2025 Tax Legislation Update

On May 22, 2025, the U.S. House of Representatives passed the “One Big Beautiful Bill Act” (the “BBB”) as part of the Republican Congress’s reconciliation package. The BBB generally extends certain tax provisions of the 2017 Tax Cuts and Jobs Act (“TCJA”) that would have otherwise expired at the end of 2025 and implements other priorities of President Trump and the Republican-controlled Congress.

The bill will next be considered by the Senate. President Trump aims to finalize the tax bill by July 4, 2025.

Below is a discussion of key provisions of the BBB. A summary of key provisions relevant to tax-exempt organizations can be found here.

Key Provisions Relevant to U.S. Individuals and Businesses

• Changes to Cap on SALT Deductions.
  • Increased Cap on SALT Deductions. The BBB generally increases the cap on individual state and local tax (“SALT”) deductions that the TCJA established, and which was set to expire in 2026. The BBB increases the cap from $10,000 to $40,000, beginning in 2025. In the case of a taxpayer with modified adjusted gross income (“MAGI”) over $500,000, the cap would phase down by 30% of the excess of MAGI over the threshold, with such cap not to be reduced below $10,000. There would be a 1% increase to the maximum cap amount and the MAGI threshold amount for tax years 2026 through 2033 (after which point such dollar amounts would remain at the 2033 level).
  • Disallowance of Certain SALT “Workarounds” by Pass-Through Entities.
  • In response to the SALT deduction cap that the TCJA enacted, several states had enacted pass-through entity tax (“PTET”) regimes. Under such PTET regimes, pass-through entities could deduct income taxes at the entity level for purposes of calculating their non-separately stated income or loss, which effectively resulted in a deduction for state and local taxes for individuals that otherwise would have been subject to the cap. The BBB requires partnerships and S corporations to separately state, and disallows deductions at the entity level for, any “specified taxes” that are subject to the cap, thereby disallowing the SALT “workaround” used by pass-through entities (and potentially disallowing certain state and local taxes that could historically be deducted at the entity level).
  • The cap on SALT deductions does not apply to income taxes paid or accrued by a partnership or S corporation engaged in a “qualified trade or business,” and such income taxes can continue to be deducted without regard to the cap. The definition of “qualified trade or business” excludes any trade or business involving services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services or brokerage services, any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees, and any trade or business that involves the performance of services that consist of investing and investment management, trading, or dealing in securities, partnership interests, or commodities.
• Increased Deduction for Business Interest. The deduction for business interest expense is generally limited to 30% of “adjusted taxable income” (“ATI”), which under current law is based on “EBIT”, instead of “EBITDA.” The BBB revises the definition of ATI to be based on EBITDA, resulting in a higher ATI amount and therefore an increased deduction for business interest. The increase is effective retroactively to tax years beginning after December 31, 2024, and applies to tax years beginning before January 1, 2030.
• No Changes to Taxation of Carried Interest. The BBB did not include any changes to the tax treatment of “carried interest.”
• Extension and Modification of 199A “Qualified Business Income” Deduction. The TCJA generally permitted certain individuals, trusts and estates a deduction of 20% of their “qualified business income,” which generally includes income from trades or businesses (but subject to limitation in the case of certain “specified” services businesses such as those in the fields of law, accounting, consulting, financial services) as well as certain REIT dividends and qualified publicly traded partnership income. The BBB makes such deduction permanent (when it otherwise would have expired after 2025), increases the deduction to 23%, and expands the deduction to include certain interest dividends from qualified business development companies. In addition, the deduction as in effect under the TCJA was subject to certain limitations, including (1) for taxpayers with taxable income over a certain threshold, a limitation based on the W-2 wages and capital investment with respect to the qualified trade or business, and (2) for taxpayers with income under a threshold amount, a limitation for “specified” service trade or businesses based on the extent to which the taxpayer’s taxable income exceeded the threshold amount. The BBB modifies the structure of these limitations so that they are phased in at a fixed rate (reducing the deduction by 75 cents per dollar over the threshold) rather than phasing in over a fixed range of income over the threshold.
• Extension of Limitation on Excess Business Losses. The BBB makes permanent the TCJA’s disallowance of deductions for “excess businesses losses” by noncorporate taxpayers. “Excess business losses” are generally losses attributable to a trade or business over the aggregate gross income attributable to such trade or business plus a threshold amount (adjusted for inflation). Disallowed excess business losses are carried forward to future taxable years.
• Extension of Reduced Individual Tax Rates. The BBB generally makes permanent the income tax rate schedules for individuals, trusts and estates enacted by the TCJA (which had been set to revert to pre-TCJA levels for taxable years beginning after December 31, 2025). The maximum income tax rate will remain at 37% under the BBB (rather than reverting to the 39.6% pre-TCJA rate). There are also modifications to the brackets based on inflation indexing.
• Permanent Disallowance of Miscellaneous Itemized Deductions. The BBB makes permanent the disallowance of miscellaneous itemized deductions, which include investment fees and expenses, legal fees, and tax preparation fees. Miscellaneous itemized deductions were disallowed under the TCJA and were otherwise set to return after 2025 (subject to certain limitations).
• Limitation on Tax Benefit of Itemized Deductions. The BBB provides that the tax benefit on itemized deductions will be reduced by the sum of (1) the amount that is 5/37 of the lesser of (A) the amount of permitted deduction for state and local taxes, or (B) the amount of the taxpayer’s income that is in excess of the dollar amount at which such taxpayer becomes subject to the 37% marginal tax rate; and (2) the amount that is 2/37 of the lesser of (A) the total itemized deductions that exceed the permitted deduction for state and local taxes, or (B) the amount of the taxpayer’s income that is in excess of (i) the sum of the permitted deduction for state and local taxes and (ii) the dollar amount at which such taxpayer becomes subject to the 37% marginal tax rate.
• Adjustments to Expensing, Depreciation and Amortization Provisions.
