House Approves the “One Big Beautiful Act”: Reconciliation Bill Now Moves to the Senate

Note: This Alert has been updated with the latest changes released by the House of Representatives

On May 22, the House of Representatives narrowly passed a multi-trillion-dollar reconciliation bill known as the “One Big Beautiful Act” (H.R. 1 or the Bill). H.R. 1 is a reconciliation bill that includes budgetary provisions relating to the border, defense, energy policy, spending cuts, the debt ceiling, and taxes that were approved by 11 House committees pursuant to instructions contained in the FY2025 congressional budget resolution. The tax proposals in H.R. 1 are largely consistent with the 389-page bill that was approved by the House Ways & Means Committee on May 16, with the exception of certain last-minute changes made to the SALT cap. The Ways & Means reconciliation bill is estimated to cost $3.7 trillion over 10 years.

The Senate is scheduled to consider H.R. 1 following the Memorial Day recess and may amend or produce its own reconciliation package pursuant to the Senate’s instructions in the FY2025 concurrent budget resolution. Based on comments from key senators indicating opposition to certain measures in the House-passed H.R. 1, as well as the differing Senate budget resolution instructions, especially relating to the scoring of the extension of the Tax Cuts & Jobs Act (TCJA), debt ceiling amount and smaller spending cuts, there is a potential for more contentious debate in the Senate and the passage of a separate Senate reconciliation measure to be resolved in a House-Senate conference.

Provisions Affecting Businesses

Research and Experimentation Deductions: The Bill makes a number of changes to the treatment of Research and Experimentation Expenses (REE) under IRC section 174. The TCJA requires taxpayers to capitalize and amortize domestic REE over five years (using a mid-year convention). Foreign REE is required to be amortized over 15 years. This rule caused many companies to report substantial amounts of phantom income and forced payment of tax on non-existent profits.

The Bill suspends this capitalization and amortization rule for tax years beginning after Dec. 31, 2024, and before Jan. 1, 2030, for domestic REE. A taxpayer can choose to: (a) deduct the domestic REE in the year paid or incurred; (b) capitalize and deduct the domestic REE ratably over the useful life of the research (but no less than 60 months), using a mid-year convention; or (c) capitalize and recover the REE over a 10-year period. Foreign REE remains subject only to 15-year amortization.

Taxpayers should review their specific tax situations to determine which option may produce the best result. For example, immediate expensing may not generate the best tax result if it generates excess business losses under IRC section 461(l). Additionally, the Bill clarifies that REE for alternative minimum tax purposes must be recovered over a 10-year period (for both domestic and foreign research).

The Bill also changes the rule-related recovery of REE on disposition, retirement, or abandonment of capitalized costs. The IRS had indicated that any remaining unamortized cost for REE could not be applied as a basis or otherwise deducted as a loss but had to continue to be recovered over the remaining period. This rule would be changed to permit the REE to be used as basis on a disposition or taken as a deduction on abandonment or retirement of the capitalized asset.

Under the TCJA, a reduction to the amount of a capitalized REE is required only if the Research and Experimentation Credit under IRC section 41 exceeds the amount allowed as a deduction under IRC section 174. If this rule produced a reduction, the amount of the basis deduction was limited to such excess. The Bill would require the amount expensed or capitalized to be reduced by the related Research and Experimentation Credit, unless a reduced credit is elected.

Bonus Depreciation: The Bill extends and modifies the first-year bonus depreciation provisions of section 168(k). The allowance is increased to 100% for property acquired and placed in service after Jan. 19, 2025, and before Jan. 1, 2030. The date is extended to Jan. 1, 2031, for longer production period property, certain aircraft, and specified plants that are planted or grafted after Jan. 19, 2025, and before Jan. 1, 2030. Some commentators criticized the decision not to make these provisions permanent by reducing the long-term economic impact of the Bill. However, these provisions allow businesses a continued favorable expense deduction timing for property types that qualify under section 168. There is bipartisan support for the extension of bonus depreciation, as it was previously included in bipartisan legislation in 2024 (H.R. 7024). H.R. 7024 failed to pass in the Senate due to controversy over other provisions.

