On May 14, the House Committee on Ways and Means voted to approve tax aspects of the budget reconciliation bill advancing Republican priorities. The tax provisions will now head to the House floor to be integrated into what’s commonly called the One, Big, Beautiful Bill (OBBB). This development follows months of negotiations among Republicans in Congress. A careful review of the process to get here and tax changes included in this version of the bill provide clues about the complicated legislative process that remains. Our tax experts catalog what tax changes are in the current bill and evaluate what’s expected to come next.
Read on for a roundup on some of the most significant recent tax policy developments.
How did we get here?
2025 has long been identified as a critical year for tax policy given the looming expiration of most of the individual tax provisions of 2017’s Tax Cuts and Jobs Act (TCJA). Victories in House, Senate, and presidential races last November meant that Republicans would be positioned to pursue their tax policy goals during 2025. However, the early stages of the legislative process have been complicated by executive branch actions, including the imposition of tariffs and staffing reductions across federal agencies, and deliberations within Congress regarding revenue and spending. In that respect, tax legislation is just one important aspect of a broader story involving the economy, global trade, and the scale of the federal government.
Members of Congress have been busy on the tax legislative front since the beginning of the year. A steady flow of legislative proposals was introduced by Republican members in pursuit of their expected priorities. Democratic members also introduced their own tax proposals with contrasting messaging. The bills introduced by Republicans can be broadly summarized along the following categories:
- TCJA extension — The TCJA was Trump’s signature legislative package during his first term in office. That bill was enacted along party lines through the budget reconciliation process, which resulted in the inclusion of expiration dates for most changes. While some aspects have already expired, the key expiration date applicable to nearly everything else is Dec. 31, 2025. Extending and modifying the TCJA has long been a priority of Republican leaders. Bills introduced during early 2025 would have taken many different approaches to extension. At least one would have involved essentially a wholesale extension, while others would have modified certain aspects, either tightening or expanding the benefits, in addition to providing extensions.
- Campaign promises — The Trump campaign also championed a variety of individual tax policy measures, like eliminating taxes on tips and overtime pay for individuals and eliminating preferential treatment of carried interest. The majority of campaign pledges involved benefits for individual taxpayers, with an emphasis on those at lower income levels.
- Pay fors — With so many tax measures at play and with the overall debt situation creating downward pressure on spending, lawmakers have been searching for “pay fors” for months. These provisions are intended to help offset the cost of tax cuts. Bills introduced during the early months of 2025 included various types of pay fors, including repeal of targeted tax provisions (e.g., Inflation Reduction Act tax credits), tightening of tax benefits (eligibility restrictions or an income-based phase-out), or even the imposition of new taxes.
- Wild cards — The biggest wild card in the tax policy deck is the SALT cap. The TCJA introduced a $10,000 limit on the amount taxpayers can deduct for taxes paid to state and local governments, but the cap is set to expire after this year. The higher the cap, the more expensive the legislation becomes.
What’s happened so far?
Congress passed a budget resolution in April that allowed the reconciliation process to begin. The reconciliation process is expedited and requires only a simple majority to pass both chambers, meaning it will avoid any potential filibuster. Notably, this is the same process used for the original enactment of the TCJA and the Inflation Reduction Act. The budget resolution gave specific instructions to both House and Senate committees to increase or decrease the deficit within specified limits.
Tax legislation work begins in the House Ways and Means Committee, and that committee released an extensive version of its draft legislation on May 12. Ways and Means also held a committee markup hearing on May 13 to debate the draft bill and consider amendments. That markup lasted 17 hours and concluded with a 26-19 vote on May 14 to approve the bill and send it to the House floor.
What’s in the Ways and Means version?
The Ways and Means Committee advanced their portion of the OBBB, which would extend many key TCJA provisions for both individuals and businesses. Individual rates are largely preserved, and three key business-related provisions — 100% bonus depreciation, full expensing of research and development costs under Section 174, and the interest expense limitation being calculated off EBITDA — would return under the draft version.
Many of the tax measures Trump promised during his campaign also appear in the draft legislation. Although, to help with costs, they tend to sunset after 2028. Proposed cuts to various energy credits and restrictions on a number of deductions would also help finance the cost of the legislation. The legislation would retroactively eliminate the employee retention credit, which has been subject considerable scrutiny from the IRS.
The Ways and Means version would raise the SALT cap to $30,000, but a small group of House Republicans large enough to influence the final reconciliation outcome have said that amount is still too low for them to support.
The Ways and Means version also includes some nonheadline provisions. Those include changes that would restrict the state regulation of artificial intelligence and increased penalties under Section 7213 for certain disclosures of taxpayer information in violation of Section 6103.
