Newly Enacted Legislation Makes Significant Tax Changes

On July 4, 2025, President Trump signed ”An Act to provide for reconciliation pursuant to title II of H. Con. Res. 14” (formerly known as the “One Big Beautiful Bill Act”) (the Act), comprehensive tax reform legislation that extends and modifies provisions of the Tax Cuts and Jobs Act of 2017 (the TCJA), modifies provisions implemented by the Inflation Reduction Act of 2022 (IRA), and introduces new tax provisions.  Highlights of some of the significant provisions in the Act include:

Business:

Energy Credits

• Energy Credits: The Act made significant changes to the energy tax credits, as modified by the IRA.  For more information on these changes, please see our separate client alert here.

General Business Provisions

• Section 461(l) Limitation on Excess Business Losses: Section 461(l) was added by the TCJA and imposes a limit on the “excess business losses” for non‑corporate taxpayers.  The amount disallowed is carried forward as a net operating loss.  The Act makes the limitation permanent.
• Section 163(j) Interest Deduction Limit: Section 163(j), as amended by the TCJA and further amended by the IRA, significantly changed the limitation on the business interest deduction.  The Section 163(j) interest deduction limit, as amended, effectively provides for full deductibility of floor plan financing interest and limits the deduction for other net interest expenses to 30% of adjusted taxable income.  The Act permanently reinstates EBITDA (rather than EBIT) as the method for calculating the 30% cap and excludes subpart F and Global Intangible Low‑Taxed Income (GILTI) from taxable income for purposes of Section 163(j).
• Deduction for Executive Compensation: Section 162 provides that a publicly held corporation may not deduct compensation paid to any covered employee that exceeds $1 million.  The Act adds an aggregation rule that modifies this limit to take into account income received by a covered employee from other members of the employer’s controlled group.

• Corporate Charitable Deduction: Corporations may deduct charitable contributions up to 10% of taxable income.  The Act modifies this rule to allow a deduction for corporate charitable contributions only to the extent a corporation’s charitable contributions exceed 1% of the corporation’s aggregate charitable contributions. 
• Section 199A Pass‑Through Business Income Deduction: The Section 199A deduction generally allows individuals with pass‑through income from a business to deduct up to 20% of qualified business income.  The Section 199A deduction was enacted as part of the TCJA and was intended to provide tax relief to taxpayers with pass‑through business income in light of the lower corporate income tax rate adopted in the TCJA.  The Act permanently extends the 20% deduction and increases the taxable income phase‑in limit on the deduction from $50,000 to $75,000 (from $100,000 to $150,000 for married filing jointly).
• Section 1202 Qualified Small Business Stock (QSBS): The Act increases the amount of gain that may be excluded in the disposition of QSBS acquired after July 4, 2025, from $10 million to $15 million (as adjusted for inflation beginning after 2026), reduced by the amount of eligible gain taken into account by the taxpayer in prior years. Shareholders may now exclude 50% of the gain on the sale of QSBS held for 3 years, 75% of the gain on the sale of QSBS held for 4 years, and 100% of the gain on the sale of QSBS held for 5 years or more.  The Act also increases the limit on the gross assets allowed to be held by the qualified small business corporation from $50 million to $75 million.
• Employer‑Provided Meal Deduction: The deduction created under the TCJA for 50% of an employer’s expenses for food and beverages provided to an employee is eliminated.  Some exceptions remain, however, for meals provided on a commercial vessel, a fishing vessel, or an oil or gas platform or drilling rig.
• Energy Efficient Commercial Buildings Deduction: Under the Act the deduction under Section 179D for the cost of energy efficient commercial building property will not apply to property the construction of which begins after June 30, 2026.
• Qualified Opportunity Zones: The TCJA created Opportunity Zones that allow taxpayers to defer and reduce taxable gains reinvested in certain economically distressed areas in the United States.  This deferral was scheduled to end on December 31, 2026.  The Act modifies benefits related to investment in Opportunity Zones and modifies the eligibility requirements for an area to qualify as an Opportunity Zone.

