OBBBA Impact on Professional Services

Permanent QBI Deduction Offers Certainty

For a significant number of professional services firms, which are often structured as pass-through entities like S-corporations, partnerships, or sole proprietorships, the permanent extension of the Qualified Business Income (QBI) deduction is a cornerstone of the OBBBA‘s impact. This deduction allows eligible business owners to deduct up to 20% of their qualified business income, directly reducing their taxable income. Prior to the OBBBA, this deduction was set to expire, creating considerable uncertainty for tax planning. Its permanent status now provides long-term stability, ensuring that firms can reliably factor this substantial tax reduction into their financial projections. The OBBBA also adjusts the income phase-in thresholds for higher earners, making the deduction accessible to a broader range of professional services owners.

Immediate Expensing of Domestic R&E Expenditures

Professional services firms, especially those engaged in highly specialized consulting, software development, engineering, or scientific research, will significantly benefit from the OBBBA’s permanent restoration of immediate expensing for domestic Research and Experimental (R&E) expenditures. Previously, under the Tax Cuts and Jobs Act, these costs were required to be capitalized and amortized over five years, creating cash flow challenges for innovative firms. For tax years beginning after December 31, 2024, firms can fully deduct these costs in the year they are incurred. This change encourages innovation and investment in specialized knowledge, software development, and process improvements, offering substantial immediate tax savings and fostering a more competitive environment for firms at the cutting edge of their fields.

Favorable Business Interest Deduction Changes

Many professional services firms undertake leveraged investments, whether for expanding office space, acquiring new technology, or financing growth initiatives. The OBBBA’s modification to the business interest deduction limitation is particularly beneficial for such firms. The law reverts to calculating adjusted taxable income (ATI) for the 30% business interest deduction cap using an EBITDA-based approach (Earnings Before Interest, Taxes, Depreciation, and Amortization) for tax years beginning after December 31, 2024. This reverses the prior EBIT-based limitation that had excluded depreciation and amortization from the ATI calculation. By including these non-cash expenses, firms with significant capital investments will find a higher ATI, enabling them to deduct a larger portion of their business interest expense. This increases financial flexibility and improves the economic viability of debt-financed strategic investments.

Accelerated Depreciation for Key Assets

The OBBBA permanently reinstates 100% bonus depreciation and significantly increases Section 179 expensing for qualified assets. For professional services firms, this translates into substantial immediate tax savings on investments in crucial operational assets. This includes new and qualifying used office equipment (computers, servers, specialized machinery), software, and Qualified Improvement Property (QIP), such as interior renovations to office spaces. For eligible assets placed in service on or after January 19, 2025, firms can fully deduct their cost in the year of acquisition. Additionally, the maximum Section 179 deduction is increased to $2.5 million (with a phase-out threshold of $4 million), allowing a broader range of immediate write-offs and enhancing cash flow for capital expenditures.

Opportunity Zones Create New Avenues

While not a direct tax deduction on current operations, the OBBBA’s renewal and expansion of the Opportunity Zones program can create new strategic opportunities for professional services firms. The program is now permanent, with a new decennial redesignation cycle for zones beginning July 1, 2026. As investment flows into these designated low-income communities, spurred by long-term capital gains benefits for investors, it generates demand for legal, accounting, consulting, architectural, and engineering services. Professional services firms can strategically establish or expand their presence in these developing areas, benefiting from new client opportunities arising from the increased economic activity and development projects within Opportunity Zones.

Disclaimer: This article provides general information and should not be considered professional financial or tax advice. Please consult with a qualified CPA or financial advisor for guidance specific to your individual business needs.