2025 Tax Legislation Update: One Big Beautiful Bill Act Narrowly Passes Senate

The “One Big Beautiful Bill Act” (the “BBB”) was passed by the U.S. House of Representatives on May 22, 2025 (such version, the “House Bill”) 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.

On July 1, 2025, the Senate narrowly passed its own version of the BBB (the “Senate Amendment”), which differs materially from the House Bill. Pressure remains on the House and the Senate to agree on a final version of the bill in order to meet President Trump’s stated deadline of July 4, 2025.

Below is a discussion of key provisions of the BBB, detailing changes the Senate Amendment made to the provisions in the House Bill and new provisions in the Senate Amendment. A summary of key provisions relevant to tax-exempt organizations can be found here.

Key Provisions in House Bill and Changes, if any, in the Senate Amendment:

• Enforcement of Remedies against Unfair Foreign Taxes. The House Bill 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 (“BEAT”), 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.

  Senate Amendment: Notably, the Senate Amendment does not include Section 899 of the Code. Removal of Section 899 from the BBB was announced by President Trump after the Treasury Department and the G7 countries reached an agreement not to apply Pillar II’s undertaxed profits rule and income inclusion rule to U.S.-parented corporate groups.

  • Changes to Cap on SALT Deductions.

    • Increased Cap on SALT Deductions. The House Bill 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 House Bill 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).

      Senate Amendment: The Senate Amendment increases the cap on SALT deductions for individuals in a manner consistent with the House Bill through 2029 (including the phaseouts), but permanently caps such SALT deductions at $10,000 for taxable years beginning after 2029.

    • 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 House Bill 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.

        Senate Amendment: The Senate Amendment does not include any limits on the SALT “workarounds” by pass-through entities.

  • 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 House Bill 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.

    Senate Amendment: The Senate Amendment permanently reinstates the EBITDA-based limitation. The Senate Amendment further amends Section 163(j), including by providing that (i) the Section 163(j) limitation is calculated prior to the application of any interest capitalization provision (with exceptions for interest capitalized under Sections 263A(f) and 263(g)) and (ii) subpart F and GILTI inclusions (including the associated Section 78 gross-up amounts), and any amounts determined under Section 956 are not taken into account in determining ATI.

  • No Changes to Taxation of Carried Interest. The House Bill did not include any changes to the tax treatment of “carried interest.”

    Senate Amendment: The Senate Amendment also does not include any changes to the tax treatment of “carried interest.”

  • 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 House Bill 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.

    Senate Amendment: No changes.

  • 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 House Bill 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 House Bill 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.

    Senate Amendment: Similar to the House Bill, the Senate Amendment makes the deduction for qualified business income permanent. Differences from the House Bill:

    • The Senate Amendment keeps the QBI deduction rate at 20% and does not expand the deduction to include certain interest dividends from business development companies.

    • Instead of modifying the structure of the phase-in of the limitations, the Senate Amendment increases the range above the threshold amount over which the limitations based on W-2 wages and “specified” service trade or businesses phase in from $50,000 ($100,000 for joint returns) to $75,000 ($150,000 for joint returns).

    • The Senate Amendment introduces a new, inflation-adjusted, minimum deduction of $400 for taxpayers who have at least $1,000 QBI from one or more active trades or businesses in which the taxpayer materially participates.

  • Extension of Limitation on Excess Business Losses. The House Bill makes permanent the TCJA’s disallowance of deductions for “excess business 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 of $250,000 (or $500,000 for a joint return), as adjusted for inflation for tax years after December 31, 2018. The House Bill also revises the carryforward provisions so that disallowed excess business losses are treated as losses attributable to a trade or business of the taxpayer subject to the excess business loss limitation in future taxable years.

    Senate Amendment: Similar to the House Bill, the Senate Amendment makes the excess business loss limitation permanent. Differences from the House Bill:

    • The Senate Amendment does not have the change requiring that disallowed excess business losses be treated as losses attributable to a trade or business of the taxpayer subject to the excess business loss limitation in future taxable years.

    • The Senate Amendment lowers the threshold amount back to $250,000 (or $500,000 in the case of a joint return) as adjusted for inflation for tax years beginning after December 31, 2025 (whereas under current law, the threshold was set at $250,000 and adjusted for inflation for tax years beginning after December 31, 2018).

