“One Big Beautiful Bill Act”

On July 4, 2025, President Trump signed into law H.R. 1, "One Big Beautiful Bill Act" (the “Act” or “OBBBA”) a comprehensive bill that combines many of the President’s major policy initiatives he had promised during his election campaign and represents the core of his second-term domestic agenda.

The bill began its legislative journey upon the passage of a concurrent budget resolution on February 20 that provided reconciliation instructions that allowed the House and Senate to extend the expiring 2017 tax cuts that were passed in the President’s first term. The House passed its reconciliation bill on May 22 with the Senate passing a slightly different version on July 1. The bill was sent back to the House which passed the Senate version on July 3 sending the bill to the President for enactment.

This client alert will examine the Act’s implications on the following policy areas:

• Artificial Intelligence
• Energy
• Health Care
• Tax

Tom Spulak, Partner, Washington, D.C., tspulak@kslaw.com

Artificial Intelligence

Notably, two significant provisions from earlier versions of the bill were not included in the final Act: a proposed tax on litigation funding and a 10-year federal moratorium on state and local AI regulations. The exclusion of the litigation funding tax provision, while not targeted specifically at intellectual property (IP) litigation, avoided potentially sweeping changes to the economics of litigation, including many patent enforcement actions brought by non-practicing entities such as individual inventors and universities. These types of cases often rely on third-party funding to offset the substantial upfront and ongoing costs associated with IP litigation, which can be prohibitive for smaller entities.

Conversely, the removal of the proposed federal moratorium on state and local AI regulation introduces significant uncertainty for the development and deployment of AI technologies. Without federal preemption, states and local governments retain broad authority to regulate AI, potentially resulting in a fragmented and inconsistent regulatory landscape at a critical juncture for the industry.

Although the Act as enacted does not directly regulate intellectual property law or the development of AI, several provisions may nonetheless have important implications for both fields. This alert summarizes those provisions and their potential impact, particularly for developers, litigants, and rights holders in the intellectual property and technology sectors.

What Was Removed—and Why It Still Matters

1. Rejection of the Federal Moratorium on State AI Regulation

Earlier drafts of the Act included a provision that would have imposed a 10-year federal moratorium on state and local regulation of artificial intelligence. Specifically, the House-passed version would have preempted states and localities from enacting or enforcing any law or regulation "limiting, restricting, or otherwise regulating artificial intelligence models, artificial intelligence systems, or automated decision systems entered into interstate commerce."

The Senate, however, rejected this proposal, thereby preserving the authority of states to legislate in this area. As a result, AI developers and IP owners now face a growing patchwork of state-level AI laws and regulations. States such as Colorado, California, Illinois, and New York have already enacted or are considering legislation addressing various aspects of artificial intelligence, including deep-fakes, biometric privacy, and the use of copyrighted works in AI training data. For example, California is advancing an "AI Bill of Rights" (Senate Bill 420) that would regulate the development and deployment of "high-risk" automated decision systems by requiring impact assessments to evaluate their purpose, data use, potential for bias, and mitigation measures.

The absence of federal preemption in this area increases compliance complexity and legal uncertainty, particularly for companies operating across multiple states. Businesses that deploy AI tools or products nationwide must now ensure compliance with each state’s unique legislative framework, navigating a patchwork of evolving requirements. This challenge is compounded by the emergence of international regulations, such as the EU AI Act. Given the significant attention this issue has received, and the likelihood of further state-level activity, federal preemption or harmonization may be revisited in future legislative sessions.

2. Elimination of the Tax on Litigation Funding Proceeds

The House version of the Act included a proposal to impose a new tax on proceeds from third-party litigation funding arrangements (initially set at 40.8%, later revised to 31.8% of "qualified litigation proceeds"), which would have affected IP litigation among other areas. The final Act omits this provision, primarily due to a ruling by the Senate parliamentarian, rather than a lack of legislative support. In fact, there appears to be bipartisan interest in regulating or taxing litigation finance, and the proposal’s inclusion in a major legislative package signals increased scrutiny of litigation funding structures.

It is estimated that up to 30% of patent litigations are supported by some form of third-party funding. The mere appearance of this proposal in the legislative process may already be influencing the litigation funding market, potentially driving capital to other jurisdictions or investment vehicles and leading to a reduction in the number of patent cases filed in the United States. The issue remains live, and future legislative or regulatory action in this area is possible.