Business Interest Limitation: The Bill reinstates the section 163(j) interest deduction limitation using a calculation of income that excludes the deduction for depreciation, amortization, or depletion. The provision is for taxable years beginning after Dec. 31, 2024, and before Jan. 1, 2030. The Bill modifies the definition of “motor vehicle” for purposes of the floor plan financing interest and floor plan financing indebtedness definitions. It also allows the Secretary of the Treasury to provide rules to provide for the application of the law for taxable years of less than 12 months that begin after the effective date and end before the date of enactment. Similar to bonus depreciation, there is bipartisan support for the extension of changes to the section 163(j) interest limitation, as it was previously included in the H.R. 7024 bipartisan legislation in 2024.

Excess Business Losses Limitation: The Bill makes two changes to the excess business loss (EBL) rule, which is scheduled to sunset after Dec. 31, 2029. EBL applies to noncorporate taxpayers and is defined as the amount by which deductions (excluding net operating losses and IRC section 199A Qualified Business Income deductions) related to trades or businesses exceed income from such trade or business. Such net business losses are currently allowed only up to certain thresholds (which for 2025 are $626,000 for joint filers and $313,000 for other filers); any losses above these thresholds are EBLs. Any disallowed EBL is carried forward and is generally treated as a net operating loss in future years. While subject to net operating loss carryover limitations (limited to 80% of taxable income), these EBLs do not impact the computation of EBL in future years.

The Bill makes two significant changes to these rules. First, the provision is made permanent. Second, in determining the amount of EBLs for tax years beginning after Dec. 31, 2024, prior year EBLs included in the net operating loss carryover are considered in determining the current year’s EBL. When this provision was initially proposed, the AICPA requested that this rule not be included in the final version of the Bill since it could effectively create a permanent disallowance of business losses unless or until a taxpayer has other business income. The House did not change the language, but it is expected that the AICPA and other business organizations will continue to pressure the Senate for a change to this rule.

Employee Retention Tax Credit: The Bill retroactively bars the IRS from issuing refunds for Employee Retention Tax Credit (ERTC) claims filed after Jan. 31, 2024. Some commentators have raised doubts about whether such retroactive legislation satisfies constitutional standards. Meanwhile, employers with legitimate ERTC claims were already severely disadvantaged by the IRS processing moratorium simply because their claims were submitted on or after Jan. 31, 2024. These employers rightfully feel short-changed, as they submitted legitimate ERTC claims well within the statute of limitations for filing claims. Under current law, taxpayers have until Apr. 15, 2025, to submit claims for 2021 ERTC refunds. Adding insult to injury, many employers have already paid additional income tax by amending their income tax returns, as required, to account for the effects of the ERTC claim while still waiting for their ERTC refunds.

Employers may wish to speak with their legal counsel to evaluate other options that could compel the U.S. government to finally process and pay their refund claim. In October 2024, the IRS extended the time to appeal denial letters beyond the typical 30-day period to the entire two years after the date of the denial letter. However, an appeal will not extend the time to file a refund suit, so taxpayers must be vigilant not to let that deadline pass. Employers may also want to consider filing “protective claims for refund” that would allow them to recoup the additional income tax they paid in anticipation of their ERTC refund in the event the IRS denies some part or all of the ERTC refund after the statute of limitations expires on claiming the associated income tax refund expires.

The Bill extends the amount of time that the IRS has to examine and deny or claw back erroneous or excessive ERTC claims from three years to six years. Also, for employers who claimed ERTC in 2020 or 2021, but have not amended their tax returns for those years, the IRS will have an additional three years to assess additional tax related to the wage deductions related to the ERTC claims.

Payments from Partnerships to Partners: The Bill makes section 707(a)(2), which addresses payments from partnerships to partners acting other than in the capacity of a partner with respect to services or contributions, self-enacting. Under current law, this type of transaction is subject to the requirements of IRS regulations. The Bill would switch that to the IRS, carving out instances where it would not apply. This provision is not retroactive.

