On July 1, the Senate passed its version of the One, Big, Beautiful Bill (OBBB). This capped a feverish period of negotiations that began in late May following passage in the House. The tax aspects of the OBBB evolved meaningfully in recent weeks as Republican senators balanced competing interests. The final Senate version diverges in key respects from the House but also reflects broader consensus on tax changes. Attention now shifts to the House for final passage, with a self-imposed July 4 deadline rapidly approaching.
- A complex but accelerated path
- Senate action sets up final enactment
- What’s in the Senate version of OBBB?
A complex but accelerated path
The OBBB has advanced through Congress at a lightning-quick pace given the volume of challenging issues considered. Work on this bill began during the early stages of 2025 with the introduction of numerous bills by Republican members of Congress that would address narrow tax issues. For example, bills introduced in January included proposals to extend the Tax Cuts and Jobs Act (TCJA), exclude tip income and overtime pay from taxation, and repeal some or all of the Inflation Reduction Act. Throughout that process, Republican leadership and President Trump called for an ambitious timeline: enactment by July 4. With passage in the Senate on July 1, that milestone is extremely close at hand.
Substantive legislative debate on the OBBB began in the House in early May. The House Ways and Means Committee initially released a draft text that included tax changes on May 12. That led to a committee hearing marking up the bill that stretched from May 13 into May 14. In the end, the Ways and Means Committee approved its amendments to the OBBB and the transmission of such bill to the Budget Committee by 26-19 votes along party lines. The Ways and Means version of the OBBB contained voluminous tax changes ranging from extension of TCJA rules to changes promised on the campaign trail to newly introduced changes. The bill was then routed through the Rules Committee and Budget Committee. That all led to final passage in the House on May 22.
The Senate operates at a different pace than the House and signaled its desire to amend the House version of the OBBB through a careful evaluation process, which resulted in several weeks of negotiations. Matters accelerated on June 16 with the release of updated bill text by the Senate Finance Committee. That release, including the bill text, section-by-section summary, and an overview, provided detailed information about the evolution of the OBBB. Following further negotiations, the Senate Finance Committee provided an updated version of the bill on June 28 as the full OBBB was poised for consideration on the Senate floor.
Senate action sets up final enactment
The Senate held a procedural vote on the motion to proceed with the OBBB on June 28. That initiated a process involving a reading of the bill and 10 hours of floor debate prior to consideration of amendments. The amendment process began on the morning of June 30 and lasted well over 24 hours. The final milestone — a vote on the amended version of the OBBB — was completed on July 1, with Vice President Vance casting the deciding vote after a 50-50 tie.
Attention now shifts to the House; that chamber will move to vote on the OBBB, as amended by the Senate. The exact timing of the vote will need to be determined, and final agreement will be needed. Early indications are that this vote will occur quickly given Trump’s desire for enactment in conjunction with the July 4 holiday.
What’s in the Senate version of OBBB?
The Senate version of the OBBB directly aligns with many tax aspects of the bill passed by the House. At its core, this includes an extension of TCJA rules applicable to businesses and individuals. The OBBB would also follow through on campaign promises, albeit in a slightly modified form. However, the Senate negotiations modified meaningful aspects of many rules (effective dates, phase-outs, balance of benefits) while adding new provisions along the way. Thus, the tax aspects of the Senate version reflect an evolution of the bill from the House.
A more detailed analysis of the OBBB will be completed when the House finalizes the bill, but a summary of key changes is included below.
Business tax changes
The OBBB would make many changes to the taxation of businesses, with the general trend being toward expanded and enhanced deductions. Many of these changes have been proposed for multiple years and include extensions and modifications of the TCJA.
Key highlights:
- QBID — A permanent extension of the 20% qualified business income deduction (QBID) under Section 199A is included. The House version would have increased this to 23% on a temporary basis while making other technical changes. The Senate bill retains the original 20% but provides certainty through permanence. Technical amendments to phase-outs have also been retained.
- Domestic R&D expensing — The Senate version of the OBBB would also restore 100% deductions for domestic research and experimentation expenditures beginning in 2025. Such amounts have been subject to capitalization under Section 174 since 2022. This aligns with the House version but goes further to provide an important transition rule. Namely, the unamortized portion of domestic costs that were previously capitalized under Section 174 would be allowed as deductions in either 2025 (full release) or split between 2025 and 2026. Certain small taxpayers would also have the option to amend tax returns for prior years to claim those deductions.
