Tax Reform 2025: Tax Bill Clears House And Moves to Senate

In a landmark legislative effort and by a razor-thin vote, the House of Representatives passed H.R. 1, the One Big Beautiful Bill Act (the “Act”) on May 22, 2025. The Act delivers on several promises that President Trump made during his presidential campaign, including exempting taxes on tips and overtime pay, permitting the deduction of interest on certain auto loans and increasing the standard deduction for seniors. This sweeping tax and spending bill allocates significant dollars to administration priorities such as defense and immigration enforcement. It also extends (or makes permanent) certain key provisions of the 2017 Tax Cuts and Jobs Act (the “TCJA”) that were set to expire at the end of 2025, while rolling back several of the clean energy tax incentives enacted in the 2022 Inflation Reduction Act. Current corporate tax and capital gains rates are unchanged and, despite strong indications to the contrary, the existing tax treatment of carried interest is also not affected.

The Congressional Budget Office and Joint Committee on Taxation have estimated that tax changes proposed by the Act, including extending provisions of the TCJA, would potentially increase the federal deficit by approximately US$3.8 trillion through 2034. The Act, which exceeds 1,000 pages, is now with the Senate for consideration. While House leaders have urged the Senate to change as little as possible in the sweeping piece of legislation, several senators have said they won’t rubber-stamp the House version. It therefore remains to be seen which proposals from the Act will ultimately be enacted as law.

Key Tax Proposals for Businesses

• Extension of Bonus Depreciation

The TCJA permitted accelerated depreciation of certain “qualified property” placed in service before January 1, 2024. The bonus depreciation percentage phases down by 20% per year in years 2023 through 2026 (2024 through 2027 for long production period property and specified aircraft), and is not available for property placed in service after 2026 (after 2027 for long production period property and specified aircraft). The Act eliminates this phase-out and restores bonus depreciation by permitting taxpayers to immediately deduct 100% of the cost of qualified property placed in service on or after January 20, 2025, and before January 1, 2030 (January 1, 2031 for long production period property).

• Relaxing Limitations on Business Interest Expense Deductions

The TCJA generally limited deductions of business interest expense to 30% of a taxpayer’s “adjusted taxable income” (“ATI”). Since January 1, 2022, a taxpayer is required to calculate its ATI based on an EBIT-like computation, where earnings are reduced by depreciation and amortization deductions. The Act increases this limit for taxable years beginning after December 31, 2024, and before January 1, 2030, by permitting a taxpayer to calculate ATI without regard to depreciation and amortization deductions.

• Elimination of Reduced Deductions for GILTI Inclusions

Under the TCJA, for taxable years prior to January 1, 2026, a U.S. corporation is allowed a 50% deduction on the global intangible low-taxed income (“GILTI”) amount to be included in income, bringing the effective rate for GILTI to 10.5%. For taxable years starting January 1, 2026, the deduction was scheduled to reduce to 37.5%, increasing the effective GILTI tax rate to 13.125%. The Act locks the deduction for GILTI at 49.2% for taxable years starting January 1, 2026, marginally driving up the current effective rate for GILTI to 10.668%.

• Elimination of Reduced Deductions for FDII Inclusions

Under the TCJA, for taxable years prior to January 1, 2026, a U.S. corporation is allowed a 37.5% deduction on the foreign-derived intangible income (“FDII”) amount to be included in income, bringing the effective rate for FDII to 13.125%. For taxable years starting January 1, 2026, the deduction was scheduled to reduce to 21.875%, increasing the effective FDII tax rate to 16.406%. The Act locks the deduction for FDII at 36.5% for taxable years starting January 1, 2026, marginally driving up the current effective rate for FDII to 13.335%.

• Locking in the BEAT Rate

Under the TCJA, the base erosion and anti-abuse tax (“BEAT”) rate is currently 10% and is expected to increase to 12.5% after December 31, 2025. The Act would permanently lock the rate at 10.1%. However, such rate is increased to 12.5% for certain domestic corporations that are subject to the Super BEAT (see discussion below).