Please see below for detailed analysis of key tax provisions included by the Ways and Means Committee in the OBBB.
Individual tax changes
The current version of legislation essentially preserves the TCJA’s tax structure relating to individual taxpayers on a permanent basis. This includes an extension of the tax brackets, increased standard deduction, elimination of personal exemptions, modifications of itemized deductions, and the child tax credit. In addition, Trump’s campaign pledges have been included. A more detailed analysis of those extensions, modifications, and newly introduced rules is included below.
TCJA extension and modification
- Tax brackets on ordinary income — The OBBB would make the tax brackets established by the TCJA permanent, including the top rate of 37%. The inflation adjustment calculation used for each bracket other than 37% would be modified slightly, which would increase the applicable dollar thresholds for 2026. Recent reporting suggested that a new top tax rate might be established as a pay for provision, but such development hasn’t materialized in the Ways and Means Committee.
- Standard deduction and personal exemptions — The TCJA doubled the standard deduction and such rule would be extended on a permanent basis. Similar to the tax brackets, a technical adjustment to the inflation factor would slightly increase the standard deduction for 2026. A further temporary increase of $1,000 for single and separate filers, $1,500 for heads of household, and $2,000 for joint filers would be added for 2025 through 2028. That increase wouldn’t be indexed to inflation. Personal exemptions would also be permanently repealed.
- Limitation on itemized deductions — The TCJA temporarily removed the overall limitation on itemized deductions, known as the Pease limitation. The Pease limitation would be reinstated but modified to reduce overall itemized deductions by 2/37 multiplied by the lesser of (1) the aggregate itemized deductions, or (2) the amount of taxable income above the 37% bracket threshold. In effect, this would limit the value of itemized deductions to a 35% benefit.
- Excess business loss rules — A limitation on an individual taxpayer’s ability to offset business losses against nonbusiness income was implemented by the TCJA as Section 461(l). Under such rules, business losses may offset business income, but any net business loss can only offset a specific amount of nonbusiness income. Such limitation was indexed to inflation and currently equals $313,000 in 2025 ($626,000 for married taxpayers filing jointly). Losses that aren’t allowable in the current year then carryforward to the following year as net operating losses (NOLs). The OBBB permanently extends the Section 461(l) rules. A technical amendment also addresses the coordination of NOL carryforwards and current year excess loss calculations.
- Child tax credit — The $2,000 increased child tax credit would be made permanent, with a temporary $500 increase (up to $2,500 per child) starting in 2025 through 2028. After the expiration of the $500 increase, the credit would be indexed to inflation (measured based on the $2,000 base credit with inflation adjustments starting with 2025). Other changes to the child tax credit made by the TCJA would also be made permanent, including the additional child credit of $1,400 (with inflation indexing this at $1,700 in 2025), the $500 nonchild dependent credit, refundability, increased phase-out thresholds, and the increased phase-out thresholds. However, all credits would be limited only to those with valid Social Security numbers issued before the due date of a tax return.
- Combat zone tax exclusion — Several tax rules provide benefits, such as income exclusions, to members of the Armed Forces serving in combat zones. The TCJA previously extended such rules on a temporary basis to qualified hazardous duty areas, including the Sinai Peninsula. The OBBB would permanently extend the TCJA rules while also making definitional changes. Accordingly, combat zone tax benefits would be extended to include Kenya, Mali, Burkina Faso, and Chad beginning in 2026.
- Other TCJA items made permanent — Many other changes made by TCJA would also be made permanent without significant modifications, including:
- Alternative minimum tax (AMT) — The increased AMT exemption and phase-out thresholds.
- Mortgage interest deduction — The cap on mortgage interest to loans of up to $750,000 of acquisition indebtedness.
- Home equity loans — Repeal of deductions for interest on home equity loans.
- Casualty loss deductions — Limitations on personal casualty losses attributable to federally declared disasters. But, see below for a separate provision addressing qualified disaster loss deductions.
- Miscellaneous itemized deductions — Repeal of miscellaneous itemized deductions.
- Bicycle commuting fringe — Repeal of the exclusion from income of certain bicycling commuting benefits.
- Moving expenses — Repeal of the deduction for moving expenses and the exclusion from income for qualified moving expense reimbursements, other than for certain members of the military.
- Wagering losses — Losses from wagering, defined broadly, would continue to be limited to the extent of wagering gains.
- ABLE accounts — Increase to the maximum contribution limitation for ABLE accounts and other ABLE account modifications. The provision treating ABLE account contributions as eligible contributions for purposes of the saver’s credit under Section 25B would be made permanent. Rules allowing for nontaxable rollovers from qualified tuition programs to ABLE accounts would be similarly extended.
