

Travis Epp: Kevin, do you want to answer a question or two while dean's getting ready, please?

Anthony DiGiacinto: I got one, a good answer. The question is about in regards to 1202, what about S corps? And I guess the question is can S corps and LLCs own section 1202 stock and it can, if an S corp or an LLC owns a 1202 stock, there's obviously a lot of rules that are surrounded, but if they sell the stock and they distribute the gain to the owner, that owner has the potential of excluding that gain from the LLC or the scorp. The stock itself has to be in a C corp. So you can't invest corp but have it qualified for 1202. But SCORP and LLCs can own 1202 stock, I guess. Dean, you're up.

Dean Peterson: I am. Thanks very much, Anthony. Oh, you're welcome. So now it's my turn to talk about the international tax provisions of the one big beautiful bill, and I'm trying to flip my slide here and not being successful with that. Oops. There we go. Thank you very much. So I'm Dean Peterson. I'm an international tax partner here at Eisner, and we've talked thus far about a lot of the domestic implications of the one big beautiful bill, many of which with the proper planning can be positive. But on the flip side, I'm here to talk about the international tax considerations, which can often be considered to be a little bit negative or increase taxpayer's effective tax rate. So with that in mind, let's take a look first at the first polling question. I'm sorry, that's polling question number six. There we go. Because I want to get a sense for who our audience is today.

So what is the extent of your international presence? Do you have minimal imports but otherwise no foreign activity? Do you have modest international activity, meaning a lot of non-US sales, maybe some non-US salespeople, or do you have significant international activity meaning one or more overseas entities with employees, sales, manufacturing and or distribution? So with a lot of our manufacturing distribution clients, we see at least some international activity, but it depends on the type of business they're in and the type of structuring they have as to how much this one big beautiful bill is going to affect them.

So I think I need to leave this up for another second or two and then I can get into it. Great. So let's talk about a few of the few items in the one big beautiful bill that affect taxpayers who have international operations. Some of these are going to be familiar to you and they're going to have new names such as this one net CFC tested income is something that was introduced in the one big beautiful bill that is formerly guilty. Guilty was the global intangible low tax income, and it's been renamed to the bit cumbersome net CFC tested income, which doesn't have a great acronym. So it employs the same section two 50 deduction. So your guilty number will have a deduction reduced from 50% to 40%. So this based on our calculations, is likely to result in approximately a 2.1% increase in your effective tax rate.

So this is a significant number which we're going to have to think about planning against. And so we've thought about a few items for planning opportunities for our clients, which I'll get into in a moment. Additionally, the repeal of the qualified business Asset Investment QBI and the deemed tangible income return is going to have an effect as well. So the key takeaway for us here is that tested income CFCs with specified tangible property, whether it's machinery, buildings, property plan equipment, et cetera, will no longer be able to reduce their 9 51 a inclusion by the 10% of qbi. So how does this really affect clients? It's definitely going to increase your overall effective tax rate. How much it's going to affect it is going to be a calculation that we can help you with. Let's talk about something that's a positive. The foreign tax credit on net CFC tested income has been increased from 80 to 90%.

So the foreign taxes deemed paid and the gross up on the net CFC tested income has gone from 80 to 90%. And this gives us a planning opportunity. We're going to be able to perform a guilty high tax analysis, formerly guilty high tax analysis to model out and maximize your foreign tax credit against your net CFC tested income. This can have an opportunity to benefit you and reduce your US tax liabilities. So we're going to have to start calling it net CFC tested income for taxable years beginning after December 31st, 2025. Let's move on to the next piece.

Thank you. So next we're going to talk about the former fit, another easy to roll off the tongue acronym that's been modified for us. Now, fidi, foreign derived intangible income has been renamed to foreign derived deduction eligible income. This deduction has been reduced from 37.5% to 33 and a third percent of the F resulting in effective tax rate increase of a little less than 1%. So the former tax rate was about 13.1% and now it's going to be around 14%. So while not a huge change, again, it is something that can definitely be significant, but I feel like this is going to be a key planning opportunity for manufacturers in particular who've employed the 50 deduction over the years. And that's another thing that we'll be able to model off for taxpayers. So now deduction eligible income will exclude actual or deemed transfers of IP to foreign persons under 360 7, and that's going to be effective now after June 15th.

This was effective, but this was nothing really new. This is an opportunity to again, model out whether or not it makes sense for you to transfer IP overseas or to foreign persons or your other entities overseas or to leave it in the us. The one key takeaway we can have for this, as with a lot of these international tax provisions, is that these are all designed for US corporations to keep their IP onshore to have increased manufacturing in the US and to bring some of their manufacturing back from overseas. So as noted above, this is effective from June 15th, 2025, but otherwise other provisions in here are for tax use beginning January 1st, 2026.

Next slide please. Let's continue to talk about the foreign derived deduction eligible income. So the repeal of QBI for purposes of computing, this number has reduced the deduction eligible income by all deductions properly eligible except for interest in research and experimental expenditures. So what happens here is this is taking a lot of your other usual deductions to increase your deduction eligible income, which is going to increase your deduction related to the foreign derived deduction eligible income. This is going to be beneficial for you as increase the amount of your eligible deduction for US corporate taxpayers. So once again, this is a modeling exercise. We'll have to go in and take a look at how you were calculating your 50 before and how the repeal of CBI is going to affect the new regime of the foreign derived deduction eligible income. We think that this could be a great planning opportunity for our clients resulting in maybe an opportunity to reduce or at least claw back some of that raise in the effective tax rate that we're going to see from the change to guilty. And these are going to be effective as noted earlier, starting for taxable years, January 1st, 2026 or later.