  • Return of Immediate Expensing of Domestic Research and Experimental Expenditures. The BBB provides that for tax years beginning after December 31, 2024 and before January 1, 2030, a deduction will be permitted for certain domestic research or experimental expenditures. This deduction had been permitted for tax years prior to 2022, but the TCJA required that taxpayers capitalize such expenditures and amortize them over five years. The provision does not fully restore the pre-TCJA historic approach, which had permitted expensing for certain foreign research and experimental expenditures as well.
  • Extension of Bonus Depreciation. The BBB permits a depreciation deduction equal to 100% of the adjusted basis of certain “qualified property” in the taxable year in which such property is placed in service in the United States or a possession of the United States. The TCJA had provided for bonus depreciation for such property but with a phase down for tax years after 2023, such that only a 40% depreciation deduction was permitted under the TCJA for property placed in service in 2025. The BBB’s allowance of 100% bonus depreciation is effective for property placed in service after its date of enactment and before January 1, 2030.
  • Special Depreciation for Qualified Production Property. The BBB permits an immediate 100% deduction for the cost of “qualified production property” placed in service before January 1, 2033. “Qualified production property” generally means property used as an integral part of manufacturing, production, or refining tangible personal property. The deduction would be effective for property placed in service after the BBB’s date of enactment.
  • Increased Expensing of Certain Depreciable Business Assets. The Code permits a taxpayer to deduct the cost of certain “section 179 property” which generally includes tangible property that would otherwise be subject to depreciation under Section 168 of the Code. Under current law, the maximum allowed deduction is $1,000,000, subject to further reduction by the amount by which the cost of the qualifying property exceeds $2,500,000. The BBB revises the cap so that the maximum allowed deduction is generally $2,500,000, subject to reduction by the amount by which the cost of the qualifying property exceeds $4,000,000. The BBB applies to property placed in service after December 31, 2024.
  • Limitation on Amortization of Certain Sports Franchises. The BBB limits amortization of “specified sports franchise intangibles” to 50% of the adjusted basis of such intangible. A “specified sports franchise intangible” is an intangible that is a franchise to engage in professional football, basketball, baseball, hockey, soccer, or other professional sport, or an intangible that is acquired in connection with such a franchise. The limitation applies to intangibles acquired after the date of the BBB’s enactment.
• Renewal and Expansion of Opportunity Zones. The TCJA designated certain census tracts that met the definition of “low-income community” as “opportunity zones” (“OZ”). The designation meant the area was designated for qualified investments to be made in exchange for certain tax benefits. The BBB creates a second round of opportunity zones, where, similar to the TCJA proposal, income and gain reinvested in an OZ are eligible for certain tax benefits. Tax benefits under the BBB include: (1) a basis step-up in the OZ equal to 10% of the reinvested capital gain if the investment is held for at least five years (or 30% in the case of certain “qualified rural opportunity funds”), and (2) for up to $10,000 of ordinary income that is reinvested on an after-tax basis in an OZ, the taxpayer is eligible for a basis step-up to fair market value once the OZ investment has been held for at least 10 years. The BBB also adds certain reporting requirements applicable to OZ investments.
• New Requirements and Increased Penalties Related to COVID-Related Employee Retention Tax Credits.
  • The BBB adds certain penalties and enforcement measures applicable to persons who charge a fee to aid in preparing documents related to the COVID-related employee retention tax credit (“ERTC”), where the fee is based on the amount of the refund or credit received (such persons, “COVID-ERTC Promoters”). The BBB increases penalties that may be imposed on COVID-ERTC Promoters and imposes diligence and recordkeeping requirements on such promoters (with failure to comply with such diligence requirements treated as “knowledge” for purposes of imposing penalties).
  • The BBB also disallows ERTCs unless a claim was made before January 31, 2024 and extends the statute of limitations for the assessment of any amounts related to claiming an ERTC.
• Termination of or Modification of Certain Energy-Related Tax Credits. The BBB terminates, phases out and/or modifies numerous energy-related credits, including certain credits enacted under the Inflation Reduction Act. For example, the BBB terminates certain clean vehicles credits, the alternative fuel vehicle refueling property credit, the energy efficient home improvement credit, the residential clean energy credit, the new energy efficient home credit, and the clean hydrogen production credit. The BBB phases out and/or modifies the clean electricity production credit, the clean electricity investment credit, the carbon oxide sequestration credit, the zero-emission nuclear power production credit, the advanced manufacturing production credit, the clean fuel production credit, and the credit for certain energy property.
• Limitation on States’ Ability to Impose Interstate Taxes. Under Public Law 86-272, states are prohibited from imposing a net income tax on a business whose activities in the state are limited to soliciting orders of tangible personal property. The BBB would amend the law to make clear that “solicitation” means “any business activity that facilitates the solicitation of orders even if that activity may also serve some independently valuable business function apart from solicitation.”
• Modification to Partnership-Disguised Sale Provision. In general, Section 707(a)(2) of the Code requires that, “Under regulations prescribed by the Secretary,” a payment to a partner for property transferred to a partnership or services performed for a partnership be treated as a transaction between the partnership and someone who is not a partner if (i) there is a related direct or indirect allocation and distribution to such partner and (ii) the transfer or performance of services and the allocation and distribution, when viewed together, are properly characterized as a transaction between the partnership and a partner acting other than in such partner’s capacity as a member of the partnership. The BBB replaces “Under regulations prescribed by the Secretary” with “Except as provided by the Secretary,” to make more clear that Section 707(a)(2) is operative even in the absence of regulations, including with respect to disguised sales of partnership interests (which is consistent with the IRS’s historic position). The change is effective for services performed and property transferred after the date of enactment.
• Modification to Taxable REIT Subsidiary Asset Test. The BBB increases the percentage of assets that real estate investment trusts (“REITs”) are permitted to hold through “taxable REIT subsidiaries” (within the meaning of Section 856(l) of the Code) from 20% to 25%. This change applies for taxable years beginning after December 31, 2025.