3. Remaining AI and IP-Related Provisions in the Enacted Act – More Investments, Less Foreign Influence

While the Act does not include certain provisions that would have directly impacted intellectual property litigation and AI regulation, it does provide for significant federal investments in AI, semiconductor manufacturing, data centers, and related fields through grants, appropriations, and enhanced tax incentives. However, eligibility for these incentives is subject to rigorous restrictions designed to prevent federal support from benefiting “prohibited foreign entities,” a term defined within the Act to include entities owned, controlled, or significantly influenced by governments such as China, Russia, Iran, or North Korea, as well as entities with substantial contractual, equity, or governance ties to such actors.

These restrictions are broad and apply to both direct and indirect relationships, including beneficial ownership, supply chain arrangements, and contractual rights that confer “effective control” or “material assistance.” Companies seeking to benefit from federal funding or tax credits must conduct thorough due diligence to identify any exposure to prohibited foreign entities, particularly in their ownership structures and supply chains. The Act imposes strict certification requirements, and noncompliance can result in loss of eligibility, recapture of credits, penalties, and enforcement actions.

Accordingly, while the Act expands funding and incentive opportunities for AI and related technologies, these benefits are available only to those companies that can demonstrate compliance with the Act’s comprehensive sourcing and foreign influence restrictions. Companies with foreign capital or complex ownership structures should carefully assess their compliance risk and implement robust due diligence and documentation practices.

Steve Baskin, Partner, Washington, D.C., sbaskin@kslaw.com; Patrick Lafferty, Counsel, Washington, D.C., plafferty@kslaw.com

Health Care —Medicaid

The Act includes significant reforms to Medicaid, Medicare, and Affordable Care Act (ACA) premium tax credits that are intended to reduce federal healthcare expenditures by more than $1 trillion over a decade. The OBBBA accomplishes this through new work requirements for Medicaid, reforms to healthcare program subsidies, and enhanced eligibility checks that are intended to result in fewer people being covered by government health programs. To offset the impact of the reduced financial healthcare expenditures, the OBBBA includes a $50 billion rural health relief fund that will be available to rural hospitals.

Reducing fraud and improving enrollment processes

1. Sec. 71101. Moratorium on implementation of rule relating to eligibility and enrollment in Medicare Savings Programs.

• Section 71101 prohibits the Secretary from implementing, administering, or enforcing certain provisions stemming from part one of a two-part final rule aimed at simplifying processes for eligible individuals to enroll and retain eligibility in the Medicare Savings Programs (“MSPs”) until October 1, 2034. See 88 Fed. Reg. 65,230 (Sep. 21, 2023) (part one of two-part final rule) (referred to as the “2023 Eligibility Final Rule”).
• The 2023 Eligibility Final Rule made several regulatory updates of which certain provisions have been halted by Section 71101 until October 1, 2034. The affected provisions include:
  • Individual enrollment: 42 C.F.R. § 406.21(c)
  • Procedures for determining eligibility for the MSP groups: 42 C.F.R. § 435.601(e)
  • Medicare Part D LIS program leads data: 42 C.F.R. §§ 435.4, 435.911(e)
  • Determining eligibility for MSPs: 42 C.F.R. § 435.952(e)

2. Sec. 71102. Moratorium on implementation of rule relating to eligibility and enrollment for Medicaid, CHIP, and the Basic Health Program.

• Section 71102 prohibits the Secretary from implementing, administering, or enforcing certain provisions stemming from part two of a two-part final rule aimed at simplifying the eligibility and enrollment processes for Medicaid, the Children’s Health Insurance Program, and the Basic Health Program until October 1, 2034. See 89 Fed. Reg. 22,780 (April 2, 2024) (part two of two-part final rule) (referred to as the “2024 Eligibility Final Rule”).
• The 2024 Eligibility Final Rule made several regulatory updates of which certain provisions have been halted by Section 71102 until October 1, 2034. The affected provisions include:
  • Determination of Eligibility: 42 C.F.R. § 435.911(c)
  • Establish maximum timeframes for redetermination of eligibility: 42 C.F.R. § 435.912
  • Aligning MAGI and Non-MAGI Renewal Requirements: 42 C.F.R. § 435.907, 435.916
  • Acting on changes in circumstances: 42 C.F.R. §§ 435.919, 457.344
  • Facilitate transitions between Medicaid and CHIP: 42 C.F.R. §§ 435.1200(b)(3)(i)-(v), 435.1200(e)(1)(ii), 435.1200(h)(1)
  • Exceptions from advance notice: 42 C.F.R. § 431.213(d)
  • Types of acceptable documentary evidence for citizenship: 42 C.F.R. § 435.407
  • Limitations on premiums and cost sharing: 42 C.F.R. §§ 447.56(a)(1)(v), 435.222
  • CHIP-specific review process 42 C.F.R. §§ 457.1140(d)(4), 457.1170, 457.1180