Clean Energy: The Bill accelerates the phase-out dates for the clean electricity production credit and the clean electricity investment credit, beginning with facilities placed in service in 2029 or later years. Each credit is reduced by 20% for facilities placed in service during 2029, 40% for facilities placed in service during 2030, 60% for facilities placed in service during 2031, with a 0% credit for facilities placed in service in 2032 and future years.

With respect to these production and investment credits, the Bill also limits transferability of these credits for facilities where production begins two years after the Bill’s enactment. Finally, the Bill restricts access to the above production and investment credits for certain prohibited foreign entities.

The Bill imposes similar phase-outs and transferability restrictions on the zero-emission nuclear power production credit, and it aligns the expiration of the investment tax credit for geothermal heat pumps with the clean electricity investment tax credit.

The Bill eliminates the transferability of the clean fuel production credit for fuel produced after Dec. 31, 2027. It places restrictions on the carbon oxide sequestration credit, repealing transferability for carbon capture equipment where construction begins two years after the Bill’s enactment date. It also restricts access to the carbon oxide sequestration credit for certain prohibited foreign entities.

Qualified Opportunity Zones: The Bill contains several changes to the Qualified Opportunity Zone (OZ) program:

• Current OZ investments would expire at the end of 2026.
• A new round of OZ designations will start in 2027 and run through 2033.
• Stricter income thresholds are established for eligible census tracts.
• A new requirement that at least 33% of a state’s OZs be rural.
• Elimination of the designation of contiguous non-low-income census tracts.
• A “hibernation” period of OZ activities because of the Dec. 31, 2026, end of the current program and the Jan. 1, 2027, opportunity for the next round of investments. Investing now would not create enough holding period before the program terminates at the end of 2026.

Capital gains deferral would be extended to the end of 2033 for new investments.

Provisions Affecting Individuals

Tax Rates: The Bill makes the regular income tax rate schedules under section 1 permanent for individuals as enacted by the TCJA. The proposal generally modifies the indexing for inflation for bracket thresholds by providing one additional year of inflation in the cost-of-living adjustment. Under the proposal, the cost-of-living adjustment for regular income tax brackets for 2026 is generally the percentage by which the chained CPI for 2025 exceeds the chained CPI for 2016. The result is that the bracket thresholds are larger than they would otherwise be without the additional year of inflation. These changes both cement current tax rate brackets and provide a more favorable COLA for future years.

Standard Deduction:The Bill makes permanent the temporary increases to the standard deduction under section 63 enacted by TCJA and modifies the inflation indexing of the standard deduction by adding one additional year of inflation in the cost-of-living adjustment starting in taxable years beginning after Dec. 31, 2025. The resulting standard deduction is larger than it would be without the adjustment. The Bill also temporarily increases the amount of the standard deduction by $2,000 in the case of married individuals filing a joint return and a surviving spouse, $1,500 in the case of a head of household, and $1,000 in any other case for taxable years beginning after Dec. 31, 2024, and before Jan. 1, 2029. These temporary amounts are not indexed for inflation. As a result, the basic standard deduction for taxable years beginning in 2025 increases to $16,000 for an unmarried individual (other than head of household or a surviving spouse) and a married individual filing a separate return, $24,000 for head of household, and $32,000 for married individuals filing a joint return and a surviving spouse. These amounts are projected to increase modestly for 2026.

Personal Exemption: The personal exemption in section 151 that was temporarily reduced to zero under the TCJA is permanently reduced to zero. This change represents the policy decision to reduce taxes through higher standard deductions, tax rate brackets and other credits.

SALT Cap: Under current law, individuals who itemize deductions may only deduct up to $10,000 in state, local, and foreign income, property, or sales and use taxes (the “SALT cap”). In the past several years, most states with an individual income tax have enacted laws that allow owners of pass-through entities to legitimately work around this limit by imposing an entity-level tax on the business.