All right, next slide please. So finally, let's talk about beat the base erodes in annual abuse. Tax BEAT doesn't affect every taxpayer. You first have to have an annual revenue of 500 million or more over the three proceeding tax years. So it doesn't affect every taxpayer and you need to have a base erosion percentage of 3% or higher, which is different for banks. And the base erosion percentage is the total base erosion tax benefits. You get over the total deductions, you pay total deductions allowed for the year, and if that total comes to 3%, then you may be in beat or 2% or higher for banks. So under the one big beautiful bill, section 59 cap A increases the rate from 10 to 10.5%. And so this doesn't sound like a big change. A lot of these doesn't sound like a huge change, but if you're a taxpayer that is eligible or has to address BEAT because of your gross receipts, then that can be a big number.

So the way to work on this is to model out your beat and try and see if you meet that gross receipt threshold first, and then you identify all those payments to foreign parties. And it's a spreadsheet that we can put together for you and help to see if there may be some tax savings there for you. But these three items, guilty being modified, fee being modified and beat being slightly modified are going to have real effects for taxpayers who do international work. One item that we didn't talk about today is the 1% remittance tax, which is an international tax aspect, but that's more on the individual side that is going to increase tax revenue by tens of billions of dollars they're anticipating. So that's just another thing that's tucked in on the international side. If you're making a transfer to a foreign individual overseas, then there are a lot of opportunities where a lot of situations where they had to pay 1% on that. So these are just a few of the international tax items that we're looking at from the one big beautiful bill, but I think these are the biggest ones that are going to affect or the manufacturing distribution clients.

And Kevin, I'm going back to you now because I think it's your turn to go again.

Kevin Harris: Thanks, Dean, appreciate it. So next we're going to cover just a few of the other items that might impact some manufacturing companies as well. So the first one is the 1 99 a qualified business income QBI deduction. The good news here is that it was made permanent. It was set to expire at the end of this year. So for flow through entities, partnerships and S corps, this 20% deduction, you'll be able to continue to take that in future years and permanent is relative until the next administration comes in and tries to change it, but at least there's not a date set for it to expire. So that's been locked in for now.

There was a change to the salt cap, the state and local income taxes. And so most of this is at the individual level for that cap of it was $10,000 under the TCJA. And so one of the workarounds that has come up is the PTET, which is the pass through entity tax. And essentially states have allowed companies to then be able to pay the tax on behalf of their shareholders because of that cap on their individual, particularly in high income states, California, New York, to be able to get around that. So if you've been doing the PT a s, I mean, I would say you probably want to continue to do that. It's still eligible even with this additional caps, it's raised from 10,000 to 40,000 for individuals, but there are some phase outs. So once income hits $500,000, it starts to phase out back to the $10,000.

So not knowing the income situations of your partners or shareholders, you might want to continue to still do those PTs. And if you don't know what the PT is and that could be applicable with you as a flow through entity, please reach out and we can talk about it, if that makes sense. Something to look into. A couple of other things are the limitation of excess business losses. So this was once again just made permanent. This was something that has been here the last few years and it just disa allows business losses in excess of two 50 or a single or 500 at married filing jointly once again on a pass through return. So on those individual returns, if there's big losses, it limits that, but you can be able to take it in future years.

And then a couple of other things, charitable contributions. So that's been changed a little bit. So now it's effectively about 9% of taxable income as a limitation for charitable contributions. The overtime exclusion certainly applies to manufacturing companies, but the good news is that I don't think you really should have to do anything. It really should be the payroll companies that are handling this. And so probably will be another box on the W2 I would suspect to be able to report that. But your employees will be able to deduct up to 12,525,000 of merit filing jointly for this overtime. So this is just a benefit that you can tell them but really shouldn't cost you anything. So that's good news for them. And there's a few impacts on some credits. The advanced manufacturing investment credit under 48 D. So this is very niche to semiconductor manufacturing.

And so under the CHIPS act, there was a credit given for this for 25% that has now been increased to 35% under the OBBA, so that's good news for that industry. And then some of the energy credits are going to set to expire. Those were not renewed as a part of this bill. So we've got the wind energy, we've got solar, nuclear power, energy efficient. Those expire over these next few years and could they be renewed in the future? Possibly, but the fact that they weren't put in into this to be renewed is probably pretty telling. So we'll see.

So we've got a couple of questions about 1 74, we got a couple of minutes. Let hit on those real quick. One of the questions was can companies still choose to amortize RD expenses under 1 74? And the answer is yes, you absolutely can. That is an option to either deduct or elect to capitalize and amortize. So you can still do that if you want. A lot of times in startups that can be maybe something that's chosen. Another question was around can small businesses on extension claim the full RD credit on their 24th tax return? And the answer is no. As of right now, and I wouldn't expect that's probably going to change in the next two months if they haven't done it yet. But they have said that this is effective as of for tax years after 12 31 24. So you can claim it on your 25 return, you can go back and amend 24 returns, but originally file 24 returns, then you have to go ahead and capitalize these. So I think that is about all our questions I see here. Travis, do you want me to turn over to you to close remarks?

Travis Epp: Sure. Kevin, thank you very much. Again, I want to thank you, thank my tax colleagues for all of the information that they've given you today. Overall, it seemed like there are some positive aspects that can help sort of lower the tax burden for our manufacturing clients. Every situation is different, but I hope, and I'm sure my colleague gave you some food for thought, so we really appreciate you taking the time to join today's webinar and I'll throw it back to Asher to close this out.

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