Tax legislation reached a key milestone during May, and all eyes are now on the Senate. Looming deadlines await in July, so there is limited runway to complete this complex legislation. The Senate is going to amend the bill, but the details of such changes are beginning to emerge. However, a review of the bill, as passed by the House, provides clues about what might be coming next. That text includes many promised changes while also excluding others. Changes impacting state and local taxes and international tax are especially notable and are generating increasing attention. Looking ahead, the coming weeks will include crucial negotiations that will determine the details, and fate, of the One, Big, Beautiful Bill (OBBB).
Read on for a roundup on some of the most significant recent tax policy developments.
- Changes loom in the Senate amid a tenuous balance
- Surveying the tax provisions as passed by the House
- What wasn’t included in the House version?
- State and local tax complications
- International tax outlook
Changes loom in the Senate amid a tenuous balance
The budget reconciliation bill known as the OBBB pursues the priorities of the Trump administration and Republican leaders in Congress through a single legislative package. By consolidating those proposals and moving quickly, such leaders intend to deliver on numerous campaign promises ahead of the midterm elections in 2026. However, many aspects of the OBBB pose their own political challenges. Taken together, they have created a complex web of interrelated negotiations. Furthermore, the intended due date for completion of the bill looms large in the coming weeks. All told, there is much to do in a short amount of time if the OBBB is to be completed.
Positive momentum was generated last month, as the House completed its work negotiating and passing its version of the OBBB. The fact that the final vote was sealed by a one-vote margin speaks to the challenges even when the bill was advanced on a party-line basis. Irrespective of the difficulties along the way, House Republican leadership did deliver on its goal of passing the bill prior to the Memorial Day weekend. The tax aspects of the House version of the OBBB originally emerged from the Ways and Means Committee on May 14 prior to being amended on the path to the House floor. Thus, the final House version included some last-minute changes, such as modification of the state and local deduction limitation (the SALT cap). Details of the House version are discussed further in the sections below.
The House had barely passed its version of the OBBB before key Republican Senators noted their intentions to amend the bill. Potential disagreements between the two chambers span the full scope of the OBBB. However, the flashpoints center on the degree of spending cuts in the bill (either too much or too little), the overall impact on the national debt, and specific tax policies being pursued. While changes in the Senate are expected, the magnitude of such changes could very well imperil the pathway to final passage in Congress. The Trump administration has also been engaged in the negotiations and recently increased its lobbying efforts by seeking to address objections to the bill related to budget deficits and the national debt.
When will the Senate complete its changes? Two potential due dates approach over the coming weeks. The first is the original, stated goal of completing the OBBB by July 4. Given the proximity of that date, the likelihood of completion is far less certain today even if it’s not yet precluded. The second date would be the exhaustion of the existing debt ceiling, which would result in the federal government being unable to borrow funds to satisfy its obligations. The precise date for that event is uncertain, but Treasury Secretary Bessent previously asked Congress to extend such limit before the end of July. In either event, both deadlines are mere weeks away at this point.
Surveying the tax provisions as passed by the House
There is so much to unpack in the legislation, with the tax portion alone spanning nearly 400 pages. Overall, the tax legislation from the House is roughly in line with what was previously expecting. Although a few key themes do stand out.
Business trifecta reinvigorated (on a temporary basis)
When enacting the Tax Cuts and Jobs Act (TCJA) in 2017, Republican members of Congress sought opportunities to reduce the overall tax cost of the bill. Offsets were found in the form of new revenue-raising rules (e.g., the SALT cap discussed below) as well as delayed changes, such as phased-out benefits. For businesses, three impactful provisions included changes to the interest expense limitation under Section 163(j), required capitalization of research and development costs, and a phase-out of 100% bonus depreciation. Such changes all began taking effect in 2022 and have meaningfully impacted businesses. Fortunately, the House version of the OBBB would restore that trifecta of provisions, albeit only for a period of 5 years.