Under the provisions in the current Bill, effective for years beginning in 2025 and thereafter, the annual SALT Cap limitation would increase from $10,000 to $40,000, subject to a phase-out rule. For individuals whose adjusted gross income exceeds $500,000, the $40,000 SALT Cap would be reduced by 30% of each dollar in excess of the $500,000 AGI, until it is ultimately reduced to $10,000 for those whose AGI exceeds $600,000. For married individuals filing separate returns, the SALT Cap is $20,000, and the phase-out starts at $250,000. The annual SALT Cap will increase in 1% increments each year based on the prior year’s limitation through 2033, where it will become fixed at $42,885 with similar increases in the phaseout levels. As currently drafted, the Bill also contains language for years after 2025, that would deny state pass-through entity tax deductions to individual partners and S corporation shareholders of entities that are either not engaged in a trade or business or are a “specified service trade or business” as defined in section 199A(d)(1)(A) (most professional services and consulting businesses). State and local taxes paid by such entities would instead be treated as a separately stated item by the partnership or S corporation and be subject to the $40,000 (or lower) individual SALT cap.

Sec 199A Qualified Business Income (QBI) Deduction: The Bill makes the Qualified Business Income (QBI) deduction, which was scheduled to expire after 2025, permanent. It also makes a number of other structural changes to the law for tax years beginning after Dec. 31, 2025.

It increases the QBI deduction from 20% of QBI to 23%. For a taxpayer in the maximum 37% bracket, this reduces the effective tax rate on QBI from 29.6% to 28.49%. The 23% rate increase applies to: (a) the tentative deduction based on QBI; (b) the limit based on taxable income (without capital gains); and (c) qualified REIT dividends and qualified publicly traded partnership income.

The current set of phase-in rules, which limit the QBI deduction for higher income taxpayers and eliminate the deduction for many professionals (e.g., those engaged in specified service trades or business (SSTB)) is replaced with a new two-step limitation process. The new rules may allow high-income taxpayers, who previously received no deduction, to now receive a partial QBI deduction.

Under Step 1 (like current law), for each qualified trade or business, the QBI deduction is limited, at certain income threshold levels, to the (a) greater of 50% of W-2 wages; or (b) 25% of W-2 wages plus 2.5% of the Unadjusted Basis of Investment Assets (UBIA). However, unlike current law, the Bill does not require a separate phase-in limit adjustment between the threshold amount and specified higher levels.

Note that since the definition of a qualified trade or business excludes SSTB, this computation would produce a zero for an SSTB.

Step 2 is a new phase-in rule where an amount equal to 23% of QBI (determined without the W-2/UBIA limit) is reduced by 75% of taxable income over the threshold amounts. This limitation can produce a deduction from an SSTB.

The tentative QBI deduction is the higher amount produced under these two steps.

The Bill would include in amounts eligible for the QBI deduction (like REIT dividends) qualified Business Development Company (BDC) interest dividends. A BDC is a company that has elected to be treated as a regulated investment company. This change in the law could cause BDCs to become a preferred source of borrowed funds since the resulting interest income could be subject to tax at a lower rate, after the QBI deduction.

Child Tax Credit: The Bill increases and extends the child tax credit under section 24(h). A maximum child tax credit of $2,500 is allowed for taxable years beginning after Dec. 31, 2024, and before Dec. 31, 2028. After Dec. 31, 2028, the maximum child tax credit will revert to a permanent amount of $2,000, which will be adjusted for inflation. The proposal permanently makes the maximum amount of the additional child tax credit for each qualifying child $1,400 adjusted for inflation ($1,700 in 2025). The Bill also makes permanent the earned income threshold of $2,500 for purposes of the earned income formula. The Bill treats any amount treated as a dividend received under section 501(d) as earned income, which is considered in computing taxable income for the taxable year. In addition, the taxpayer’s SSN, their spouse (if married filing jointly), and the qualifying child must appear on the return. The SSN for each individual must be issued before the due date of the return.

AMT Exemption: The individual AMT exemption amounts and phase-out thresholds under section 55A that were scheduled to expire under the TCJA are repealed in the Bill and made permanent. This means that taxpayers who would pay a greater additional alternative minimum tax will now continue with higher exemption levels previously provided by TCJA.

Repeal of Certain Miscellaneous Itemized Deductions: The Bill permanently suspends certain miscellaneous itemized deductions that were scheduled to expire under TCJA. These include unreimbursed employee expenses, investment advisory fees, tax preparation fees, certain legal fees, hobby expenses, and safe deposit box rentals.

