The "One Big Beautiful Bill Act" (OBBBA)

The 2025 "One Big Beautiful Bill Act" (OBBBA) has delivered significant taxpayer-friendly changes for 2026, including the restoration of 100% bonus depreciation and immediate R&D expensing. For business owners, these provisions offer substantial planning opportunities.

However, the rapid shift in rules has created what practitioners are calling a "compliance gap." Companies that were managing through prior-year amortization requirements now face a complex transition—and those who botched the documentation or calculations are discovering back-taxes, penalties, and uncomfortable IRS attention.

The Big Wins: What OBBBA Restored

Before diving into compliance traps, let's acknowledge the positive changes:

100% Bonus Depreciation Returns

After phasing down from 100% (2022) to 80% (2023), 60% (2024), and 40% (2025), bonus depreciation is now back to 100% for 2026. Qualifying property placed in service in 2026 can be fully expensed in Year 1.

• Qualifying property: MACRS property with recovery periods of 20 years or less, computer software, qualified improvement property, and certain film/TV/theater productions
• Used property now qualifies: The OBBBA clarified that used property qualifies for bonus depreciation, provided it's new to the taxpayer
• No phase-down scheduled: Unlike the TCJA version, the OBBBA's 100% bonus depreciation is intended to be permanent (though future legislation could change this)

Immediate R&D Expensing Restored

The controversial Section 174 amortization requirement—which forced taxpayers to capitalize and amortize R&D expenses over 5 years (15 years for foreign research)—has been repealed. For 2026, businesses can once again immediately expense research and development costs.

Compliance Trap #1: The Transition from Amortization

The most immediate compliance risk involves businesses that were amortizing R&D expenses under the 2022-2025 rules. The transition back to immediate expensing creates several pitfalls:

Unamortized Balances

If you capitalized R&D expenses in 2022-2025, you likely have unamortized balances on your books. The OBBBA allows a catch-up deduction for these remaining amounts, but the mechanics are complex:

• Remaining unamortized R&D from prior years can be deducted in 2026
• Proper tracking of each year's capitalized amounts is required
• State treatment may differ (see State Non-Conformity below)

Documentation Requirements

To claim the catch-up deduction, you must demonstrate:

• The amounts were properly characterized as Section 174 R&D
• They were actually capitalized and amortized in prior returns
• The remaining unamortized balance is accurately calculated

Companies that took aggressive positions—or simply failed to track their amortization properly—may find the catch-up deduction triggers IRS scrutiny of their prior-year positions.

Compliance Trap #2: Section 163(j) Interest Limitations

One of the less-discussed OBBBA changes involves the return to EBITDA-based interest expense limitations under Section 163(j).

The Background

Section 163(j) limits business interest expense deductions to 30% of "adjusted taxable income" (ATI). The definition of ATI has shifted:

• 2018-2021: ATI was calculated similar to EBITDA (adding back depreciation and amortization)
• 2022-2025: ATI shifted to EBIT (no add-back for depreciation and amortization), making the limitation more restrictive
• 2026+: The OBBBA returns to EBITDA-based calculations

The Compliance Trap

Businesses with significant debt may have:

• Disallowed interest expense carryforwards from 2022-2025 (when the limitation was more restrictive)
• Made debt restructuring decisions based on the EBIT limitation that are now suboptimal
• Failed to track carryforward amounts properly, creating audit exposure

The interaction between restored 100% bonus depreciation and the EBITDA-based interest limitation is particularly significant. With larger depreciation deductions reducing taxable income, more interest expense may be limited—but the EBITDA add-back helps offset this.

Compliance Trap #3: State-Level Non-Conformity

Perhaps the most dangerous compliance trap involves state tax treatment. States are not required to conform to federal tax law changes, and many have chosen not to adopt OBBBA provisions.

Bonus Depreciation Non-Conformity

Several states continue to limit or disallow bonus depreciation:

R&D Expensing Non-Conformity

States have also taken varied positions on R&D expense treatment:

• Some states never adopted the Section 174 amortization requirement and allowed immediate expensing throughout
• Others adopted federal treatment and may or may not conform to the OBBBA's repeal
• A few states have their own R&D credit provisions that interact differently with the federal rules

The Multi-State Nightmare

For businesses operating in multiple states, non-conformity creates:

• Different depreciation schedules for federal vs. each state
• Separate tracking of federal and state tax basis in assets
• Potential for deferred tax asset/liability mismatches
• Increased audit risk when state and federal returns show different treatment

Compliance Trap #4: Qualified Improvement Property (QIP) Confusion

Qualified Improvement Property continues to cause confusion. QIP—improvements to the interior of nonresidential buildings—now qualifies for 100% bonus depreciation under the OBBBA, but historical issues persist:

• 2018-2019: QIP was inadvertently assigned a 39-year life (the "retail glitch"), making it ineligible for bonus depreciation
• 2020+: The CARES Act corrected this, assigning a 15-year life and making QIP eligible for bonus depreciation retroactively
• 2026: QIP remains eligible for 100% bonus depreciation under OBBBA

Businesses that didn't file amended returns or accounting method changes to claim retroactive bonus depreciation on 2018-2019 QIP may have:

• Permanently lost deductions they were entitled to
• Incorrect basis calculations affecting current-year depreciation
• State-level complications if they claimed federal bonus depreciation but operate in non-conforming states

Avoiding the Traps: Action Items for 2026

1. Audit Your Depreciation Schedules

• Review assets placed in service 2018-2025 for correct bonus depreciation treatment
• Verify QIP is properly classified and depreciated
• Confirm federal vs. state basis tracking is accurate

2. Reconcile R&D Amortization

• Calculate remaining unamortized R&D from 2022-2025
• Document the original capitalization and amortization taken
• Prepare for the catch-up deduction with proper support

3. Review Section 163(j) Positions

• Calculate current-year interest limitation under EBITDA rules
• Track disallowed interest carryforwards from prior years
• Model the interaction between bonus depreciation and interest limitations

4. Map State Conformity

• Identify which states you file in and their conformity status
• Establish separate tracking for states that don't conform
• Consider timing of asset purchases based on state treatment

5. Document Everything

• Maintain contemporaneous records of asset acquisitions and costs
• Document the business purpose for major capital expenditures
• Keep records supporting R&D expense characterization

Key Takeaways

1. 100% bonus depreciation is back: The OBBBA restored full first-year expensing for qualifying property in 2026
2. R&D immediate expensing restored: The Section 174 amortization requirement is repealed, with catch-up deductions available for unamortized amounts
3. Transition creates compliance traps: Companies must properly document their shift from amortization to expensing
4. Section 163(j) returns to EBITDA: Interest limitation calculations change, affecting businesses with significant debt
5. State non-conformity is dangerous: Many states don't follow federal treatment, requiring separate tracking and calculations
6. Historical issues persist: QIP and other TCJA-era confusion continues to affect depreciation schedules
7. Documentation is essential: The IRS will scrutinize large deductions—contemporaneous records are your defense

The OBBBA's taxpayer-friendly provisions are valuable—but only if you can claim them correctly. Companies that rushed to take advantage of new rules without proper documentation, or that failed to manage the transition from prior-year requirements, may find themselves facing back-taxes, penalties, and IRS examination. Proactive compliance review now is far less costly than resolution later.