• Suspension of Amortization for Domestic Research and Experimental Expenses

The TCJA ended the ability of taxpayers to currently deduct domestic research and experimental (“R&E”) expenditures and instead required taxpayers to amortize such expenses over a five- or fifteen-year period, depending on the nature of the expenditure. With respect to certain domestic R&E expenditures incurred in taxable years beginning after December 31, 2024, and before January 1, 2030, the Act returns the treatment of such expenditures to that of before the TCJA. The Act allows taxpayers to elect to (i) immediately expense such costs, or (ii) capitalize and amortize such expenditures ratably over a period selected by the taxpayer (but no less than 60 months) beginning with the taxable year in which such expenses were paid or incurred. Foreign R&E expenditures would continue to be required to be amortized over a fifteen-year period.

• Enforcement against Unfair Foreign Taxes

The Act introduces a new provision (Section 899) to the Code, which would impose increases in U.S. tax rates (generally by 5% for each year of the “unfair foreign tax” up to a maximum of 20% above the maximum statutory rate) for certain income earned by, and withholding (including FDAP and FIRPTA) and excise taxes applicable to, residents of “discriminatory foreign countries” that are deemed to have imposed “unfair foreign taxes” on U.S. persons. Governments of such “discriminatory foreign countries” would also be denied benefits under Section 892 (which generally exempts eligible government entities from U.S. withholding taxes on certain types of investment income). The term “unfair foreign tax” includes an undertaxed profits rule (such as that imposed by the OECD’s Pillar 2), digital services tax, diverted profits tax and, to the extent provided by the Secretary, an “extraterritorial” or “discriminatory” tax, or any other tax enacted with a purpose indicating that it will be economically borne disproportionately by U.S. persons. The Secretary would have discretion and authority to issue regulations and guidance on the application of these rules. Although the Act does not explicitly address the exemption for portfolio interest, the House Budget Committee report on the Act has a footnote that states that proposed Section 899 is intended to apply to both reduced and zero tax rates applicable under a tax treaty, but is not intended to apply to income that is explicitly excluded from the application of withholding tax, such as portfolio interest.

• Super BEAT under Proposed Section 899

Section 899 would also subject non-publicly held U.S. subsidiaries that are majority-owned or controlled (directly or indirectly) by foreign parents that are residents of discriminatory foreign countries to a modified (and more punitive) BEAT regime (the “Super BEAT”). The Super BEAT would presume such U.S. corporate subsidiaries to be subject to the BEAT regime (without regard to the US$500 million current average annual gross receipt test and the 3% base erosion percentage test) and would impose an increased BEAT rate of 12.5%. The Super BEAT additionally turns off certain provisions available within the ordinary BEAT regime that would lessen its impact, such as credit offsets to BEAT liability, reductions of base erosion payments for amounts on which U.S. tax is imposed or withheld, reductions of base erosion payments for amounts that qualify under the services cost method and for payments made at cost. Furthermore, the Act provides that if any amount (other than the purchase price of depreciable or amortizable property or inventory) would have been a base erosion payment but for the fact that the taxpayer capitalizes the amount, then such amount is treated as if it is deducted rather than capitalized (for purposes of determining base erosion payments and base erosion tax benefits).

• Flooring Corporate Charitable Contribution Deductions

Under current law, deductions for charitable contributions by corporate taxpayers are subject to a 10% ceiling. The Act introduces a 1% floor as an additional condition for the deductibility of such contributions, and subjects any disallowed deductions to carryforward rules.

• Deduction for Excessive Employee Compensation

The Act adds an aggregation rule to the limitation under Section 162(m) of the Code for executive compensation such that for taxable years beginning after 2025, in the case of a publicly held corporation that is a member of a controlled group, all members of the controlled group would be considered for purposes of the deduction disallowance under Section 162(m).