- Student loan discharge — Income exclusion on student loan discharge due to death or disability and exclusion for certain employer payments of student loans.
New tax changes
Trump discussed many new tax changes on the campaign trail, with an emphasis on excluding income from taxation or otherwise providing tax benefits. The Ways and Means draft would carry out those intentions in addition to making other changes.
- No tax on tips — Excluding tip income from taxation was a prominent feature on the campaign trail, but enacting such a rule is a complex undertaking. The OBBB would pursue this policy in the form of a tax deduction available to individuals, subject to multiple qualifications and guardrails, for 2025 through 2028. Importantly, such deduction is also available to taxpayers who don’t itemize through an addition to their standard deduction. Qualifying tips must be received from an occupation that traditionally and customarily involves tips, as determined by the Treasury Department in future guidance. A qualifying occupation doesn’t not involve a specified service trade or business (as defined under Section 199A) and any tips are further excluded from qualified business income under QBID. The recipient must not be a highly compensated employee (as defined by Section 414(q)(1)). The qualifying tips must be reported to the employee on Form W–2 or under special rules for independent contractors. The taxpayer must also include a Social Security number on the income tax return claiming the deduction.
- No tax on overtime pay — The campaign promise relating to excluding overtime pay from income would be implemented in much the same way as no tax on tips. Namely, individuals would be able to claim a tax deduction equal to the amount of qualified overtime compensation they receive in a tax year, regardless of whether they itemize deductions. “Qualified overtime compensation” would be defined to mean, basically, the 50% extra amount paid to workers for overtime under the Fair Labor Standards Act. The term wouldn’t include tips within the meaning of the proposed deduction for tips and highly compensated employees would also be excluded. A Social Security number would be required on the income tax return claiming the deduction. This deduction would also be available for 2025 through 2028.
- Enhanced deduction for seniors — Individuals age 65 or older would get an increased deduction of up to $4,000 per individual in 2025 through 2028. Such amount would be subject to an income-based phase out beginning at $75,000 of income or $150,000 for married taxpayers filing jointly. The deduction would be available to taxpayers who claim the standard deduction as well as those who itemize their deductions. However, such amount wouldn’t be indexed for inflation.
- No tax on car loan interest — Individuals would be able to deduct the amount of vehicle loan interest paid for personal vehicles during 2025 through 2028. The deduction would be capped at $10,000 per year but would be subject to additional limitations. Namely, this would be phased out for taxpayers beginning at $100,000 of modified AGI ($200,000 for married taxpayers filing jointly), with full phase-out at $150,000 ($250,000 for a joint return). The deduction would only be available with respect to personal vehicles for which final assembly occurred in the United States. New tax reporting would be required by those receiving qualifying interest payments of more than $600 in a calendar year (e.g., a new form of Form 1099 reporting).
- Disaster losses — The rules relating to personal casualty losses resulting from natural disasters have been a source of confusion in recent years. A federally declared disaster triggers various tax rules, including those extending due dates to pay taxes and file tax returns. Congress has also periodically designated losses from certain disasters as being eligible for more generous qualified disaster loss rules. Without the enhanced deduction rules, personal casualty loss deductions are only allowed to the extent that they exceed 10% of the taxpayer’s AGI. Practically, that floor has limited the ability for many taxpayers to claim disaster losses in recent years. The OBBB would apply qualified disaster loss designations, and the enhanced deduction, to all federally declared disasters beginning on Jan. 1, 2020, and ending 60 days after enactment of the bill. This change would provide significant, retroactive opportunities for taxpayers to claim additional losses based on disasters occurring over the past five years.
- Earned income tax credit changes — The OBBB would modify the earned income tax credit (EITC) by adding a new certification process to confirm a child’s status as a qualifying child of the taxpayer. Such regime would be effective beginning in 2028, but transition rules would apply during the interim years (2025 through 2027). The EITC would also be increased for certain Purple Heart recipients.
- Charitable contributions — Taxpayers who claim a standard deduction are generally not entitled to charitable contribution deductions. However, a temporary rule, applicable in 2021, provided an additional deduction for such taxpayers. The OBBB would restore such charitable contribution deduction, with the maximum deduction amount equal to $300 for married taxpayers filing jointly and $150 for other filers. This change would be applicable in 2025 through 2028.
- Credit for scholarships for elementary and secondary education — There would be a nonrefundable credit available to individuals who make charitable contributions to certain Section 501(c)(3) organizations that provide scholarships for elementary and secondary expenses of eligible students. Such credit would be capped at the greater of $5,000 or 10% of the taxpayer’s gross income. Such credits would be subject to an aggregate cap of $5 billion, with money being distributed on a first-come, first-served basis when contributions were made. Additional reporting and procedural mechanisms would be established to administer this program. Such credits would be available for 2026 through 2029.
