Reinstatement of accelerated depreciation
The OBBBA reinstates 100% bonus depreciation for qualified property acquired and placed in service after Jan. 19, 2025. The TCJA contained a phase-down schedule where after 2025, the bonus depreciation rate would have decreased to 20% for property placed in service in calendar year 2026 with a complete phase out by 2028 for most property. This reinstatement is set to be a permanent provision. In addition, new Section 168(n) provides 100% expensing for certain non-residential real property used in qualified production activities.
The bill will also increase Section 179 expensing limits to $2.5 million, with a phase-out beginning at $2.5 million to $4 million for property placed in service after Dec. 31, 2024.
Implications for Canadian businesses:
- Capital investment: Canadian companies investing in U.S. manufacturing or production facilities can benefit from accelerated deductions, improving liquidity and reducing U.S. taxable income.
- Cross-border operations: For Canadian-controlled entities operating in the U.S., this provision may influence decisions on asset acquisition and timing, potentially leading to tax planning opportunities.
Note of interest: Canadian manufacturers who take advantage of the flexibility for structuring their U.S. business may greatly benefit from immediate tax write-offs to boost cash flow. There is potential to reduce or eliminate taxable income while investing in automation and modernization. Additionally, a Canadian manufacturer may also be able to take advantage of tax credit stacking to create a strong tax-incentivized capital strategy.
Restoration of immediate expensing for domestic R&E expenditures
The OBBBA creates a new Section, IRC 174A, which will immediately and permanently allow for the reinstatement of expensing of domestic R&E expenditures paid or incurred in the taxable year. This reverses the 2022 requirement under IRC Section 174, which mandated that R&E expenses be capitalized and amortized over five years (15 years for foreign R&E). Expenditures for software development are explicitly included as research or experimental expenditures eligible for immediate expensing if domestic.
Only eligible small businesses may elect retroactive expensing for 2022-2024; other taxpayers must follow the transition rules for unamortized amounts which include an election for unamortized amounts or a change in accounting method.
There are currently no proposed changes to the requirement for foreign R&E to be capitalized, as the focus of the bill is to improve investment within the U.S.
Implications for Canadian businesses:
- Research & development activities: Canadian companies conducting R&D in the U.S. can benefit from immediate tax deductions, enhancing cash flow and incentivizing innovation.
- Transfer pricing considerations: It's crucial to review intercompany agreements and transfer pricing policies to ensure compliance with both U.S. and Canadian tax regulations. The U.S. tax system may be more advantageous for Canadian business to locate R&E activities within the U.S.
Note of interest: When a Canadian private equity (PE) firm invests through a U.S. corporation, the benefit of immediate expensing is realized at the U.S. corporate level. Canadian PE firms should consider the impact of higher U.S. deductions on their Canadian tax liability. The U.S. deductions may reduce U.S. taxable income in the immediate term, but the benefit in Canada depends on the availability of foreign tax credits and the treatment of U.S. losses under Canadian law.
Increase in limit for interest deductibility
The OBBBA reinstates the add-back for depreciation, amortization, and depletion in the adjusted taxable income (ATI) calculation for interest deductibility for tax years beginning after Dec. 31, 2024. Further, the OBBBA coordinates interest capitalization and deduction limitations. Under the new law, business interest limitation applies before capitalization, and disallowed interest is not subject to future capitalization.
Implications for Canadian businesses:
- Interest deductions: Canadian entities with significant debt in the U.S. may benefit from increased interest deductions, reducing U.S. taxable income.
- Capital-intensive industries: Sectors such as manufacturing with substantial capital expenditures will have better ability to deduct interest under the new law.
Note of interest: U.S. subsidiaries must comply with Section 163(j) as amended by the OBBBA, which may limit the deductibility of interest paid to Canadian parents or affiliates. The U.S. rules are similar to thin capitalization rules in other countries. Additionally, the OBBBA does not impact transfer pricing rules, which continue to require that interest rates and terms on related-party debt be at arm’s length.
Foreign taxpayer provisions
The final bill was passed after removal of the controversial Section 899, formally titled Enforcement of Remedies Against Unfair Foreign Taxes, at the request of U.S. Treasury Secretary Scott Bessent, following coordinated discussions with G7 members. Previously dubbed a “revenge tax,” Section 899 could have heavily impacted foreign taxpayers with U.S. operations or investments. Although the “revenge tax” is currently not on the table, the U.S. may revisit in the future as a tool to counter what they deem to be discriminatory practices of foreign countries.