Key International Tax Provisions

• Enforcement of Remedies against Unfair Foreign Taxes. The BBB adds new Section 899 to the Code, which increases U.S. federal income tax and withholding tax rates by up to 20 percentage points on “applicable persons” from “discriminatory foreign countries.”
  • Key Definitions:
    • A “discriminatory foreign country” is any foreign country that has one or more “unfair foreign taxes.” An “unfair foreign tax” means any of (A) an undertaxed profits rule, (B) a digital services tax, (C) a diverted profits tax, and (D) to the extent provided by the Secretary of the Treasury, an extraterritorial tax, discriminatory tax, or any other tax enacted with a public or stated purpose of being economically borne disproportionately by United States persons. 
    • An “applicable person” means, with a few narrow exceptions (A) any government (within the meaning of Section 892 of the Code) of a discriminatory foreign country, (B) any individual or foreign corporation who is a tax resident of a discriminatory foreign country, (C) any foreign corporation (other than a publicly traded corporation) that is more than 50% owned by other applicable persons, (D) any private foundation created or organized in a discriminatory foreign country, (E) any trust that is majority-owned by other applicable persons, and (F) foreign partnerships, branches and other entities proscribed by the Secretary of the Treasury.
  • Tax Effects of Section 899:
    • Governments of discriminatory foreign countries would not be eligible for the benefits of Section 892 of the Code.
    • Section 899 may override tax treaties granting preferential tax withholding rates.
    • Certain corporations more than 50% owned by applicable persons would be subject to higher base erosion and anti-abuse taxes, and the tax base of such tax would be broadened.
    • Applicable U.S. income taxes and withholding taxes would be increased by five percentage points per year that a discriminatory tax is in place, up to a maximum increase of 20 percentage points.
• Modification to Deduction for Foreign-Derived Intangible Income and Global Intangible Low-Taxed Income. The BBB provides for a permanent 36.5% deduction for foreign-derived intangible income (“FDII”) and a permanent 49.2% deduction for global intangible low-taxed income (“GILTI”). Under the TCJA, the FDII deduction is currently 37.5% and would have decreased to 21.875% for taxable years after 2025, and the GILTI deduction is currently 50% and would have decreased to 37.5% for taxable years after 2025.
• Modification of Base Erosion Minimum Tax Amount. Under the TCJA, the base erosion minimum tax amount under Section 59A of the Code applicable to certain corporations with payments to foreign-related parties generally equals the excess of 10% of the taxpayer’s modified taxable income over the taxpayer’s regular tax liability (with certain adjustments). The percentage would have increased to 12.5% for taxable years after 2025, but the BBB would permanently change the percentage to 10.1%.
• Modifications to De Minimis Entry Privilege for Commercial Shipments. Under current law, Section 321 of the Tariff Act of 1930 generally allows shipments bound for American businesses and consumers valued under $800 to enter the U.S. free of duties and taxes (the “de minimis privilege”). The change would repeal this de minimis privilege worldwide. It would also increase penalties for violators of the Tariff Act of 1930 by allowing the imposition of a civil penalty of up to $5,000 for the first violation and up to $10,000 for each subsequent violation. These penalties would be in addition to any other penalties permitted by law. The repeal of the de minimis privilege would take place July 1, 2027. The additional civil penalties would go into effect 30 days after the date of enactment.