- Enhanced depreciation — The Senate bill follows the House version by restoring 100% bonus depreciation, enhancing Section 179 expensing, and creating a new category of 100% depreciation for qualified production property (e.g., manufacturing and production buildings).
- Interest expense limitation — The Section 163(j) business interest expense limitation would be restored to its pre-2022 calculation by including depreciation, amortization, and depletion addbacks when calculating adjusted taxable income. Beginning in 2025, such addbacks would have the effect of increasing the amount of annual interest expense deductions. However, the Senate version diverged from the House by adding a technical clarification curtailing interest capitalization planning. Specifically, the Section 163(j) limitation would be applied before elective capitalization under Section 263(a) or Section 266 starting in 2026.
The SALT cap
The annual limitation on state and local tax deductions for individual taxpayers (the SALT cap) has been one of the more challenging aspects of the OBBB. The current $10,000 cap is scheduled to expire at the end of 2025, but an extension has been expected for some time. Perspectives among Republicans in Congress range from those seeking elimination of the cap to those interested in tightening the cap, potentially including a corporate SALT cap. As the legislative process advanced, two interrelated issues were considered: the core SALT cap and the treatment of pass-through entity taxes (PTETs).
The final Senate bill represents a simplification of proposals from the House and Senate on a temporary basis. Specifically, it would provide a $40,000 SALT cap, with inflationary adjustments, for 2025 through 2029. That cap would be phased down, but not below $10,000, by 30% of the taxpayer’s modified adjusted gross income (MAGI) exceeding $500,000. The Senate bill wouldn’t touch the existing treatment of state PTETs, so pass-through owners would still benefit from such deductions. Beginning in 2030, the $10,000 limitation would be reimposed, which would set the stage for future legislative consideration.
For comparison, the prior versions of the OBBB included the following SALT cap changes:
- The House version would have implemented a $40,000 cap in the same manner as the Senate version discussed above on a permanent basis. However, the House version would also have eliminated the benefit of PTETs for pass-through owners of specified service trades or businesses and created additional restrictions on certain other PTETs.
- The Senate Finance Committee would have taken a more aggressive approach by restoring the baseline $10,000 SALT cap. That version would’ve allowed some PTET deductions for all pass-through businesses, subject to a cap at the greater of $40,000 or 50% of the PTET.
Evolving Inflation Reduction Act tax credits
The tax credits and incentives provided by the IRA have drawn considerable attention from both Republicans in Congress and Trump. Much of the focus on the campaign trail involved the magnitude of spending, electric vehicles (EVs), and wind and solar projects. However, efforts to alter or repeal such programs faced challenging political headwinds. Since the IRA’s enactment, taxpayers across the country have completed qualifying projects, with many more projects in development.
The House version of the OBBB didn’t fully repeal the IRA but would’ve significantly accelerated the expiration of tax credits and incentives. EV-related credits would’ve faced the earliest expiration dates. Others would’ve remained available for years provided that accelerated beginning of construction dates could be satisfied. The initial Senate Finance Committee text would’ve delayed the expiration dates from the House bill. However, such efforts drew the attention of Republicans in the House.
The final Senate version of the OBBB represents some form of compromise. Key highlights include:
- Early termination of wind and solar credits under Section 45Y (production tax credit) and Section 48E (investment tax credit) for property placed in service after Dec. 31, 2027.
- Technical enhancements to the Section 45Y and Section 48E rules that restrict eligibility and increase penalties depending on the connection to or assistance received from prohibited foreign entities.
- Modification of the Section 45X advanced manufacturing production credit to add a phase-out for applicable critical minerals (beginning in 2031), terminate the credit for wind components produced and sold after Dec. 31, 2027, and add restrictions related to material assistance received from prohibited foreign entities.
- Accelerated expiration of EV credits for those purchased after Sept. 30, 2025, and for EV charging equipment placed in service after June 30, 2026.
“No tax” campaign promises
Tax matters permeated the 2024 election cycle. Some of the attention was on the expiring TCJA and the looming tax increase that would be felt by taxpayers. However, the major headlines centered on proposals to exclude various items from taxation. Potential income exclusions could’ve included tips, overtime pay, Social Security benefits, and compensation for active-duty military or police. Several of those proposals have been included in the OBBB, albeit in modified form.