Loan Limit on Interest Deduction on Principal Residence: The $750,000 ($375,000 married individual filing separately) limit on principal residence acquisition indebtedness under section 163(h), scheduled to expire under TCJA, is made permanent, as is the exclusion of interest on home equity indebtedness from the definition of qualified residence interest. This provision may limit tax benefits for taxpayers facing rising housing prices and interest rates. This impact may be offset by an increased SALT deduction.

Personal Casualty Losses: The temporary limitation on personal casualty losses in section 165(h)(5) under TCJA is made permanent by the Bill. TCJA allows an individual taxpayer to claim an itemized deduction for a personal casualty loss if the loss is attributable to a declared federal disaster area. A loss is deductible only to the extent of the sum of the individual’s personal casualty gains plus the amount by which aggregate net disaster-related losses exceed 10% of the individual taxpayer’s adjusted gross income. For individual taxpayers, personal casualty losses are losses of property not connected with a trade or business, or a transaction entered into for profit, if such losses arise from fire, storm, shipwreck, other casualty, or theft. Personal casualty losses are deductible to the extent they exceed $100 per casualty.

Moving Expenses: The Bill would permanently repeal the deduction for moving expenses under section 217(k), except in the case of a member of the Armed Forces (or their spouse or child) to whom section 217(g) applies. The Bill would also permanently repeal the qualified moving expense reimbursement exclusion under 132(g)(2), except in the case of a member of the Armed Forces of the United States on active duty who moves pursuant to a military order and incident to a permanent change of station.

Tip Income: The Bill creates a new section 224 that allows a deduction for qualified tip income through 2028. The amount is determined from the qualified tips that an individual receives during a taxable year and is included on Form W-2s, 1099-K, or 1099-NECs, or reported by the taxpayer on Form 4317 (or successor). Qualified tips include any cash tip received by an individual in an occupation that traditionally and customarily receives tips on or before Dec. 31, 2024. The provision sunsets on Dec. 31, 2028. The list of such occupations is to be published by the IRS. There are restrictions on highly compensated employees ($160,000 for 2025), and the IRS may set other requirements. No deduction is allowed unless the taxpayer includes their SSN and their spouse’s SSN (if married filing jointly). For individuals who do not itemize deductions, the tip deduction is allowed in addition to the standard deduction.

Note: The Senate recently unanimously passed the “No Tax on Tips Act” on May 20. This legislation allows a deduction for cash tips up to $25,000 for workers making up to $160,000 a year. Social Security and Medicare taxes are still due on the tips. The “No Tax on Tips Act” will be considered by the House and could pass as a stand-alone measure.

New Deduction for Seniors: A new $4,000 temporary bonus deduction is added under section 63(f) for all individuals who have attained age 65 (and for each spouse meeting the applicable criteria in the case of a joint return). The Bill allows a deduction for taxable years beginning after Dec. 31, 2024, and before Jan. 1, 2029. This additional amount is $4,000 per individual and phases out for taxpayers with income over a threshold amount of $150,000 for taxpayers filing jointly and $75,000 for all other taxpayers. The senior bonus deduction amount is reduced by 4% of modified AGI in excess of the applicable threshold amount. The deduction for the senior bonus amount is allowed for both taxpayers claiming the standard deduction and those who itemize deductions. The amount is not indexed for inflation. Under the proposal, the SSN of the taxpayer and spouse (if married filing jointly) must appear on the return. The SSN for each individual must be issued before the due date of the return.

Overtime Pay: For taxable years 2025 through 2028, the Bill provides a deduction for overtime pay equal to the qualified overtime compensation an individual receives during the taxable year. Qualified overtime compensation is overtime compensation paid to an individual required under section 7 of the Fair Labor Standards Act (FLSA) in excess of the regular rate at which such individual is employed. Amounts excluded from the overtime deduction include qualified tips and any amount received by a highly compensated individual ($160,000 threshold). Individuals who do not itemize deductions may add the deduction to their standard deduction amount. The IRS is provided authority to issue guidance concerning the implementation of these new provisions.

