The 2025 reconciliation bill—known as the One Big Beautiful Bill Act (OBBBA)—extends and reinstates several business tax provisions originally enacted under the 2017 Tax Cuts and Jobs Act (TCJA). While the TCJA permanently lowered the corporate income tax rate from 35 to 21 percent, other core provisions expired as early as 2022, with additional phaseouts running through 2027.

This brief reviews OBBBA’s major domestic business tax provisions, their fiscal cost, and their likely economic effects—particularly through their influence on the cost of capital and business investment. The key provisions include:

Bonus depreciation allows immediate deduction of the full cost of qualifying equipment, boosting the present value of tax deductions, lowering the cost of capital, and improving cash flow. Empirical evidence shows bonus depreciation increases investment, particularly amongst small and financially constrained firms. Bonus depreciation had started to phase out in 2023 and was scheduled to fully expire in 2027. The reconciliation bill permanently reinstates 100 percent bonus depreciation in 2025 and after, which the Joint Committee on Taxation (JCT) estimates to cost about $363 billion over 10 years.

Expensing of some structures allows immediate deduction of the cost of building structures used for domestic manufacturing, chemical and agricultural production, and some refining operations like fuel processing. This is a new provision in the reconciliation bill and was not part of the TCJA. Expensing of structures is valuable compared with regular depreciation, which requires the cost to be recovered evenly over 39 years. It has never been allowed in the US and is not common in most countries. It applies if construction begins between January 20, 2025, and December 31, 2029, and the property is placed in service before January 1, 2031. JCT estimates this will cost $141 billion over 10 years.

R&D expensing allows immediate deduction of R&D outlays rather than capitalization and amortization over five years. There is a strong economic case for subsidizing R&D because of positive social spillovers. The TCJA required R&D expenditures to be capitalized beginning in 2022. The reconciliation bill reinstates expensing in 2025, which will cost $141 billion over 10 years. The new law allows small businesses to retroactively expense R&D expenditures incurred between 2022 and 2024.

Interest deduction limitations disallow deductions for net interest above a certain fraction of income. The TCJA set an initial limit at 30 percent of earnings before interest, taxes, depreciation, and amortization (EBITDA), and then tightened it starting in 2022 to 30 percent of earnings before interest and taxes (EBIT). The reconciliation bill reinstates the 30 percent EBITDA limit, which will align the US with most OECD countries. This will cost $61 billion over 10 years.

The qualified business income (QBI) deduction allows eligible pass-through businesses to deduct up to 20 percent of qualified income, lowering their effective tax rate. Unlike the benefits of the other four provisions above, the benefits of the QBI deduction do not depend on the level of investment and there is little evidence of its impact on growth. The benefits are concentrated among high-income owners and certain industries. The reconciliation bill permanently extends the 20 percent deduction, which will cost $737 billion over 10 years.

Although the House initially passed a version of the bill that temporarily extended bonus depreciation and R&D expensing, Congress ultimately chose to make these provisions permanent. While a permanent extension carries a higher budgetary cost, it has a larger long-term impact on investment and economic growth.

Impact on Investment and Growth

The Tax Policy Center (TPC) estimates that permanently reinstating 100 percent bonus depreciation, R&D expensing, and the 30 percent EBITDA limit on interest deductions would raise GDP in 2035 by 0.3 percent, increase the capital stock by 0.9 percent, and lift investment by 1.5 percent relative to prior law. By contrast, temporary expensing of certain structures has little long-run effect on GDP or investment. Overall, TPC projects that the reconciliation bill will increase GDP in 2035 by 0.5 percent, the capital stock by 0.4 percent, and investment by 1 percent. The smaller impact of the full package—relative to the business provisions alone—reflects the offsetting effect of higher federal debt and deficits, which crowd out private investment.

Although bonus depreciation, R&D expensing, and the loosening of the interest deduction limit make up a fraction ($560 billion) of cost of the reconciliation bill, they drive most of its growth impact and have a significant effect on investment. In contrast, the Qualified Business Income (QBI) deduction contributes little to growth and is less directly linked to new investment. On a GDP-per-dollar basis, its impact is weaker than other business provisions, yet its fiscal cost is more than 30 percent higher over the next decade and more than double over 25 years. Moreover, because permanent bonus depreciation already lowers the cost of capital for pass-throughs, the QBI deduction adds little benefit at the margin.

To help illuminate the trade-offs involved, this brief reviews findings from the Tax Policy Center’s Investment and Capital Model (ICM), which calculates how taxation affects the user cost of capital and the effective marginal tax rates (EMTR) on marginal investments, key measures in understanding how tax policy distorts investment decisions at the margin. This analysis considers the overall impact of the reconciliation bill on effective marginal tax rates and compares it with recent changes and the original impact of the TCJA and of the above provisions for both C corporations and pass-through entities, accounting for both debt and equity financing. Our key observations are as follows:

• OBBBA’s impact. The reconciliation bill significantly brings down the cost of capital and effective marginal tax rate of new investments for both corporations and pass-throughs, with an average reduction in EMTR of 6 and 8 percentage points in 2025, respectively. Equity-financed investments see a decline of roughly 5 percentage points for corporations, compared with over 9 percentage points for debt-financed investment, due to the relaxing of interest deduction limit. The average corporate EMTR for manufacturing structures sees a large reduction of about 20 percentage points.
• TCJA’s impact. The TCJA had also significantly reduced the cost of capital of investments financed with equity for both corporations and pass-throughs—by about 11 percentage points for C corporations and 7 percentage points for pass-throughs—primarily through lower statutory rates and expanded bonus depreciation. Since 2022, EMTRs had risen because of the phaseout of bonus depreciation and the requirement to capitalize R&D expenditures
• Equity vs. debt financing. The TCJA narrowed the tax wedge between equity and debt financing. Equity-financed investments saw substantial EMTR reductions and debt-financed investments experienced an increase in EMTRs because of the reduced value of interest deductions from lower tax rates and the new limitation. Tax differentials between equity and debt remain narrow under the reconciliation bill, although debt-financed investments would have a small advantage.
• Corporations vs. pass-throughs. Pass-throughs had a tax advantage prior to 2018. The TCJA greatly reduced that advantage, and as of 2025, C-corporations and pass-throughs faced similar EMTRs, on average. The reconciliation bill retains a small advantage for pass-throughs that finance with equity, and a small advantage for corporations that finance with debt. The average EMTR is now roughly the same under the new law for corporations and pass-through businesses.

In summary, there is a solid economic justification for allowing the expensing of investments in tangible assets and research and development. Those provisions target marginal investments, reducing the cost of capital, and potentially boosting investment. Sectors with higher shares of equipment (e.g., utilities, transportation) benefit most; sectors dominated by structures (e.g., real estate) benefit less. Full expensing was a large factor in reducing the average effective marginal tax rates after 2017, and its phaseout had led to a slow but steady increase in EMTRs since 2022.

In addition, a significant portion of the budgetary cost of allowing for expensing is temporary and comes from shifting future deductions into the present, which limits the long-term costs of these policies. Because those provisions impact the timing of deductions, the cost of a temporary extension is much smaller than a permanent extension, but with little long-term impact on growth. 

The QBI deduction is costly, and there is little evidence that it had a positive impact on growth and investment. When the law allows for 100 percent bonus depreciation, the QBI deduction has a smaller impact on the effective marginal tax rate for pass-throughs, mainly by lowering the effective marginal taxation of structures.