- Business interest expense limitation under Section 163(j) — The OBBB would restore the ability of businesses to addback depreciation, amortization, and depletion when calculating adjusted taxable income (ATI). ATI is the base upon which the annual interest expense limitation is calculated. Thus, restoring those addbacks will increase ATI and thereby increase the amount of annual interest expense deductions. Such changes would be effective for 2025, which would provide a more immediate benefit.
- R&D expensing under Section 174 — The OBBB would restore full, first-year expensing for domestic research and development costs incurred after Dec. 31, 2024, and before Jan. 1, 2030. Foreign costs would continue to be capitalized and amortized over 15 years.
- Bonus depreciation — 100% bonus depreciation would also be restored for qualifying property placed in service after Jan. 19, 2025, and before Jan. 1, 2030. Bonus depreciation began phasing down annually by 20% starting in 2023, resulting in a current deduction of 40% in 2025.
The changes listed above have broad bipartisan support and are expected to be retained in any version of the OBBB passed by the Senate. However, the primary focus of Republican senators in this respect is likely the temporary nature of the House bill. Returning to a situation with changes looming in the distance complicate business planning.
New 100% deduction for domestic manufacturing facilities
President Trump made numerous promises related to the return of manufacturing to the United States while on the campaign trail. That goal is also a key aspect driving the imposition of tariffs on the importation of goods from foreign countries. Multiple aspects of the House version of the OBBB would benefit domestic manufacturing, but most aren’t specifically targeted to those taxpayers. However, the bill would establish a new category of 100% depreciation for such businesses establishing manufacturing or production facilities in the United States.
The new deduction, under Section 168(n), would provide another 100% depreciation deduction for certain qualified production property (QPP). For this purpose, QPP includes nonresidential real property placed in service within the United States that’s used in either: (1) manufacturing of tangible personal property, or (2) in agricultural or chemical production. QPP is focused on the property involved in the manufacturing or production activities, so it would exclude 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.
The definition of QPP is reminiscent of the domestic production activities deduction (DPAD), which previously existed under Section 199 prior to the TCJA. However, the new QPP deduction is focused on the cost of manufacturing or production property rather than on the production from such property.
The 100% deduction would be mutually exclusive to bonus, meaning the two couldn’t be taken for the same property. But proposed Section 168(n) and bonus depreciation would have tremendous potential to be paired together through careful cost segregation studies and planning.
Pass-through business deduction made permanent
The TCJA permanently cut the corporate tax rate from 35% down to 21% and introduced a deduction for qualified business income (QBID). The 20% QBID established a degree of relative parity between corporations and pass-through entities in the subsequent years but has been scheduled to expire at the end of 2025. An expiration of QBID in the absence of changes to the corporate tax rate would dramatically alter the decision-making process when forming or reorganizing a business entity.
The OBBB would extend QBID on a permanent basis while also modifying it in various ways. The most important of these would be an increase in the deduction from 20 to 23%. Technical enhancements would consolidate the phase-out for specified service trades or businesses (SSTBs) with the limitations based on W-2 wages and business asset basis. However, such modifications wouldn’t fundamentally alter QBID. These permanent modifications to QBID would provide greater business taxation certainty in conjunction with the current 21% corporate tax rate.
Campaign promises made real
Trump made a series of tax-related promises on the campaign trail, which largely focused on excluding certain types of income from taxation for individuals. Those included promises to alleviate taxes on tips, overtime pay, and Social Security benefits. True income exclusions pose thorny procedural challenges since they could impact income taxes as well as payroll and self-employment taxes. Ultimately, the House concluded to pursue these income exclusions in the form of deductions that reduce taxable income. Such deductions would be provided on a temporary basis, with benefits only being recognized during 2025 through 2028.
- Tips: The OBBB would create a new deduction equal to the amount of qualifying tips received by workers during the year. This type of provision would have the potential for abuse without meaningful guardrails. In that respect, the OBBB would limit the deduction to those whose work is “traditionally and customarily” compensated partly through tips (to be defined by future guidance) and would further prevent the deduction from being taken by high earners.
- Overtime pay: The OBBB would also provide a new deduction for overtime pay albeit with similar limitations as the tip deduction. Specifically, the deduction for overtime pay would come in an amount equal to qualified overtime pay, which would be defined by reference to the Fair Labor Standards Act.