Interest on Domestic Auto Purchases: For taxable years 2025 through 2028, a deduction is allowed for qualified passenger vehicle loan interest. Individuals are allowed an above-the-line deduction for interest on loans used to purchase American-made cars. The deduction is capped at $10,000, with income phase-outs starting at $100,000 (single) and $200,000 (married filing jointly).

Colleges and Universities: The TCJA required certain colleges and universities with at least 500 students paying tuition and endowments exceeding $500,000 per student to pay an excise tax of 1.4% of their net investment income for the year. This is a flat rate for these institutions. In determining the per student amount, assets which are used directly for educational purposes are excluded.

The Bill replaces this flat excise tax with a tiered system that ranges from 1.4% to 21%. The rate depends on the ratio of institution assets to students.

• Student-Endowment Ratio of up to $500,000 – no excise tax applies
• Student-Endowment Ratio of $500,001 to $750,000 – 1.4%
• Student-Endowment Ratio of $750,001 to $1,250,000 – 7%
• Student-Endowment Ratio of $1,250,001 to $2,000,000 – 14%
• Student-Endowment Ratio of over $2,000,000 – 21%

In determining the Student-Endowment Ratio, the Bill excludes from the denominator students who are not (a) U.S. citizens or nationals; (b) lawful permanent residents; and (c) individuals present in the U.S. for other than a temporary purpose with the intention to become a U.S. resident.

To ensure compliance, these institutions will be subject to increased reporting requirements.

Clean Energy: The Bill terminates several credits, including the clean vehicle credits for new and previously-owned motor vehicles, the qualified commercial clean vehicles credit, 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 Bill accelerates the expiration dates of these credits to Dec. 31, 2025 or 2026, depending upon the specific credit and certain other factors.

Provisions Affecting Trusts, Estates and Gifts

Tax Rates: The income tax rates and brackets for estates and trusts enacted in the TCJA are made permanent with modifications for inflation. To the extent possible, taxpayers may wish to revisit their estate and trust planning for this change, along with the increased exemption.

Exemption: The unified estate and gift tax exemption is made permanent to an inflation-indexed $15 million per individual for taxable years beginning after Dec. 31, 2025. The generation-skipping transfer tax exemption is also permanently increased to an inflation-indexed $15 million. The $15 million exemption amount is indexed for inflation with a base year of 2025. Accordingly, the exemption amount is $15 million for decedents dying and gifts made in calendar year 2026 and increases with inflation thereafter. Taxpayers may want to revisit their estate and gift planning in light of these changes.

Provisions Affecting Businesses with International Operations

In international taxation, the Bill reduces to 49.2% of the currently applicable 50% deduction for GILTI, which was scheduled to decline to 37.5%, effective for taxable years beginning after Dec. 31, 2025. As a result, the effective tax rate on GILTI is slightly increased to 10.668% (before foreign tax credits) for taxable years beginning after Dec. 31, 2025. Similarly, for domestic corporations, the Bill reduces to 36.5% of the currently applicable 37.5% deduction for FDII, which was scheduled to decline to 21.875% after 2025. Therefore, the effective tax rate on FDII is slightly increased to 13.335%.

The Bill slightly increases to 10.1% of the current applicable 10% BEAT tax rate, which was scheduled to increase to 12.5% for taxable years after Dec. 31, 2025. In addition, under another business-friendly provision, the Bill repeals the scheduled modification that would have required applicable corporate taxpayers to reduce their regular tax liability by all tax credits for purposes of calculating the BEAT tax. Accordingly, as under the current law, research and development credits and 80% of certain other credits will not reduce a taxpayer’s regular tax liability, thus limiting potential BEAT liability. These changes to the BEAT provisions apply to taxable years beginning after Dec. 31, 2025.

Provisions that did not make it into the Bill

There are a number of provisions that were not included in the Bill. Those provisions include lower corporate tax rates (including the 15% rate for domestic manufacturers, increased tax rates for high-income individuals making over $2.5 million annually, the taxation of carried interest, and a corporate SALT cap. Also, the new provision relating to the $4,000 senior bonus replaced the proposal to eliminate tax on Social Security benefits.

Conclusion

Again, the process is fluid, and we anticipate additional proposals and changes to be forthcoming. We will keep you informed of any significant changes as they occur.