Key Tax Proposals for Partnerships / Pass-Through Entities

• Amendments to Rules governing Disguised Sale Transactions between a Partner and a Partnership

The law currently provides that “under regulations prescribed by the Secretary,” certain transactions between a partner and a partnership will be treated as transactions occurring between the partnership and a person that is not a partner. Current Treasury regulations treat certain related (or deemed related) contributions and distributions of property as taxable “disguised sales” of property. However, no current regulations address similar disguised sales of partnership interests. The Act revises the provision such that it is expressly effective “except as provided” by the Secretary. While the range of partnership transactions intended to be covered by this change is not immediately clear, the proposal could potentially be intended to address, among other things, disguised sales of partnership interests on which the Treasury has unsuccessfully sought to promulgate regulations in the past.

• Elimination of PTET Deductions for SALT

The TCJA severely limited an individual’s ability to deduct state and local taxes (“SALT”). In response, several states enacted pass-through entity tax (“PTET”) legislation as “workarounds” by shifting an individual’s state income tax liability to a passthrough entity that the individual owns. Under IRS guidance, such PTET taxes are not subject to the SALT cap. The Act eliminates the ability of individual partners or S corporation shareholders to utilize state law workarounds to the SALT cap for any partnership or S corporation engaged in a “specified service trade or business.” A specified service trade or business is generally a trade or business whose principal asset is the reputation or skill of one or more employees or owners, such as medicine, finance, investment management, athletics, law or accounting. The Act requires PTET paid by such partnerships to be separately stated (i.e., reported to the partners separately from the partnership’s bottom-line income and loss) and provides that such taxes may not be deducted at the partnership level. In addition, the Act seems to eliminate the ability for partners in such businesses to deduct state and local taxes historically imposed directly on partnerships, such as sales taxes or the New York City unincorporated business tax.

• Removing the Sunset on Qualified Business Income Deduction under Section 199A

The TCJA established a temporary 20% deduction for qualified business income (the “Section 199A Deduction”) for noncorporate taxpayers through the end of 2025. The Act increases this deduction to 23% and makes it permanent.

• Expanding the Section 199A Deduction to BDC Dividends

Dividends from real estate investment trusts (“REITs”) have generally been eligible for the benefit of Section 199A Deductions. The Act expands Section 199A to apply to the portion of dividends representing net interest income paid by a “business development company” taxable as a regulated investment company.

• Restricting Deductibility of Excess Business Losses

The TCJA restricted the ability of noncorporate taxpayers to deduct “excess business losses” (generally, losses attributable to the trade or business of a taxpayer that exceed certain income thresholds). The Act makes such restrictions permanent and allows disallowed excess business losses to be carried forward to subsequent taxable years.

Key Tax Proposals for Individuals

• Locking in Marginal Tax Rates

The Act locks in the reduced marginal U.S. federal income tax rates introduced by the TCJA, making the maximum rate of 37% for individuals permanent.

• Permanently Expanding Estate and Gift Tax Exemption Amounts

The increased estate and lifetime gift tax exemption of US$10 million expires after December 31, 2025, after which the exemption amount would revert to the pre-TCJA limit of US$5 million. The Act permanently increases the basic exclusion amount to US$15 million per individual.

• Increase in SALT Deduction Cap

The TCJA imposed a US$10,000 cap on itemized deductions of individual taxpayers for SALT (US$5,000 for married taxpayers filing separately), which cap is scheduled to expire for taxable years beginning after December 31, 2025. The Act increases the SALT cap to US$40,400 (US$20,200 for married taxpayers filing separately), and makes it permanent, but phases it down to US$10,000 (US$5,000 for married taxpayers filing separately) for taxpayers with adjusted gross income in excess of US$505,000 (US$252,500 for married taxpayers filing separately).

• Narrowing Itemized Deductions

The TCJA suspended the Pease limitation from 2018 through 2025, which limitation-capped or phased out some itemized deductions for individual taxpayers exceeding certain income thresholds. The Act permanently eliminates the Pease limitation and replaces it with a provision that marginally reduces the value of itemized deductions for individual taxpayers in the highest marginal income tax bracket (37%).