Depreciation and Amortization Provisions

• Section 168(k) Bonus Depreciation: The TCJA allowed 100% bonus depreciation for certain property placed in service before January 1, 2023, with the amount decreasing by 20% each year through 2027.  The Act reinstates and makes permanent 100% bonus depreciation for certain property placed in service after January 19, 2025.
• Section 168(n) Bonus Depreciation: The Act creates a new, permanent provision allowing for 100% bonus depreciation for “qualified production property,” which includes nonresidential structures used as an integral part of certain manufacturing, agricultural, chemical production, or refining processes.
• Section 179 Expense Deduction: Section 179 allows for an immediate expense deduction upon purchase of depreciable business equipment.  Previously, the Section 179 deduction was limited to $1 million per year, as adjusted for inflation, and is subject to phaseout if qualifying purchases during the tax year exceed $2.5 million, as adjusted for inflation.  The Act increases these limits for tax years beginning after 2024 to $2.5 million and $4 million, respectively, as adjusted for inflation.
• Section 174 and 174A Research and Development Expensing: Prior to the TCJA, certain research and development (R&D) expenditures could be deducted in the year incurred.  The TCJA changed this treatment to require capitalization and amortization of R&D expenditures over 5 years (domestic R&D expenditures) or 15 years (foreign R&D expenditures) starting in years beginning after 2021.  The Act permanently reinstates the deduction for domestic R&D expenditures in the year incurred for years beginning after 2024.  Taxpayers with annual gross revenue of $31 million or less may apply this change to tax years beginning in 2022.  The 15-year capitalization and amortization rule for foreign R&D expenditures remains in place.

Taxation of Foreign Income

• Global Intangible Low‑Taxed Income (GILTI) & Foreign‑Derived Intangible Income (FDII): The TCJA added the GILTI and FDII provisions to help shift taxable income back to the United States from lower‑tax foreign jurisdictions.  The GILTI provisions impose a tax on income derived from controlled foreign corporations. FDII is income related to the use of intellectual property when creating in the United States products for export.  Section 250(a) was enacted as part of the TCJA and provides a deduction of a certain percentage of a taxpayer’s GILTI and FDII.  This produces an effective tax rate of 13.125% for GILTI and FDII through the end of 2025.  The Act includes several changes to the GILTI and FDII regimes. First, the Act changes the names of the GILTI and FDII regimes to “net CFC tested income” (NCTI) and “foreign-derived deduction eligible income” (FDDEI), respectively. Second, the Section 250(a) deduction percentages for years after 2025 are slightly decreased, such that the effective tax rate for NCTI (formerly GILTI) and FDDEI (formerly FDII) is 14%. Lastly, the Act changes the computation of NCTI and FDDEI so that (i) income from the export of intangible assets outside the United States will no longer be eligible for the Section 250(a) deduction, and (ii) NCTI and the deduction for FDDEI will no longer be calculated by reference to the tangible asset base of the taxpayer.
• Section 59A Base Erosion and Anti‑Abuse Tax (BEAT): The BEAT was enacted by the TCJA and is meant to discourage corporations operating in the United States from shifting profits out of the United States.  The BEAT is a 10% tax on “modified taxable income,” calculated by adding back to corporate taxable income certain “base erosion” payments made to foreign corporations.  The Act increases the BEAT tax rate to 10.5% and treats certain capitalized interest expenses as a base erosion payment for taxable years beginning after 2025.
• Controlled Foreign Corporations (CFCs): Section 954(c) contains a look‑through rule that excludes from foreign personal holding company income dividends, interest, rents, and royalties earned by a CFC from a related CFC.  This provision was set to expire on December 31, 2025, but the Act permanently extends the look‑through rule.  The Act also reinstitutes restrictions on downward attribution of stock ownership pursuant to Section 958(b), except in limited circumstances described in new Section 951B.  The Act also amends Section 951 to require a U.S. shareholder of a CFC to include in gross income a pro rata share of the CFC’s subpart F income if the shareholder owns stock in a CFC at any point during the year.
• Foreign Tax Credit: The Act modifies the calculation of the foreign tax credit in two ways.  First, the foreign tax credit limitation under Section 904 is modified by (i) limiting the amount of foreign-sourced income attributed to a U.S. shareholder as NCTI to the amount of such income after applying applicable Section 250(a) deductions and excluding any deductions for foreign expenditures for research and development, and (ii) allowing up to 50% of income from the sale or exchange of inventory manufactured within the United States but sold outside the United States to be treated as foreign‑sourced income.  Second, the amount of foreign tax deemed paid by a U.S. shareholder with respect to NCTI is increased from 80% to 90%.

Tax-Exempt Organizations

• Excess Compensation paid by Tax‑Exempt Organizations: Section 4960 imposes an excise tax on each of the five highest compensated employees of a nonprofit to the extent compensation paid to the employee exceeds $1 million.  The Act expands this tax to include all employees of an organization receiving over $1 million, including former employees who were employed at any time beginning after 2016.
• Private Colleges and Universities: The Act changes the endowment excise tax rate for certain educational institutions for tax years starting after 2025 from the previous flat rate of 1.4% to a new graduated scale from 1.4% to a top rate of 8%. 

