How Trump’s “Big Beautiful” tax law changes the game for smaller companies

President Donald Trump’s so-called “Big Beautiful” bill, signed into law last week, extends tax incentives for smaller companies through 2030.

According to analyst Aldiyar Anuarbekov, the measure is expected to boost capital expenditures among smaller firms and make them more attractive to invest in, potentially acting as a catalyst for their stocks. At OnInvest’s request, he analyzed the implications of the legislation for the small-cap sector.

One of the most significant provisions of the new law is the reinstatement of full expensing for investments in equipment and other qualified fixed assets. The accelerated depreciation measure, first introduced under the 2017 Tax Cuts and Jobs Act, had been gradually phased out, allowing businesses to expense only 40% of eligible capital investments as of this year.

Under the new legislation, businesses will once again be allowed to deduct 100% of the cost of qualified property – defined as tangible assets used in the course of business and not held for resale – purchased between January 20, 2025, and January 1, 2030. This is a huge boost to smaller companies. For instance, if a small manufacturer builds a new facility or acquires machinery, it can immediately deduct the full investment from its taxable income in the year of purchase, rather than depreciating it over several years.

Large one-off expenditures for modernization or expansion are no longer "penalized" by tax timing rules, which should help businesses to preserve cash flow. By allowing firms to retain more of their capital upfront, the policy is expected to stimulate increased investment by smaller firms in equipment and infrastructure, enhancing long-term competitiveness.

The new law eliminates a key provision that had required companies to amortize R&D expenses over five years. Through 2029, businesses will again be allowed to fully expense domestic R&D costs in the year they are incurred. However, R&D expenditures related to activities conducted outside of the U.S. will still be subject to capitalization.

The rollback is a welcome relief for smaller tech firms. Since 2022, the requirement to capitalize and amortize R&D spending had increased their effective tax burden, even as they ramped up investment to innovate. By restoring immediate expensing, the recently passed law is expected to improve financial performance and ease cash flow constraints. For small-cap firms, from software developers to biotech startups, the ability to deduct R&D spending upfront removes a major tax obstacle.

The new law eases restrictions on interest expense deductions, offering relief to capital-constrained businesses. Previously, companies could deduct net interest expenses only up to 30% of EBIT. The updated provision raises the cap to 30% of EBITDA, thereby substantially increasing the deductible amount.

This change is particularly meaningful for small businesses, especially in capital-intensive sectors such as biotech, health care, utilities, and real estate. For example, early-stage life sciences firms investing heavily in laboratory and diagnostic equipment, as well as regional utilities and small-cap REITs focused on industrial and warehouse assets, stand to benefit. With a greater portion of interest payments now eligible for tax deductions, borrowing for growth becomes more cost-effective. For smaller companies, the effect should be stronger net income and free cash flow and thus a stronger investment case.

According to estimates from Barclays equity strategists, the shift to EBITDA-based interest deductions could boost aggregate earnings for Russell 2000 companies by approximately 12% relative to current forecasts. Their analysis shows that in 2024, EBITDA for Russell 2000 constituents (excluding financials) totaled around $196 billion, compared with EBIT of $87 billion. With EBITDA projected to grow by 15% in 2025 and interest expenses expected to remain steady, the resulting tax savings could provide a meaningful lift to small-cap profitability.

The legislation significantly broadens eligibility for small business tax preferences by raising the gross receipts threshold for qualifying manufacturers. Under current law, companies with average annual gross receipts below $25 million can opt for simplified accounting methods, are exempt from the limitation on interest expense deductions, and are not subject to uniform inventory capitalization rules or certain cost capitalization requirements. Beginning in 2026, the new law increases the threshold to $80 million for businesses engaged in manufacturing.

The law also includes a series of provisions aimed at improving the operating environment for smaller enterprises. Notably, it introduces a temporary federal income tax exemption on employee tips and overtime pay for the years 2025 through 2028. This is expected to boost take-home pay for service-sector workers and ease hiring pressures for employers. In addition, the federal estate tax exemption is permanently raised. Starting in 2026, the exemption will increase to $15 million for individuals and $30 million for married couples, up from the current $13 million threshold. This change significantly reduces the estate tax burden on business succession, allowing founders of successful small and mid-sized enterprises to pass on their businesses with minimal tax liability, which was previously out of the question.

By reducing tax obligations tied to income, investment, and borrowing, the law should boost profits and free cash flow, thereby lifting valuations and attracting capital. For small-cap companies – often with less access to financing than large-cap peers – these reforms represent a major window of opportunity.

The AI translation of this story was reviewed by a human editor.