- Social Security benefits: The promise to exclude Social Security from taxes would be implemented in a similar but different manner than the two items above. In this case, the policy goal would be implemented by providing an additional $4,000 deduction to those 65 and older, but subject to an income-based phase-out.
The new deductions provide reduced tax burdens on individuals up to certain income levels. However, such rules specifically benefit some taxpayers at the expense of others. This aspect has already gotten the attention of some senators and could lead to further changes. For example, a broad increase in the standard deduction would provide similar benefits but would apply to all taxpayers. Looking ahead, the key questions here are whether Republican senators wish to continue the targeted approach to the “no tax” provisions and what level of impact on tax revenues is acceptable. In any event, the sustained focus on these type of income exclusion provisions by Trump suggests that some version will be included in a final bill.
Expiration dates are back
Sunsetting various tax provisions was a key feature of the TCJA that helped reduce the projected impact of the bill on federal revenues. Accordingly, many of its tax benefits were frontloaded and phased out over time. The “trifecta” of business-related TCJA provisions noted above — bonus depreciation, R&D expensing, the interest expense limitation — were, for example, phased down over time, creating cost savings in the following years. Moreover, the bulk of the TCJA was then set to expire at the end of 2025. Those dynamics have resulted in impacts on taxpayers in the intervening years and created uncertainty about the tax future beyond 2025.
For better or worse, the House version of the OBBB would take a similar approach. The business deduction trifecta of changes would be applied during 2025 and 2029. Similarly, the “no tax” deductions would be available during 2025 and 2028. Other, temporary provisions are found throughout the tax portion of the OBBB. Although such temporary rules are balanced with permanent extension of other rules, such as QBID, the SALT cap, the estate and gift tax exemption, and all of the other individual income tax rules. Taken together, the looming expiration of temporary provisions sets the stage for such items to take on added significance during the 2028 presidential election cycle.
What wasn’t included in the House version?
Many campaign promises have been translated to legislative text in the current version of the OBBB. However, others have been excluded at this point. The list of exclusions includes several proposals that generated considerable attention, so their omission is particularly notable.
Carried interest
The tax treatment of carried interests is periodically scrutinized by members of Congress from both parties. For example, the TCJA included the creation of a new rule, under Section 1061, which imposed a three-year holding rule for certain gains to receive long-term capital gain treatment. The Biden administration revisited carried interest taxation but ultimately didn’t include any changes in the Inflation Reduction Act. More recently, Trump has repeatedly indicated his preference for eliminating the preferential treatment for carried interest altogether.
Despite promises to close the carried interest “loophole,” both technical and political challenges await. On the technical front, there are difficulties in defining the line between carried interests, which may be disfavored, and many other situations involving profits interests that incentivize participation in the growth of a business. If changes are sought, then Congress would also need to address the coordination or any new rules with the existing version of Section 1061. The political dynamics are complicated by the limited revenue associated with legislative changes to carried interest, which pale in comparison to other, revenue-raising tax changes. Taken together, those factors suggest a degree of skepticism about the potential for inclusion of carried interest changes in the OBBB during Senate deliberations.
Preferential tax rate for domestic manufacturing
Trump previously stated his desire to enact a 15% tax rate on the income from domestic manufacturing. The details of such proposal were vague at the time, but several options could be utilized to achieve such a result. So far, the OBBB doesn’t touch the 21% corporate tax rate that was implemented by the TCJA. Similarly, the increase in QBID to 23% would reduce the taxation of flow-through business income, but it wouldn’t come close to a 15% effective tax rate except at lower income levels. That’s not to say that domestic manufacturing businesses wouldn’t benefit from the OBBB in its current form. Changes to QBID, paired with the trifecta and QPP deduction, discussed above, would certainly lower the tax burden on manufacturing businesses. However, at this time, there has been no movement to provide additional tax relief to such businesses.