• Permanently Repealing Miscellaneous Itemized Deductions and Personal Exemption

The Act permanently eliminates the ability to claim miscellaneous itemized deductions (which was suspended under the TCJA) as well as the personal exemption.

Key Tax Proposals for Tax-Exempt Entities

• Increasing Excise Tax on Investment Income of Certain Private Colleges and Universities

Under current law, certain private educational institutions are subject to a flat 1.4% tax on their net investment income for the taxable year. The Act creates a tiered-tax system instead based on the institution’s student-adjusted endowment. The tax rate ranges from 1.4% in the case of an institution with a student adjusted endowment in excess of US$500,000 but less than US$750,000, to 21% for institutions with student-adjusted endowments of US$2 million or greater.

• Increasing Excise Tax on Investment Income of Private Foundations

Under current law, private foundations exempt from tax under Section 501(a) of the Code are subject to a flat 1.39% excise tax on their net investment income for the taxable year. The Act creates a tiered-tax system for levying excise tax on private foundations based on the size of the foundation (more specifically, the value of the foundation’s assets). The tax rate ranges from 1.39% in the case of private foundations with assets worth less than US$50 million, to 10% for foundations with assets of US$5 billion or more.

Other Miscellaneous Tax Proposals

• Greater Scrutiny of COVID-related Employee Retention Tax Credits

To clamp down on promoters who misled those who have no chance of meeting the requirements for Employee Retention Tax Credits (“ERTC”) while charging excessive fees, the Act increases the penalty for aiding and abetting the understatement of a tax liability by an ERTC promoter. The penalty is the greater of US$200,000 (US$10,000 in the case of a natural person) or 75% of the gross income derived by such promoter with respect to the aid and assistance of such understatement. The Act also imposes additional penalties on an ERTC promoter that fails to comply with due diligence requirements with respect to a taxpayer’s eligibility for (or the amount of) the ERTC.

• Expanding the Qualified Opportunity Zone Program

The TCJA introduced the Qualified Opportunity Zone (“QOZ”) program to encourage new investments in economically distressed communities, which investments under certain conditions could be eligible for preferential tax treatment such as temporary (and in some cases, permanent) deferral of capital gains taxes and qualified Section 1231 gains through December 31, 2026. The Act allows for the designation of additional QOZs (although narrowing the eligibility requirements for designating a community as a “low-income community”) and generally extends the investment period in the QOZ program through December 31, 2033, while modifying the investment incentives that would be available pursuant to such program.

• Retiring Clean Energy Tax Credits

The Act accelerates the expiration of certain clean energy tax credits enacted by the 2022 Inflation Reduction Act such as credits in respect of certain previously owned clean vehicles, new vehicles, commercial clean vehicles, household energy efficient improvements, etc. The Act also phases out the availability of certain other credits, such as the clean electricity production credit, the clean electricity investment credit and the zero-emission nuclear power production credit. In addition to the repeals and accelerated phaseout schedules for existing energy credit provisions, the Act introduces complex restrictions relating to certain relationships with “prohibited foreign entities.” These restrictions are not merely limited to ownership or control by prohibited foreign entities but would also deny the availability of certain tax credits to projects that rely on “material assistance” from a prohibited foreign entity.

• Modifying the Taxable REIT Subsidiary Test

Under current law, no more than 20% of the value of the assets of a REIT may consist of securities of one or more taxable REIT subsidiaries. The Act increases this limit to 25%.

• Limiting Amortization of Certain Sports Franchises

The Act limits the fifteen-year amortization of a professional sports franchise and related intangible assets (the “Sports Section 197 Intangibles”) that are acquired in an acquisition of an interest in (or assets of) of a team to 50% of the adjusted tax basis of those assets. This change is effective for Sports Section 197 Intangibles acquired after the date of the enactment of the Act.