  • Extension of Reduced Individual Tax Rates. The House Bill 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 House Bill (rather than reverting to the 39.6% pre-TCJA rate). The House Bill adds an additional year of inflation adjustment to all brackets except for the 37% bracket.

    Senate Amendment: The Senate Amendment also makes permanent such income tax rate schedules but adds an additional year of inflation adjustment only to the 10% and 12% brackets.

  • Permanent Disallowance of Miscellaneous Itemized Deductions. The House Bill 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).

    Senate Amendment: The Senate Amendment also makes permanent the disallowance of miscellaneous itemized deductions but removes certain “educator expenses” from the list of miscellaneous itemized deductions.

  • Limitation on Tax Benefit of Itemized Deductions. The House Bill provides that the amount of a taxpayer’s 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.

    Senate Amendment: The Senate Amendment instead provides that the amount of itemized deductions otherwise allowable will be reduced by 2/37 of the lesser of (1) the amount of itemized deductions or (2) the amount of taxable income of the taxpayer that exceeds the dollar amount at which the taxpayer becomes subject to the 37% marginal tax rate. The limitation is not applicable with respect to the determination of the deduction for qualified business income.

  • Adjustments to Expensing, Depreciation and Amortization Provisions.

    • Return of Immediate Expensing of Domestic Research and Experimental Expenditures. The House Bill 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.

      Senate Amendment: The Senate Amendment also allows taxpayers to immediately deduct domestic research or experimental expenditures paid or incurred in taxable years beginning after December 31, 2024, but makes such expensing permanent (instead of expiring after December 31, 2029). In addition, the Senate Amendment adds that small business taxpayers (that meet the gross receipts test in Section 448 permitting the cash method of accounting) will generally be permitted to apply this change retroactively to taxable years beginning after December 31, 2021. Further, all taxpayers that made domestic research or experimental expenditures after December 31, 2021, and before January 1, 2025, will be permitted to elect to accelerate the remaining deductions for such expenditures over a one-year period or a two-year period.

    • Extension of Bonus Depreciation. The House Bill 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 House Bill’s allowance of 100% bonus depreciation is effective for property placed in service after January 19, 2025 and before January 1, 2030.

      Senate Amendment: The Senate Amendment also allows taxpayers to immediately expense 100% of the cost of qualified property acquired and placed in service on or after January 19, 2025, and makes such expensing permanent (instead of applying only to property placed in service before January 1, 2030).

    • Special Depreciation for Qualified Production Property. The House Bill 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 House Bill’s date of enactment.

      Senate Amendment: Similar to the House Bill, the Senate Amendment allows taxpayers an additional first-year depreciation deduction equal to 100% of the adjusted basis of qualified production property but applies to property placed in service after the date of enactment and before January 1, 2031 (instead of before January 1, 2033). In addition, the Senate Amendment contains a new provision to make clear that property used by a lessee does not constitute qualified production property of the lessor, and that tangible personal property does not include food or beverage prepared in the same building as a retail establishment in which such property is sold.

    • 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 House Bill 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 House Bill applies to property placed in service after December 31, 2024.

      Senate Amendment: No changes.

    • Limitation on Amortization of Certain Sports Franchises. The House Bill 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 House Bill’s enactment.

      Senate Amendment: The Senate Amendment does not include this provision.

  • 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 House Bill 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 House Bill include (1) deferral of gain recognition for capital gain reinvested in an OZ, with gain required to be recognized by the earlier of (a) the date the investment is sold and (b) December 31, 2026 (for amounts invested before January 1, 2027), or December 31, 2033 (for amounts invested after December 31, 2026, and before January 1, 2034), (2) 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 (3) deferral of up to $10,000 of ordinary income that is reinvested in an OZ. The House Bill also adds certain reporting requirements applicable to OZ investments.

    Senate Amendment: The Senate Amendment establishes a permanent opportunity zone policy with rolling 10-year designations instead of simply creating a second round of opportunity zones. Consistent with the House Bill, the Senate Amendment permits deferral of gain that is reinvested in an OZ, with the deferred gain required to be recognized upon the earlier of the date the investment is sold and the five-year anniversary after the investment is made. The Senate Amendment also provides for a 10% basis step-up after five years (or 30% in the case of “qualified rural opportunity funds”) but does not contain the provision permitting deferral of up to $10,000 of ordinary income invested in an OZ.