- Expansion of 529 plans — The draft legislation would address tax-advantaged 529 savings plans in several ways. The draft text would treat a broader range of post-secondary credentialing expenses as qualified for 529 purposes. It would also consider certain elementary and secondary school expenses as higher education expenses, meaning such expenses would be accounted for in determining whether a contribution would be prohibited as more than necessary to pay for expenses.
- MAGA accounts — As drafted, the legislation would create a new kind of tax-preferred account, a money account for growth and advancement (MAGA account), for the benefit of children. The beneficiary of an account would need to be below the age of 8 at the time it’s established. Distributions wouldn’t be permitted until the beneficiary turns 18, and only half of such balance is available for distribution between the ages of 18 through 24. Distributions from a MAGA account used for qualified expenses are subject to capital gains tax. MAGA accounts are to be administered by a trustee that’s either a bank or another person qualified to administer such account. Contributions would be generally capped at $5,000 per year, adjusted for inflation, and there would be a limit of a single beneficiary per MAGA account. Additional limitations would be imposed on the nature of investments managed by a regulated investment company.
Estate and gift tax changes
The TCJA generally doubled the estate and gift tax exemption beginning in 2018 and provided for annual inflation adjustments to such amount. For 2025, such exemption is currently $13.99 million. However, the increased exemption is scheduled to expire at the end of 2025. The prospect of such change has added complexity to estate and gift tax planning in recent years.
The OBBB would permanently extend the increased unified estate and gift tax exemption. Such amount would also be set at $15 million for tax years beginning after Dec. 31, 2025. That new threshold would be subject to further adjustment based on inflation in future years.
The SALT cap
The annual limitation on an individual taxpayer’s deduction for state and local taxes (the SALT cap) was first imposed in 2018 by the TCJA. While that bill broadly provided for tax cuts, the SALT cap was a key pay for provision that reduced the overall cost of the bill. States and taxpayers began searching for opportunities to reduce the impact of such cap almost immediately following enactment. In recent years, most states have adopted pass-through entity (PTE) tax regimes that shift the burden of state taxes from individuals to pass-through entities. Such rules, first approved by the Treasury Department in Notice 2020–75, have limited the impact of the SALT cap for those receiving income from such entities.
The impact of the SALT cap increases with income and affects taxpayers across the country. However, the magnitude of impact is amplified in states with higher income and property tax rates. Such dynamic has made the SALT cap a highly relevant issue to members of congress from the higher-taxed states. Accordingly, it was expected that negotiations over the SALT cap would be one of the more challenging aspects of this bill.
The Ways and Means draft would impose the following changes:
- Increasing the cap. A variety of technical adjustments would be made to the manner in which the SALT cap is implemented. However, the core limitation would be increased from $10,000 to $30,000 per taxpayer ($15,000 if married filing separately). The cap would be subject to a phase out (discussed below) but wouldn’t be reduced below $10,000 per taxpayer ($5,000 if married filing separately).
- Income-based phase out. The increased cap would be phased out for taxpayers beginning at $400,000 of modified AGI ($200,000 if married filing separately). That phase-out would be equal to 20% of income above the phase-out threshold. Accordingly, the deduction would be fully phased down to the minimum for taxpayers with $500,000 or more of modified AGI ($250,000 if married filing separately).
- PTET changes. The OBBB would generally eliminate the ability of pass-through entities to deduct state PTE taxes. Accordingly, partnerships and S corporations would be required to separately state each partner or shareholder’s allocable share of various tax payments. However, at the individual level, the SALT cap would be modified with respect to state and local income taxes paid by a pass-through entity operating a qualified trade or business, as defined in Section 199A. That rule would, in effect, favor all pass-through businesses other than specified service trades or businesses. The bill would also include an income recognition provision aimed at SALT “allocation mismatches.” Such situations would arise in cases where a partnership makes a SALT payment and a partner receives tax benefits that exceed such partner’s distributive share of the specified tax payment.
Business tax changes
The Ways and Means version of tax legislation would reintroduce the so-called “trifecta” package of business tax provisions: the full expensing of research and development costs under Section 174; computational changes to the interest expense limitation under Section 163(j); and restoration of the 100% “bonus” depreciation deduction in the first year certain property is placed in service. The qualified business income deduction under Section 199A would also be extended and modified. Furthermore, a variety of new tax changes were introduced in the Ways and Means draft.