Increasing the highest individual rate
Trump has been more equivocal when it comes to a potential increase to the highest individual marginal rate. While indicating an openness to such changes, including a potential 40% top bracket, he has delivered mixed signals about his level of support for such changes. Ultimately, the path to inclusion of this type of change will likely turn on the perceived need for revenue offsets to balance with other aspects of the OBBB.
A tantalizing clue about the potential for an increased top ordinary income rates is found in the proposed changes to QBID. As discussed above, that deduction on pass-through business income, would jump from 20 to 23% under the House version of the OBBB. Is the insertion of the higher QBID rate a prelude to an increased top ordinary income bracket? The answer is unclear at this point, but the increased deduction rate would certainly reduce the impact of a higher top income bracket.
State and local tax complications
Three aspects of the OBBB would modify federal rules related to state and local taxation. One change, relating to the SALT cap, is generating much attention while the others might have gone unnoticed so far.
The evolving SALT cap
The TCJA introduced a new limitation on state and local tax deductions for individual taxpayers. This is the SALT cap, which allows a maximum of $10,000 in annual deductions, since the TCJA became effective in 2018. Without congressional action, this limitation is set to expire at end of the current year.
The SALT cap is one of the most challenging aspects of the OBBB. While the cap impacts higher-income taxpayers across the country, its impact is felt most acutely by taxpayers in higher-tax states. The uneven impact has created a difficult political situation within the Republican conference in Congress. Specifically, Republicans in the House from high-tax states — notably, California, New Jersey, and New York — have pushed to significantly increase the cap. That dynamic is different in the Senate given the lack of Republican senators from those same states.
The OBBB, as passed by the House, included some last-minute changes that increased the SALT cap. The SALT caucus members that pushed for such changes have already voiced their objection to further reductions in the Senate. How far will the Senate go in changing the SALT cap? The answer to that question will be a key factor in the likelihood of final passage of the OBBB.
By the numbers: Where things stand
The initial Ways and Means version would have increased the cap to $30,000, with a phase-down beginning at $400,000. The phase-down would then stop at $10,000. Final negotiations in the House increased both the maximum deduction and the income-based phase-down. Accordingly, the maximum cap would be $40,000 per taxpayer ($20,000 per married taxpayer filling separately). Such amount would be phased back down to $10,000 ($5,000 if filing separately) based on income. Such phase-down would begin at $500,000 of modified adjusted gross income (MAGI) and would be fully implemented at $600,000 of MAGI. These changes would apply to 2025 (e.g., tax years beginning after 2024). All of those dollar amounts would then be increased in 2026 and further increased by 1% per year through 2033.
Impact on state PTE elections; certain businesses favored
While the stated cap number is generating headlines, the mechanics of the changes have gotten comparatively little attention. Unfortunately, the OBBB would also make numerous technical changes to pass-through entities and their associated taxes beginning in 2026. The impact of such changes would include the following:
The OBBB would generally force pass-through entities to separately state many taxes, include state pass-through entity tax (PTET) payments. At the partner level, PTET allocations would be subjected to the SALT cap unless an exception applies. One exception would be for state and local income taxes paid by a pass-through entity operating a qualified trade or business within the meaning of QBID. Notably, such distinction would disfavor all specified service trades or businesses (SSTBs), which include the fields of accounting, law, consulting, financial services, health, athletics, performing arts, etc. Fundamentally, this would amplify the favored tax status of non-SSTBs over SSTBs by expanding beyond QBID to include the SALT cap.
While the proposed SALT cap changes would generally favor nonservice businesses, the changes could also result in the loss of PTET deductions with respect to all pass-through entities, depending on the states involved. This aspect is caused by the form of changes and their interaction with state laws implementing PTETs. Namely, some states would be required to take legislative action to amend their PTETs to provide continuing benefits to non-SSTBs. Such legislative action might reasonably be expected to occur, but timing or political dynamics might get in the way. In summary, the impact of the proposed SALT cap changes wouldn’t necessarily be isolated to owners of pass-through entities operating service businesses.