  • New Requirements and Increased Penalties Related to COVID-Related Employee Retention Tax Credits. The House Bill 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 House Bill 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 House Bill 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.

    Senate Amendment: Like the House Bill, the Senate Amendment imposes a penalty of $1,000 for each failure to comply with certain diligence requirements and extends the statute of limitations for the assessment of ERTC-related liabilities. However, the Senate Amendment does not impose a minimum penalty of $200,000 (and up to 75% of the gross income derived by a promoter) for aiding and abetting the understatement of tax liability related to ERTCs. Additionally, the Senate Amendment does not cause failure to comply with diligence requirements to be treated as knowledge for purposes of imposing penalties.

  • Termination of or Modification of Certain Energy-Related Tax Credits. The House Bill terminates, phases out and/or modifies numerous energy-related credits, including certain credits enacted under the Inflation Reduction Act. For example, the House Bill 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 House Bill 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.

    Senate Amendment: Similar to the House Bill, the Senate Amendment terminates, phases out and/or modifies numerous energy-related credits with several modifications to slow the phaseout of some tax credits.

  • 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 House Bill 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.”

    Senate Amendment: The Senate Amendment does not include this provision.

  • Modification to Taxable REIT Subsidiary Asset Test. The House Bill 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.

    Senate Amendment: No changes.

  • Modification to Deduction for Foreign-Derived Intangible Income and Global Intangible Low-Taxed Income. The House Bill 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.

    Senate Amendment: The 36.5% and 49.2% deductions in the House Bill are reduced to 33.34% and 40%, respectively.

  • 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 House Bill would permanently change the percentage to 10.1%.

    Senate Amendment: The Senate Amendment changes the rate of 10.1% under the House Bill to 10.5%.

  • 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.

    Senate Amendment: No changes.

  • Creation of Trump Accounts. The House Bill 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 eight 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 House Bill 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.

      Senate Amendment: The Senate Amendment generally defines a Trump account as an Individual Retirement Account that is not a Roth IRA, and generally treats a Trump account in the same manner as an Individual Retirement Account. The account must be created in the U.S. for an individual under the age of 18 (rather than eight in the House Bill). The account must be created by the Treasury Secretary or funded by a qualified rollover contribution. Contributions may be accepted beginning on or after 12 months after the provision is enacted. Like in the House Bill, annual contributions cannot exceed $5,000. Distributions cannot be made until the beneficiary reaches age 18, but otherwise the rules applicable to distributions from IRAs generally apply. Employers may contribute up to $2,500 (which shall be adjusted for inflation) to the Trump account of an employee or their dependent without it being taxable to the employee. The Senate Amendment includes a pilot program similar to the program in the House Bill.

  • No Tax on Tips. Taxpayers earning less than $160,000 per year (adjusted annually for inflation) are allowed under the House Bill 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.

    Senate Amendment: The Senate Amendment caps the deduction for “qualified tips” at $25,000 for any taxable year. Instead of limiting the deduction to taxpayers earning less than $160,000 per year as in the House Bill, the Senate Amendment includes a phase-out provision reducing the amount allowed as an above-the-line deduction by $100 for each $1,000 by which the taxpayer’s adjusted gross income exceeds $150,000 ($300,000 in the case of a joint return), phasing out completely at an adjusted gross income of $400,000 ($550,000 in the case of a joint return). Under the Senate Amendment, independent contractors also qualify for the deduction. The Senate Amendment defines “qualified tip” as any cash tip received by an individual in an occupation which “customarily and regularly” received tips on or before December 31, 2024. “Cash tips” include tips received from customers that are paid in cash or charged and, in the case of an employee, tips received from other employees under any tip-sharing arrangement.

  • No Tax on Overtime. The House Bill 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.

    Senate Amendment: The Senate Amendment caps the deduction for overtime pay at $12,500 ($25,000 in the case of a joint return) for any taxable year. Instead of limiting the deduction to “highly compensated employees” as in the House Bill, the Senate Amendment includes a phase-out provision reducing the amount allowed as a deduction by $100 for each $1,000 by which the taxpayer’s modified adjusted gross income exceeds $150,000 ($300,000 in the case of a joint return), phasing out completely at an adjusted gross income of $275,000 ($550,000 in the case of a joint return).

  • Estate and Gift Tax Changes. The House Bill 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.

    Senate Amendment: The Senate Amendment changes the effective date from taxable years beginning after December 31, 2025 to estates of decedents dying and gifts made after December 31, 2025.