TCJA extension and modification
- Qualified business income deduction (QBID) — The 20% QBID was a key aspect of the TCJA, which provided relative parity to pass-through entities in comparison with the 21% corporate tax rate. QBID included limitations, including an income-based phase-out for service companies and reduced benefits if the underlying business failed to pay a sufficient amount in W-2 wages or hold a requisite amount of property. The OBBB would extend QBID on a permanent basis while making several notable changes. First, the deduction would increase from 20 to 23% beginning in 2026. Second, the phase-out for specific services income and the phase-in of the W-2 wage and asset limits would be combined into a single process. Such changes would generally expand the deduction at lower-income levels while potentially tightening it further up the income scale. The inflation calculation relating to the threshold amount — the point at which the phase outs begin — would be modified to slightly increase that trigger starting in 2026. Third, the rules relating to qualified REIT dividends and qualified publicly traded partnership income would be expanded to include qualified business development company (BDC) interest dividends.
- R&D expenditures under Section 174 — Full first-year expensing for domestic research and development costs would return. The TCJA subjected such costs to required capitalization and amortization, albeit on a phased-in timeline, with 2022 being the first year of application. The draft legislation would suspend the currently required capitalization of domestic R&D costs for tax years beginning after Dec. 31, 2024, and ending before Jan. 1, 2030. Thus, taxpayers would be able to fully expense domestic R&D costs, although capitalization would still be possible in that period. Foreign costs would still need to be capitalized and amortized over 15 years.
- Interest expense limitation under Section 163(j) — The draft would restore the interest expense limitation under Section 163(j) to its initial form. This means that the computation of adjusted taxable income, upon which the 30% limitation is applied, would include add-backs for depreciation, amortization, and depletion deductions. Since 2022, current law has excluded such add-backs, which tightened the limitation for many businesses. A technical modification would also expand the definition of a motor vehicle for floor plan financing to include any trailer or camper. The modified limitation would apply to tax years beginning after Dec. 31, 2024, and before Jan. 1, 2030 (e.g., the 2025 through 2029 calendar years).
- Bonus depreciation — Bonus depreciation would return to its initial TCJA level of 100% for property acquired and placed in service after Jan. 19, 2025 ,and placed in service before Jan. 1, 2030. Certain property, including some aircraft, would be eligible for 100% bonus for an additional year (if placed in service before Jan. 1, 2031).
- Special depreciation for qualified production property — The draft would introduce another 100% depreciation deduction for certain “qualified production property.” This refers to nonresidential real property placed in service within the United States that’s used in manufacturing of tangible personal property or in agricultural or chemical production. Qualified property wouldn’t include property used for offices, administrative services, lodging, parking, sales activities, software engineering activities, or other functions unrelated to manufacturing or production. This would apply to property for which construction began after Jan. 19, 2025, and before Jan. 1, 2029. In addition, such property would need to be placed in service after the enactment of the OBBB and before Jan. 1, 2033. Technical coordination rules would modify Section 1245 for this property, including special depreciation recapture provisions.
- Section 179 expensing — Section 179 allows for first-year expensing of the aggregate costs of certain property, subject to certain limitations, including a current maximum deduction limit of $1,250,000 ($1 million, indexed for inflation). The draft would increase the maximum limit to $2,500,000. Section 179 also has an acquisition limit, now set at $3,130,000 ($2,500,000, indexed for inflation); this limitation would be increased to $4 million.
- Increase to gross receipts threshold for small manufacturing businesses — Certain taxpayers, like C corporations, generally can’t use the cash method of accounting, with an exception for certain taxpayers with average annual gross receipts of $25 million or less over a three-year period. Many other rules, such as the interest expense limitation, also utilize that gross receipts test under Section 448(c). The OBBB would increase the $25 million threshold to $80 million, indexed for inflation, for a manufacturing taxpayer (other than a tax shelter). For this purpose, a manufacturing taxpayer derives substantially all of its gross receipts from the lease, rental, sale, license, exchange, or other disposition of qualified products. Qualified products, in turn, include tangible personal property, except food and beverages prepared on-site at retail, that are produced or manufactured in a manner that includes substantial transformation. This modified definition of a small business taxpayer would also apply to the business interest expense limitation under Section 163(j), the uniform capitalization rules of Section 263A, and Section 471 inventory accounting. The changes made by the OBBB would be applicable to tax years beginning after Dec. 31, 2025.
- Employer credits — The employer-provided healthcare credit, Section 45, would be increased to 40% of qualified childcare costs, plus the total credit limit would be increased to $500,000 (for eligible small businesses, there would be a 50% increase, with a total limit of $600,000). The Ways and Means version would permanently extend the paid family and medical leave credit, Section 45S, and it would make the adoption credit, Section 23, now a nonrefundable credit, as refundable up to $5,000 (indexed for inflation) starting in 2026.
New tax changes
- Amortization of sports team intangibles — 50% of the adjusted basis of Section 197 intangible assets would be excluded from amortization by professional sports franchises.