Modifying P.L. 86-272
Remember that tax legislation is just part of the overall reconciliation package that includes draft policy from a dozen or so House committees. Among these other committees was the House Judiciary Committee, which proposed a modification to Public Law 86-272 to be included with the OBBB.
P.L. 86-272 is as foundationally important as it is esoteric. P.L. 86-272 is a federal preemption law that prevents all states from imposing net income taxes on any businesses that do nothing more than “solicit” orders for tangible property in a given state. But what exactly is “solicitation?” When P.L. 86-272 was enacted in the late 1950s, businesses didn’t exist in a digital world, and the rules have historically developed around physical presence. In more recent years, a perpetually difficult planning point is to what extent digital footprints represent “solicitation.”
The OBBB would go a long way toward answering this question by modifying the definition to mean that a business that sells goods doesn’t “solicit orders” where its business activity facilitates that solicitation, even where the activity serves some other “independently valuable business function.” This is generally viewed as an expansion of the definition of “solicitation,” which could cause businesses to be taxable in fewer states if enacted.
The boundaries of what this will ultimately mean for multistate businesses is unclear given the lack of specificity in the proposal. But it’s clear enough that it would significantly change how nexus works in practical terms.
Conformity and tax planning
The starting point for state income taxes is generally federal adjusted gross income (AGI). However, states don’t always perfectly conform to federal AGI and instead take a variety of approaches to get there. The three approaches followed by most states are: (1) those that have “rolling” conformity whereby they automatically conform to federal tax law as it changes unless the state opts out of conforming to any particular law; (2) “static” or “fixed” conformity whereby they conform to federal tax law as of a certain date with any modifications specifically defined; and (3) selective conformity whereby they only conform with specific identified provisions of federal law.
Wide-ranging federal tax law changes have significant knock-on effects for states. Changes that tend to broaden the federal tax base often increase state revenues, whereas changes that narrow the base tend to decrease state revenues.
We expect many states to rethink their approaches to conformity based on the OBBB, given the number of changes that could decrease AGI and thereby decrease state tax revenue (e.g., exclusion from income for tips and overtime). Considering the speed at which the OBBB is progressing, it may take some time for states to respond, which could cause a wave of state tax changes that occur much later in 2025 or even into 2026.
International tax outlook
The OBBB would make limited changes to the core of international tax rules. Some of those changes include extensions and adjustments to the effective rates for a suite of TCJA tax measures: BEAT, FDII, and GILTI. The rates for these measures were set to increase. The OBBB would largely preserve the current rates, which would increase only slightly going forward. However, another change, the establishment of new Section 899, could have a much more significant impact on businesses and individuals.
Section 899
Section 899 imposes a remittance tax on taxpayers from countries that have what the White House and Congress tend to think of as taxes that treat U.S. companies in an unfair, discriminatory manner. Examples of these types of taxes are digital service taxes and the so-called “top up” tax created by the OECD minimum tax deal. This proposal can be understood as a complementary policy effort to protect U.S. companies, but not just those engaged in manufacturing, refining, or certain kinds of production.
The rate under Section 899 would vary from between 5 and 20%. The possibility of such a high rate means the possibility of conflicts with existing tax treaties. In fact, Section 899 as drafted would expressly override treaties. Europe is home to many of the countries that have adopted the emerging global minimum tax rules, so these overrides are expected to be particularly impactful on European countries.
Section 899 seems consistent with the administration’s overall tax policy vision, which is to protect U.S. companies and shift the U.S. international tax base, to the extent possible, to non-U.S. persons. Still, Section 899 has the potential to have a chilling effect on investment in U.S. markets by deterring investments in U.S. operations. Businesses have already experienced other countries’ willingness to retaliate when it comes to tariffs, and there might not be principled reasons to expect anything different when it comes to Section 899.
While the retaliatory elements of Section 899 may have some appeal from a policy point of view, there are a number of senators who have expressed some level of skepticism as to whether overtly overriding existing treaties is the best policy to pursue. There is also the possibility of choppy procedural waters in the Senate, given the various limits on legislation enacted through the reconciliation process. This is one area of the OBBB that’s likely to continue to be under negotiation as the legislation progresses.