The OBBBA does not fundamentally alter the definition of base erosion payments, the base erosion percentage, or the gross receipts threshold used in the base erosion and anti-abuse tax (BEAT). BEAT imposes an updated minimum tax of 10.5% on large corporations that make deductible payments to related foreign parties.
Implications for Canadian businesses:
- U.S. subsidiaries: Foreign companies with U.S. subsidiaries that make deductible payments (interest, royalties, certain services, etc.) to related foreign parties remain subject to BEAT if they meet the size and base erosion percentage thresholds. The increased rate raises the minimum tax exposure.
- Planning considerations: The BEAT’s broad reach, high rate, and denial of foreign tax credits can result in double taxation and increased U.S. tax costs, especially for groups with significant intercompany payments.
Note of interest: For Canadian private equity funds and investors, these changes require careful modeling of both Section 163(j) and BEAT. Structuring alternatives should be considered to mitigate BEAT and Section 163(j) impacts.
Limitation on downward attribution of stock restored
The OBBBA restores the limitation on downward attribution of stock ownership and reinstates the substance of former Section 958(b)(4) which applied before the TCJA law change. This will have a significant impact on the determination of controlled foreign corporation (CFC) status, particularly in structures involving U.S. persons and Canadian (or other foreign) entities.
Implications for Canadian businesses:
- Direct and indirect ownership still counts: The limitation only applies to downward attribution from foreign persons. U.S. persons are still treated as owning stock they own directly or indirectly (through foreign entities) per Section 958(a). Therefore, if a U.S. person directly or indirectly owns 10% or more of a Canadian corporation, CFC status may still arise.
- Cross-border operations: Unlike under the most recent U.S. tax law, under the OBBBA a U.S. person (such as a U.S. subsidiary or partnership) will not be treated as owning stock in a Canadian (or other foreign) corporation that is actually owned by a foreign person (such as a Canadian parent). If a Canadian parent owns both a U.S. subsidiary and a Canadian subsidiary, the U.S. subsidiary will not be treated as constructively owning the Canadian subsidiary’s stock via downward attribution. The Canadian subsidiary will not be classified as a CFC solely because of the U.S. subsidiary’s presence in the group. This change will greatly decrease the compliance obligations and tax burdens on certain cross-border structures.
Note of interest: This law change creates a planning opportunity whereby multinational businesses have a wider range of options available in the design of cross-border structures.
Form 1099 reporting threshold increase
The OBBBA includes an increase to the Form 1099 reporting threshold from $600 to $2,000. This change reduces the reporting burden for businesses making payments to independent contractors and vendors.
Implications for Canadian businesses:
- Administrative efficiency: Canadian companies with U.S. operations can benefit from reduced administrative requirements, streamlining compliance processes.
- Vendor management: Reviewing and updating vendor agreements to align with the new reporting thresholds can ensure compliance and avoid potential penalties.
Additional changes enacted by the OBBBA
In addition, the OBBBA includes several other noteworthy changes to U.S. business taxation:
- Enhancement of the qualified business income deduction under Section 199A
- Modification of the foreign tax credit limitation
- Modifications to GILTI and FDII provisions
- New sourcing rules for inventory produced in the U.S. and sold abroad
- Permanent extension of the look-through rule for CFCs
- Modification of pro rata share rules for Subpart F income
- Repeal of the one-month deferral rule for specified foreign corporations under Section 898(c)
- New 1% floor on corporate charitable deductions
- Changes to tax credits and incentives available
Navigating what comes next
The OBBBA tax reform aims to catalyze U.S. business investment by restoring 100% bonus depreciation, raising expensing limits, facilitating immediate R&E deductions, and easing interest deduction limits.
It is important to note that while the OBBBA introduces several federal tax reforms, these changes do not automatically apply to state tax calculations. Each state in the U.S. has its own tax laws and may not conform to federal tax changes, requiring businesses to evaluate the impact of federal changes on state tax obligations. Canadian taxpayers with U.S. operations must continue to manage cross-border impacts, transfer pricing, and potential double taxation carefully.
There will likely be potential for further reform as the scale and ambition of OBBBA suggest that further technical corrections and legislative adjustments are likely as the effects of the law become clearer in practice.
Reach out to our team to discuss how we can support your organization through U.S. tax reform.
The information in this publication is current as of July 14, 2025.
This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.