- Expansion of FICA tip credit — The primary focus of the tip provisions discussed above was on an income exclusion via deduction for individuals receiving tips. However, the OBBB would also expand the federal tip credit available to employers operating beauty service businesses.
- Excess compensation deduction — Current law, Section 162(m), allows employers to deduct “reasonable compensation” paid to employees. The deduction is capped at $1 million per covered employee for publicly traded corporations. The OBBB would broaden this by introducing an aggregation rule that applies across controlled groups. Such changes would apply to tax years beginning after Dec. 31, 2025.
- ERC retroactive termination and enforcement — Initially enacted in March 2020, the employee retention credit (ERC) was a refundable tax credit provided to employers during the COVID-19 pandemic. The ERC was administered through the payroll tax system, so employers were able to retroactively claim such credit by filing amended payroll tax returns (Form 941–X) for the applicable quarters during 2020 and 2021. However, concerns at the IRS about inaccurate or fraudulent claims escalated as the years passed after the pandemic. In response, the IRS initiated a series of extraordinary measures, such as pausing the processing of ERC claims and accelerating examinations of filings. Legislative changes have been introduced in recent years to alleviate the concerns. The OBBB builds on those efforts by retroactively terminating the eligibility of employers to claim the ERC, unless such claims were filed on or before Jan. 31, 2024 (the date of the IRS moratorium on processing). The bill would also extend the statute of limitations for enforcement efforts and increase penalties for ERC promoters that didn’t conduct proper due diligence on employer eligibility.
- Increased threshold for 1099 reporting — The OBBB would increase the dollar threshold at which certain forms of information reporting (Form 1099) are required. Reporting related to payments to persons engaged in a trade or business or for payments of remuneration for services would begin at $2,000 in a calendar year. Such changes would begin in 2026, and the applicable dollar threshold would be indexed for inflation in future years.
- Expensing of qualified sound recording production costs — The bill would expand on special tax expensing rules relating to qualified film, television, and live theatrical productions. Such changes would allow for up to $150,000 per year in deductions related to qualified sound recording production expenses. Eligible recordings must commence before Jan. 1, 2026. In addition, the OBBB would modify bonus deprecation rules to include qualified sound recording productions commencing in tax years ending after the date of enactment with placed in service dates prior to Jan. 1, 2029.
International tax changes
- Extension of FDII and GILTI deductions — The OBBB would modify the preferential rates used in core international tax rules implemented by the TCJA. For foreign-derived intangible income (FDII), the deductions would be increased from 21.875% to 37.5%. For global intangible low-taxed income (GILTI), such rates would increase from 37.5 to 50%. The same would be true for the base erosion and anti-abuse tax (BEAT), with the draft legislation extending the current BEAT rate.
- New code section to address discriminatory taxation by foreign jurisdictions — The OBBB would add a new code section, Section 899, which would allow the United States to increase rates on income earned by persons in jurisdictions considered to impose discriminatory taxes on U.S. taxpayers. For example, such rules could be deployed in reaction to digital services taxes imposed by foreign governments.
- Tariffs and a new penalty related to the de minimis exemption — The U.S. Tariff Act at Section 321 provides a de minimis exemption to allow low-value goods — goods valued at $800 or less — to enter U.S. markets free of tariffs. The Trump administration has been focused on this exemption, and the OBBB would introduce a penalty that would be imposed on any party that attempts to use the exemption through an importation that otherwise violates U.S. law.
Inflation Reduction Act
The IRA was the Biden administration’s signature tax legislation, and it introduced a number of new renewable energy-related credits and significantly reworked the investment tax credit (ITC) and the production tax credit (PTC), two credits that have been in place for decades. Trump’s policy priorities include scaling back the IRA’s renewable credits, and the draft legislation from the Ways and Means Committee gives us an early indication of exactly how Republican lawmakers will approach these credits.
In general, the legislation in its current form would terminate many of the new IRA renewable credits and would phase out and limit others, especially as to their availability to foreign entity taxpayers.
The IRA introduced a transferability feature at Section 6418 that allows taxpayers to sell their credit rights to third parties. The current draft would eliminate transferability, but on an ad hoc basis as to only some of the IRA credits.
Extension and modification of clean fuel production credit
The current version of draft legislation would extend the clean fuel production credit at Section 45Z through 2031 and modify it by disallowing the credit to foreign taxpayers beginning one year after the date of enactment. The current draft would eliminate transferability as to the clean fuel production credit.
Incremental termination of IRA credits
The legislation would terminate:
- The clean hydrogen production credit, which is part of the general business credit at Section 38, for tax years after 2025.
- The previously owned clean vehicle credit, Section 25E, for tax years after 2025.