3. Sec. 71103. Reducing duplicate enrollment under the Medicaid and CHIP programs.

• Section 71103 requires the Secretary to establish a system for states to submit enrollees’ social security numbers on a monthly basis. The Secretary’s system must utilize the social security numbers to ensure that individuals are not enrolled in multiple States’ plans.
• Section 71103 requires states to regularly consult enrollee’s address information to confirm they are eligible for the state plan. Managed care entities with state contracts must provide states with enrollee addresses beginning January 1, 2027.

4. Sec. 71104. Ensuring deceased individuals do not remain enrolled.

• Beginning January 1, 2027, states must verify on a quarterly basis that no enrolled individuals are deceased. If an individual is determined to be deceased, they must be disenrolled and no additional payments shall be made on that enrollee’s behalf.

5. Sec. 71105. Ensuring deceased providers do not remain enrolled.

• Beginning on January 1, 2028, states must check the Death Master File at least quarterly to ensure that deceased providers do not remain enrolled in Medicaid.

6. Sec. 71106. Payment reduction related to certain erroneous excess payments under Medicaid.

• Federal law previously directed CMS to recoup federal funds for erroneous payments made for ineligible individuals and overpayments for eligible individuals if the state’s eligibility “error rate” exceeds 3 percent. CMS was permitted to waive the recoupment if the Medicaid agency had taken steps to demonstrate a “good faith” effort to get below the 3 percent allowable threshold.
• Section 71106 expands the scope of overpayments potentially subject to recoupment by CMS. This provision takes effect in FY 2030.

7. Sec. 71107. Eligibility redeterminations.

• Section 71107 requires redeterminations of eligibility to occur every six months for the ACA Medicaid expansion population. The remainder of the Medicaid population must be subject to annual redeterminations.

8. Sec. 71108. Revising home equity limit for determining eligibility for long-term care services under the Medicaid program.

• States impose home equity limits on how much equity a Medicaid applicant can have in a home without the equity counting towards the Medicaid asset limit.
• Beginning on January 1, 2028, the home equity limit is capped at $1 million regardless of inflation.

9. Sec. 71109. Alien Medicaid eligibility.

• Section 71109 shortens the list of eligible immigrant populations whose care can be covered by Medicaid.
• Prior to the enactment of the OBBBA, hospitals could receive Medicaid payments from the federal government for emergency care provided to several qualified immigrant groups, including refugees, asylees, victims of human trafficking, and those granted deferred action status, among others.
• Section 71109 prohibits Medicaid payments to States for medical assistance to individuals unless they fall into one of four categories: (i) U.S. citizens and U.S nationals; (ii) certain U.S. lawful permanent residents; (iii) Cuban and Haitian entrants; and (iv) individuals in the U.S. under a Compact of Free Association with the Marshall Islands, Micronesia, and Palau.
• The same restrictions apply to Children’s Health Insurance Program eligibility.

10. Sec. 71110. Expansion FMAP for emergency Medicaid.

• Section 71110 limits Federal Medical Assistance Percentage (FMAP) payments for emergency care furnished to immigrants who qualify for Medicaid coverage.
• Before the OBBBA, states that enrolled in Medicaid expansion under the ACA would be eligible to receive a higher percentage of Medicaid reimbursement for the costs of emergency care provided to immigrants who would qualify for Medicaid except for their immigration status.
• The OBBBA caps FMAP payments to the state’s regular FMAP percentage for emergency care provided to immigrants not eligible for Medicaid coverage.
• These modifications to FMAP payments will likely lead to lower Medicaid payments to states and could also result in lower reimbursement to providers.

Preventing wasteful spending

1. Sec. 71111. Moratorium on implementation of rule relating to staffing standards for long-term care facilities under the Medicare and Medicaid programs.

• Section 71111 imposes a moratorium through September 30, 2034, on CMS’s enforcement of its May 2024 final rule (89 Fed. Reg. 40876) establishing minimum staffing standards for long-term care facilities.

2. Sec. 71112. Reducing State Medicaid costs.

• Section 71112 reduces retroactive Medicaid and CHIP eligibility beginning January 1, 2027; limits retroactive coverage to one month prior to application for ACA expansion adults; limits coverage to two months prior for all other applicants; and applies similar limits to CHIP pregnancy-related and child health assistance.