  • Notable Exclusions from the House Bill

    1. No limitation on state and local tax deductions for corporations
    2. No increased tax rate for individuals in the highest tax bracket
    3. No increase to the stock buyback excise tax rate
    4. No extension of the Section 954(c)(6) look-through rule for payments between related CFCs, currently applicable before January 1, 2026

    5. No re-addition of the Section 958(b)(4) limitation on downward attribution for purposes of determining CFC status

       Senate Amendment: The Senate Amendment addressed (d) and (e), as described below. As detailed throughout this outline, the Senate Amendment excluded many changes that were in the House Bill.

  New Provisions in Senate Amendment:

  • Expansion of Qualified Small Business Stock Gain Exclusion.

    Under current law, gain from the sale of qualified small business stock (“QSBS”) acquired after September 27, 2010, is eligible for a 100% exclusion from U.S. federal capital gains tax if it is held for more than five years. The aggregate amount of eligible gain that can be excluded is subject to a per-taxpayer per-issuer cap. Specifically, each taxpayer that holds QSBS-eligible stock in a company can exclude from income the greater of (i) $10 million or (ii) 10 times the aggregate adjusted bases of QSBS disposed of by the holder. Stock only qualifies as QSBS if, among other requirements, the issuing corporation had less than $50 million of aggregate gross assets at all times prior to the issuance of stock and had less than $50 million of aggregate gross assets immediately after the issuance of stock.

    The Senate Amendment replaces the strict five-year cliff for gain exclusion with a phase-in approach. QSBS acquired after the date of enactment that is held for (i) at least three years would be eligible for 50% gain exclusion, (ii) at least four years would be eligible for 75% gain exclusion, and (iii) at least five years would be eligible for 100% gain exclusion. The Senate Amendment increases the per-taxpayer per-issuer dollar cap to $15 million for stock acquired after the date of enactment, indexed to inflation beginning in 2027, and increases the corporate-level aggregate-asset ceiling to $75 million, indexed to inflation beginning in 2027. The gain exclusion phase-in and increase in per-issuer dollar cap apply to taxable years beginning after the date of enactment and the increase to the corporate-level aggregate asset ceiling applies to stock issued after the date of enactment.

  • Enhancement of Advanced Manufacturing Investment Credit.

    Under current law, manufacturers of semiconductors and semiconductor manufacturing equipment are eligible for a tax credit equal to 25% of the qualified investment in an advanced manufacturing facility (whose primary purpose is the manufacturing of semiconductors or semiconductor manufacturing equipment) the construction of which begins prior to January 1, 2027. The Senate Amendment increases the credit rate to 35% effective for property placed in service after December 31, 2025.

  • New International Tax Provisions. The Senate Amendment makes multiple changes to international tax provisions of the Code that were not in the House Bill.

    • Rules for allocation of certain deductions to foreign source “Net CFC Tested Income” (fka Global Intangible Low-Taxed Income) for purposes of foreign tax credit limitation.

      In order to determine its foreign tax credit (FTC) limitation, a taxpayer must first determine its taxable foreign source income by allocating and apportioning deductions between U.S.-source gross income and foreign-source gross income in each limitation category. The Senate Amendment limits the deductions allocable to income in the global intangible low-taxed income (GILTI) category to only: (1) the Section 250 deduction relating to GILTI allowed under Section 250(a)(1)(B) of the Code (and any deduction allowed under Section 164(a)(3) of the Code for taxes imposed on such amounts), and (2) other deductions directly allocable to such income, except that no amount of interest expense or research and experimental expenditures may be allocated to such income. Any other directly allocable deduction will be allocated or apportioned to U.S.-source income. This amendment applies to taxable years beginning after December 31, 2025.

    • Modifications to determination of deemed paid credit for taxes properly attributable to tested income.

      Under current law, U.S. corporations are generally deemed to have paid 80% of foreign taxes paid or accrued on GILTI for FTC purposes. The Senate Amendment increases the percentage to 90%. The Senate Amendment also disallows credits under Section 901 of the Code for 10% of any foreign income taxes paid or accrued (or deemed paid) with respect to certain amounts excluded from gross income under Section 959(a) of the Code by reason of an inclusion in gross income for GILTI purposes. The change from 80% to 90% applies to taxable years beginning after December 31, 2025, while the partial credit disallowance applies to foreign income taxes paid or accrued with respect to amounts excluded from gross income under Section 959(a) due to inclusion under Section 951A after June 28, 2025.