The Senate version of the OBBB largely follows the House version with respect to “no tax” changes. Those exclusions have been implemented through deductions, which will reduce the taxable income of eligible taxpayers even if they don’t itemize.
- Tips — The OBBB would permit taxpayers to deduct up to $25,000 of annual tip income. This deduction would phase down at a rate of 10% of modified AGI exceeding $150,000 ($300,000 for married taxpayers filing jointly). The deduction for qualifying tips would be available during 2025 through 2028. This would be available to both employees and independent contractors but would be limited to industries that customarily received tips prior to 2025.
- Overtime — The bill would also provide a deduction of up to $12,500 ($25,000 if married filing jointly) for qualified overtime compensation received during the year. Such an amount would phase down at the same thresholds and rates as the tip deduction discussed above. The overtime pay deduction would also be available during 2025 through 2028.
- Seniors — During 2025 through 2028, seniors would be entitled to an additional deduction of up to $6,000 per individual. For this purpose, a senior would include any taxpayer aged 65 or older as of the end of the tax year. The additional deduction would be phased down at a rate of 6% of the taxpayer’s modified AGI in excess of $75,000 ($150,000 for married taxpayers filing jointly).
- Car interest payments — A new annual deduction of up to $10,000 per taxpayer would also be provided with respect to qualified passenger vehicle loan interest. This would be available for 2025 through 2028 and would include multiple requirements for the underlying vehicle (original use, type, gross vehicle weight rating, and location of final assembly) and the nature of the financing. This deduction would also phase down at a rate of 20% of modified AGI exceeding $100,000 ($200,000 for married taxpayers filing jointly).
Individual tax changes
The bulk of the individual tax changes involve extending expiring TCJA rules. These have been expected for some time and have largely been uncontroversial throughout the legislative process.
Key highlights:
- Rates and deductions — The OBBB would essentially extend all the TCJA rules related to individual taxation. Those include the applicable tax brackets, itemized deduction limitations, elimination of personal exemptions, and alternative minimum tax rules. The Senate version of the bill involved minimal changes from the House version.
- Estate and gift tax — The OBBB would permanently extend the TCJA’s estate and gift tax exemption at a slightly increased amount.
- Section 1202 gain exclusion — The Senate version of the OBBB would also modify and expand existing rules under Section 1202, which provide a gain exclusion upon the sale of qualified small business stock.
- Trump accounts — The House bill included a new tax-advantaged savings account for children, or “Trump accounts.” The Senate bill would adopt the House framework but expand the rules to include more beneficiaries. The accounts would generally allow for annual contributions of $5,000, with no deduction generated, and distributions would be precluded until the child turns 18.
International tax changes
The final Senate version of the OBBB includes a variety of changes to international tax rules, but the absence of a key flashpoint rule.
- Elimination of Section 899 — First proposed in the House version of the bill, Section 899 would’ve created a retaliatory tax regime in response to foreign taxes that are considered unfair to U.S. taxpayers. The Senate Finance Committee restated that proposal while also including a deferred effective date and a slightly decreased rate. However, in the intervening days, international tax negotiations progressed to the point that Treasury Secretary Bessent called for the removal of this rule from the OBBB. Thus, Section 899 was removed from the final Senate version of the bill to provide space for the Trump administration and the Treasury Department to continue negotiating with other countries.
- Evolution of international rules — The Senate bill would make adjustments to the applicable rules for foreign tax credits, foreign-derived intangible income (FDII), the base erosion anti-abuse tax (BEAT), look-through rules for controlled foreign corporations, and downward attribution rules for stock ownership, among others. The House bill would have narrowly modified a few rules, so the final Senate version represents a more comprehensive update to international tax rules.
Real estate
The Senate version largely tracks with the House version in terms of changes to real estate development incentives, with an emphasis on permanence. Those include expansion and modification of opportunity zone rules, low-income housing tax credits, and new markets tax credits.
However, a few surprises were included in the final Senate version of the OBBB. The tax-exempt bond rules under Section 142 were expanded to treat spaceports in the same manner as airports. For this purpose, a spaceport means a facility located at or near a launch site or reentry site for: (a) manufacturing, assembling, or repairing spacecraft or space cargo; (b) flight control operations; (c) providing launch or reentry services; or (d) transferring crew, participants, or cargo to or from spacecraft. The Senate version would also provide a tax installment payment arrangement related to gain on the sale of qualified farmland to qualified farmers.