- The clean vehicle credit, Section 30D, for tax years after 2026.
- The qualified commercial clean vehicles credit, Section 45W, for tax years after 2025, except where the taxpayer already has a written, binding contract in place.
- The alternative fuel vehicle refueling property credit, Section 30C, for tax years after 2025.
- The energy efficient home improvement credit, Section 25C, for tax years after 2025.
- The residential clean energy credit, Section 25D, for tax years after 2025.
- The new energy efficient home credit, Section 45L, for tax years after 2025.
Phase-out and restrictions for the ITC and PTC
The Ways and Means draft would also phase out and restrict the current versions of both the ITC at Section 48E and the PTC at Section 45Y. Sections 48E and 45Y are the “tech-neutral” versions of the ITC and PTC, meaning they now apply to projects that anticipate zero greenhouse gas emissions.
- The PTC at Section 45Y would be phased out in 20% increments, beginning with facilities placed in service in 2029, for a total phase-out to zero for facilities placed in service after 2031. The credit wouldn’t be available for foreign-owned qualified facilities starting with tax years after enactment, and wouldn’t be available to facilities that begin construction more than one year after enactment and that get material assistance from foreign entities. The draft legislation would eliminate the transferability of the PTC, though the repeal would be effective only as to qualified facilities that begin construction more than two years after the effective date of the proposed legislation. In general, the modifications to the PTC would take effect for tax years after the enactment date.
- The ITC at Section 48E would be phased out and modified in nearly identical ways to the PTC at Section 45Y.
There would also be a modification of the previous version of the ITC at Section 48, which allowed the credit for certain, enumerated kinds of energy properties, including geothermal heat pump property. The ITC at Section 48 would essentially accelerate the phase-out for geothermal heat pump property.
Modification of other credits
The draft text would also phase out the zero-emission nuclear power production credit at Section 45U, again by 20% increments beginning in the 2029 tax year, with the credit being fully eliminated after 2031. Section 45U wouldn’t be transferable.
The carbon oxide sequestration credit at Section 45Q wouldn’t be available for any tax year beginning after the enactment date, and would similarly not be transferable.
The draft legislation would also restrict and phase out the advanced manufacturing production credit at Section 45X by making it unavailable for foreign taxpayers for tax year after the enactment date, and would eliminate transferability for components sold in 2028 or later.
Real estate investment
- Opportunity zones — The OBBB draft would make many alterations to the Qualified Opportunity Zone Program. Those include keeping the designation period for initial qualified opportunity zones (OZs) open for an additional two years, through 2028, rather than through 2026. The legislation would allow additional zones to be designated for a longer period, through 2033, and for those purposes would modify the definition of low-income community to be a tract with a poverty rate of at least 20%, or a median family income not in excess of 70% of the greater metropolitan area median family income or the statewide median family income, whichever is greater. There would be information reporting requirements as well, with penalties that would apply for the failure to comply.
- Low-income housing credit (LIHTC) — There would be an increase to the state housing credit ceiling by way of an increase in the multiplier (from 1 to 1.125) used to figure the population component of the state housing credit ceiling. The OBBB draft text would expand the tax-exempt bond financing requirement by allowing additional buildings financed with exempt bonds to qualify, without receiving a credit allocation from the state housing credit ceiling. The text would also provide a temporary increase in the credit by temporarily sweeping in Native American and rural areas.
Education and exempt organizations
The OBBB would make the following tax changes in relation to universities and certain tax-exempt organizations:
- Expansion of excise tax for excess compensation within an exempt organization — Current law imposes an excise tax on tax-exempt employers that pay over $1 million to any of their five highest-paid employees. The draft legislation would expand what employees count for purposes of determining whether the excise tax applies, including by looking beyond only the five highest-paid employees.
- Tiered increases to excise tax on university endowments — Current law, Section 4968, imposes a flat excise tax of 1.4% on the net investment income of certain universities. The OBBB would introduce higher, tiered excise tax rates, depending on endowment size. The larger the endowment, the higher the proposed rates would be. The rate would remain 1.4% for institutions with student-adjusted endowments between $500,000 and $750,000. It would be 7% for adjusted endowments between $750,000 and $1,250,000, 14% for institutions with adjusted endowments between $1,250,000 and $2 million, and 21% for adjusted endowments above $2 million.
- Tiered increases to net investment income of certain private foundations — The OBBB would also increase the excise tax on private foundations, depending on the value of their assets. The excise tax is now at 1.39%, and would remain for private foundations with assets of less than $50 million. The rate would move to 2.78% for those foundations with assets of between $50 and $250 million, to 5% for those with assets between $250 million and $5 billion, and to 10% for those with assets of $5 billion or more.