    • Sourcing certain income from the sale of inventory produced in the United States.

      Under current law, a U.S. person’s income from the sale of inventory is allocated between U.S. and foreign sources based solely on the production activities with respect to such inventory. Under the Senate Amendment, solely for purposes of the FTC limitation, if a U.S. person maintains an office or other fixed place of business in a foreign country, the portion of income from the sale outside the United States for use outside the United States of inventory produced in the United States, to which the third sentence of Section 863(b) applies (i.e., income from the sale of inventory property purchased in a U.S. possession and sold in the United States is treated as partly from sources within and partly from sources without the United States), and that is attributable to the office or other fixed place of business will be treated as foreign-source taxable income. Such income, however, cannot exceed 50% of the total income from the sale or exchange of inventory (and attribution does not depend on title passage). The changes to these rules apply to any sale or other disposition occurring after December 31, 2025.

    • Determination of deduction eligible income.

      The Senate Amendment modifies the definition of deduction eligible income (DEI) for purposes of determining FDII in two ways:

      1. Except as otherwise provided by the Treasury Secretary, DEI would not include any income from the sale or other disposition (including pursuant to a deemed sale or other deemed disposition or a transaction subject to Section 367(d)) of intangible property (as defined in Section 367(d)(4)) or property that is subject to depreciation, amortization or depletion. This provision would apply to sales or other dispositions occurring after June 16, 2025.

      2. DEI will no longer be reduced by interest expenses and research and experimental expenditures properly allocable to gross income. This limits deductions to DEI to expenses (including taxes) that are directly allocable to gross income. These changes apply to taxable years beginning after December 31, 2025.

    • Rules related to deemed intangible income.

      The Senate Amendment eliminates the net deemed tangible income return for qualified business asset investment (QBAI) for both FDII and GILTI provisions. As a result, the current FDII and GILTI would be reclassified as “foreign-derived deduction-eligible income” and “net CFC tested income,” respectively. These changes apply to taxable years beginning after December 31, 2025.

    • Permanent extension of look-through rule for controlled foreign corporations.

      The current “CFC look-through rule” in Section 954(c)(6) excludes from foreign personal holding company income (FPHCI) dividends, interest, rents, and royalties received or accrued by one CFC from a related CFC to the extent attributable or properly allocable to income of the related CFC which is neither subpart F income nor ECI. The Senate Amendment makes this rule permanent (when it otherwise would have expired after 2025).

    • Repeal of election for 1-month deferral in determination of taxable year of specified foreign corporations.

      Under current law, “specified foreign corporations” (as defined in Section 898(b)) are required to use as a taxable year the taxable year of their majority U.S. shareholder (the “majority U.S. shareholder year”). A specified foreign corporation, however, may elect a taxable year beginning one month earlier than the majority U.S. shareholder year (a “one-month deferral year”). The Senate Amendment repeals the election. This repeal would apply to taxable years of specified foreign corporations beginning after November 30, 2025.

    • Restoration of limitation on downward attribution of stock ownership in applying constructive ownership rules.

      Currently, due to the repeal of Section 958(b)(4) in 2017, attribution of certain stock of a foreign corporation owned by a foreign person to a related U.S. person is required for purposes of determining whether the U.S. person is a U.S. shareholder of the foreign corporation and, therefore, whether the foreign corporation is a CFC. The Senate Amendment restores Section 958(b)(4) (i.e., restoring the limitation on the downward attribution of stock ownership). It also creates a new Section 951B to allow for downward attribution from a foreign person in certain cases.

    • Modifications to pro rata share rules.

    Under current law, a United States shareholder that owns stock in a CFC on the last day of the CFC’s taxable year must include in gross income its pro rata share of the CFC’s subpart F income, subject to certain adjustments. The Senate Amendment eliminates the last-day ownership requirement. Under the Senate version, a United States shareholder would be required to include its pro rata share of subpart F income if it owns stock on any day during the CFC taxable year. It proposes similar rules for calculating a United States shareholder’s GILTI inclusion. These changes would apply to taxable years of foreign corporations beginning after December 31, 2025. A special transition rule applies to dividends paid (or deemed paid) by CFCs on or before June 28, 2025.