Other Provisions of General Interest

• Creation of Trump Accounts. The BBB provides for the creation of “Trump accounts,” a new form of tax-advantaged savings account intended for minors.
  • General Characteristics: Trump accounts are trust accounts created for the exclusive benefit of an individual. The account beneficiary must be a U.S. citizen and must be under the age of 8 on the date the account is established. The trustee must be a bank or a similar financial institution. Trump account funds can only be invested in stock of regulated investment companies that track an established index of U.S. equities, do not use leverage, minimize fees and expenses, and meet other regulatory criteria. Trump accounts are generally exempt from taxation (except on income treated as UBTI).
  • Contribution Rules: The contribution limit for each taxable year is $5,000, adjusted annually for inflation. Contributions must be in cash on or after January 1, 2026, and can only be made when the beneficiary is under 18 years old. Qualified rollover contributions, contributions from U.S. federal, state, local and tribal governments and contributions from certain tax-exempt entities do not count towards this limit.
  • Distribution Rules: Distributions cannot be made before a beneficiary turns 18 years old and only half of the value as of the beneficiary’s 18th birthday may be distributed before the beneficiary turns 25 years old. Once a beneficiary turns 31 years old, all remaining amounts are treated as deemed distributed to the beneficiary.
  • Tax Treatment of Distributions: Distributions of profits from the Trump account that are used for certain qualified purposes (such as higher education expenses and first-time home purchases) are taxed at long-term capital gains rates. Other distributions of profits are subject to tax at ordinary rates and, in the case of a distributee under 30, are also subject to a 10% penalty tax.
  • Pilot Program: The BBB also calls for the establishment of a pilot program for children born between January 1, 2024 and December 31, 2028, under which each such child will be given a $1,000 federal contribution to their Trump account.
• No Tax on Tips. Taxpayers earning less than $160,000 per year (adjusted annually for inflation) are allowed under the BBB an above-the-line deduction for “qualified tips,” which are defined as cash tips received by individuals in occupations that “traditionally and customarily” received tips on or before December 31, 2024. Tips would be required to be reported to the employee in order to qualify for the deduction. Tips are still treated as “covered wages” for purposes of payroll taxes. No such deduction would be permitted for taxable years beginning after December 31, 2028.
• No Tax on Overtime. The BBB allows an above-the-line deduction for certain overtime pay (excluding overtime pay received by highly compensated employees). Such overtime amounts would be treated as “covered wages” for purposes of payroll taxes. No such deduction would be permitted for taxable years beginning after December 31, 2028.
• Estate and Gift Tax Changes. The BBB permanently increases the estate and gift tax exclusion to $15 million for taxable years beginning after December 31, 2025, and indexes this exclusion for inflation. The estate and gift tax exclusion was originally increased by the TCJA from $5 million to $10 million, adjusted for inflation.

Other Notable Exclusions from BBB

• No limitation on state and local tax deductions for corporations
• No increased tax rate for individuals in the highest tax bracket
• No increase to the stock buyback excise tax rate
• No extension of the Section 954(c)(6) look-through rule for payments between related CFCs, currently applicable before January 1, 2026
• No re-addition of the Section 958(b)(4) limitation on downward attribution for purposes of determining CFC status