Individuals:

• State and Local Tax Deduction: The TCJA imposed a $10,000 limit on the amount individuals can deduct for state and local income and property taxes (SALT).  The Act increases the SALT deduction limit to $40,000 for years 2025 through 2029, with the limit reverting back to $10,000 in 2030.  The Act also phases out the deduction (but not below $10,000) for individuals with modified adjusted gross incomes over $500,000 per year ($250,000 for married filing separately).  The $40,000 deduction limit and the phaseout threshold amount increase by 1% each year.  
• Individual Income Tax Rates: The TCJA lowered the tax rates and thresholds for individuals, estates, and trusts, resulting in the highest marginal ordinary income tax rate of 37%.  The Act makes these lower tax rates and thresholds permanent.
• Child Tax Credit: The Act extends the child tax credit and increases the amount of the credit to $2,200 per child.
• Standard Deduction: The Act makes permanent the increased standard deduction amounts introduced by the TCJA.
• Senior Deduction: The Act creates an additional $6,000 deduction for seniors (ages 65 or older) from 2025 to 2028 that phases out at income levels greater than $75,000 ($150,000 for married filing jointly).
• Alternative Minimum Tax: The alternative minimum tax (AMT) applies to high‑income taxpayers to help ensure that a minimum amount of tax is paid regardless of applicable exclusions, deductions, and credits.  Beginning in 2026, the Act extends the AMT limitations permanently, reverts the exemption phaseout threshold to $500,000 ($1 million for married filing jointly), and accelerates the phaseout by increasing the scale from 25% to 50% of alternative minimum tax income above the threshold.
• Mortgage Interest Deduction: The TCJA imposed a limit on the mortgage interest deduction to the first $750,000 for new mortgages and suspended the deduction for home equity interest. The Act permanently extends this provision and allows certain mortgage insurance premiums on new mortgages to qualify for the mortgage interest deduction.
• Limit on Itemized Deductions: The Act reinstates and modifies the limit on overall itemized deductions that was suspended under the TCJA.  Beginning after 2025, itemized deductions (other than Section 199A qualified business income) for individuals in the 37% tax bracket are effectively limited to 35%.
• Non‑Itemized Charitable Deduction: The Act permanently expands and reinstates beginning in 2026 a deduction previously available in 2021 for charitable contributions made by individuals who elect not to itemize.   This deduction applies only to cash charitable contributions and is capped at $1,000 ($2,000 for married filing jointly).
• Estate and Gift Tax Exclusion: The Act permanently extends the TCJA’s $10 million (indexed for inflation) exclusion from estate and gift tax and sets the exclusion amount at $15 million beginning in 2026 (indexed for inflation).
• Individual Energy Credits: The tax credits available for individuals for energy‑efficient  home improvements installed during the year under Section 25C and qualified energy property expenditures under Section 25D are repealed by the Act beginning in 2026.  The credit under Section 30C for qualified alternative fuel vehicle refueling property is also repealed by the Act for property placed in service after June 30, 2026.
• Trump Accounts: The Act provides for the creation of “Trump accounts” for the benefit of individuals under age 18.  The accounts are subject to rules somewhat similar to individual retirement accounts.  Contributions are limited to $5,000 per year.  A one‑time $1,000 payment to the account from the Treasury is available for accounts established for children born after 2024 and before 2029. 
• New Personal Deductions: The Act creates new deductions for:
• Tips: “Qualified tips” of up to $25,000 per year beginning in 2025.  The deduction applies only for voluntary tips received in occupations in which tips are customary and regularly received.  The deduction is available to non-itemizers, but the amount phases out for taxpayers with modified adjusted gross income over $150,000 ($300,000 for married filing jointly). 
• Overtime: “Qualified overtime earnings” of up to $12,500 per year ($25,000 for married filing jointly) beginning in 2025. The deduction is available to non-itemizers, but the amount phases out for taxpayers with modified adjusted gross income over $150,000 ($300,000 for married filing jointly). 
• Car Loan Interest: The Act creates a deduction for up to $10,000 per year of for “qualified passenger vehicle loan interest” incurred in connection with vehicle purchases after 2024 and paid or accrued in 2025 to 2028.  The deduction applies only to vehicles with final assembly in the United States.  The deduction is available to non-itemizers, but the amount phases out for taxpayers with modified adjusted gross income over $100,000 ($200,000 for married filing jointly).