- Expansion of UBTI based on publicly available research — Exempt organizations like educational institutions and hospitals are subject to unrelated business income tax (UBIT) for income not substantially related to their exempt purposes. Current law excludes some income from UBIT, including income from research done by organizations operating primarily for the purpose of carrying on fundamental research the results of which are freely available to the general public. The OBBB would exclude only that income derived from fundamental research that is freely available to the general public.
- UBTI inclusion for name and logo royalties — The OBBB would also expand the UBIT rules to include royalty income received by a tax-exempt organization with respect to licensing its name or logo. Income derived from such sales would be included in the organization’s gross unrelated business taxable income. Such changes would be effective for tax years beginning after Dec. 31, 2025.
Immigration and border security
The Trump administration has focused considerable attention on border security and immigration since taking office in January. For example, many tariff actions have been described in national security terms with the northern and southern borders providing the stated framework. Such focus has carried over to Subtitle C of the bill, which includes the following tax changes:
- Excise tax on remittances. The OBBB would establish a new 5% excise tax to be applied to certain cross-border financial transactions, or remittance transfers, originating in the United States or any territory or possession of the United States. Such tax is to be paid by the sender, or, if not collected, then it’s paid by the remittance transfer provider. The primary exception to this tax is for senders that are verified as U.S. citizens or nations by a qualified remittance transfer provider. However, a sender that pays such excise tax may also claim a tax credit on their income tax return equal to the excise tax by providing a Social Security number.
- Premium tax credit limitations. Health insurance premium assistance is provided by the federal government with respect to the Patient Protection and Affordable Care Act. Such subsidy can be claimed as a tax credit on an income tax return. The OBBB would modify the premium tax credit in multiple ways, with the general trend of restricting eligibility based on the immigration status of the taxpayer. Certain modifications would take effect for tax years beginning after Dec. 31, 2025, while others would be deferred to the following year.
- Modifications to educational tax credits. The American Opportunity Tax Credit and Lifetime Learning Tax Credit provide credits for certain types of qualified tuition and related educational expenses. The OBBB would modify eligibility rules by requiring the inclusion of a Social Security of the taxpayer and any other relevant individuals (e.g., a dependent child). Such changes would take effect for tax years beginning after Dec. 31, 2025.
Healthcare
The Ways and Means draft would expand the definition of rural emergency hospital, and would also increase health plan Custom Health Option and Individual Care Expense (CHOICE) arrangements and create more flexibility as to health savings accounts (HSAs).
- CHOICE arrangements — The draft would codify and modify a final rule from 2019 that allows employers to allow individual coverage HRAs (CHOICE arrangements) without violating the Affordable Care Act’s (ACA’s) group health plan requirements. And it would allow employees in a CHOICE arrangement to use a salary reduction to buy health insurance on the APA exchange.
- New credit — It would create a new credit as part of the general business credit, Section 38, for those employers that have employees enrolled in CHOICE arrangements. The credit wouldn’t be available to large employers, that is, employers with at least 50 full-time employees.
- HSAs — The draft would prevent the allowable deduction for HSA contributions to be zero during any month for any individual eligible for Medicare but enrolled only in Medicare Part A. And it would ensure a direct primary care service wouldn’t be treated as a health plan that would otherwise make an individual ineligible to contribute to an HSA. It would expand what expenses may be reimbursed through an HSA including, for example, certain gym membership expenses. It would increase the limitation on deductions for HSA contributions, allow for certain amounts in FSAs or HRAs to be rolled into HSAs, and allow for certain expenses incurred before an HSA is established to be later reimbursed through the HSA, provided one is established within 60 days. It also includes HSA-related changes that would impact married couples: either spouse eligible for catch-up contributions to a HSA would be able to allocate catch-up contributions to the other spouse’s account, and would make it so whether an employee has coverage from spouse’s FSA doesn’t impact the employee’s eligibility to contribute to an HSA. Lastly, it would ensure that certain qualified services and items received through an on-site employee clinic wouldn’t be treated as a health plan for purposes of determining eligibility to contribute to an HSA.
The road ahead
The House Ways and Means Committee has completed its work on the OBBB, and other committees are also completing their roles. Accordingly, all attention shifts to the floor of the House of Representatives. At this point, there are many open questions as Republican leadership in the House aims to craft a bill that’s acceptable to the requisite number of members. That task is expected to be challenging given the many politically sensitive changes contemplated in the OBBB. However, resolution of those questions will likely occur over the coming days or weeks. If and when the legislation passes the House, then it will be the Senate’s turn. Early indications are that the Senate has a strong interest in amending the current version of the OBBB, so we’re still a long way from final answers as to what tax changes will ultimately be enacted.