3. Sec. 71113. Federal payments to prohibited entities.

• Section 71113 prohibits federal Medicaid funds from going to certain nonprofit providers that offer abortion services, for a one-year period following enactment.
• This prohibition applies to organizations meeting specific criteria (e.g., 501(c)(3), essential community provider, >$800K in FY2023 Medicaid reimbursements).
• Exemptions are included for cases of rape, incest, or life endangerment.

Stopping abusive financing practices

1. Sec. 71114. Sunsetting increased FMAP incentive.

• The American Rescue Plan Act of 2021 created a new incentive for non-expansion states to expand their Medicaid programs under the ACA – getting a 5% bump to their FMAPs for eight calendar quarters. Section 1114 would terminate this incentive, requiring non-expansion states to expand their Medicaid programs by January 1, 2026, in order to be eligible, making Medicaid expansion a less enticing option for states that have yet to implement it.

2. Sec. 71115. Provider taxes.

• Provider taxes are an extremely common means that states use to finance their Medicaid state share. Under Section 71115, starting in 2028, states that expanded their Medicaid programs will have a 0.5% reduction to their “hold harmless” threshold until bottoming out at 3.5% in 2032, forcing expansion states to either scale back programs or use general revenue funds or intergovernmental transfers (IGTs) to finance a greater portion of their state share.
• Additionally, both expansion and non-expansion states alike will have their hold harmless thresholds for classes of providers that are not already subject to provider taxes set to 0%, effectively barring states from implementing any new provider tax to support state Medicaid programs.

3. Sec. 71116. State directed payments.

• Using state directed payment programs, some states were able to reimburse providers for Medicaid services at upwards of 90% of the average commercial rates.
• Section 71116 significantly scales back the upper limit that Medicaid providers can receive for services, instead limiting the maximum amount for state directed payments in Medicaid expansion states to 100% of the Medicare payment rates and in non-Medicaid expansion states at 110% of the Medicare payment rates, as opposed to Average Commercial Rate.
• For programs that already exist, Section 71116 directed the Secretary to wind down the reimbursement rates by ten percentage points each year until reaching the new statutorily designated ceiling.

4. Sec. 71117. Requirements regarding waiver of uniform tax requirement for Medicaid provider tax.

• Federal law authorizes states to tax providers to finance the state share of Medicaid spending. All but one state has adopted some form of provider taxes.
• In 1991, Congress enacted restrictions that require provider taxes to be broad based and uniform. CMS can waive the broad based and uniform requirements if the tax is “generally redistributive,” i.e., it tends to draw funds from non-Medicaid sources. CMS has adopted a test for determining whether a tax is “generally redistributive.” But the agency reports that some states have found ways to circumvent the test.
• To close this perceived loophole, Section 71117 provides that a tax will not be considered “generally redistributive” if it imposes a higher tax rate on Medicaid units (e.g., bed days, discharges, costs) than non-Medicaid units. States with non-compliant taxes are required to fix them immediately, unless CMS implements a transition period (not to exceed 3 years).

5. Sec. 71118. Requiring budget neutrality for Medicaid demonstration projects under section 1115.

• Section 71118 authorizes CMS to waive compliance with the Medicaid statute to authorize funding for demonstration projects that promote the objectives of the Medicaid program. According to MedPAC, Section 1115 demonstration accounts for over 50% of Medicaid spending.
• It has been CMS’s longstanding policy that demonstrations must be budget neutral. But the Government Accountability Office has repeatedly faulted CMS for approving demonstrations that are not budget neutral.
• Section 71118 prohibits CMS from approving new or renewing existing Section 1115 demonstration projects unless the Chief Actuary for CMS certifies that the project is budget neutral.
• Section 71118 also gives CMS discretion to decide whether savings achieved by a demonstration can be applied towards calculating budget neutrality in future approval periods.

Increasing personal accountability

1. Sec. 71119. Requirement for States to establish Medicaid community engagement requirements for certain individuals.

• States must incorporate a “Community Engagement” requirement into their processes for determining eligibility for Medicaid.
• Those applying for Medicaid enrollment will need to show they have completed at least 80 hours of “Community Engagement” during the prior month.
• Those who are already enrolled in Medicaid, must, at their next regularly scheduled redetermination of eligibility, show that they have completed at least 80 hours of “Community Engagement” for one or more prior months.
• “Community Engagement” is defined as:
  • working at least 80 hours;
  • performing at least 80 hours of community services;
  • participating in a work program for at least 80 hours;
  • being enrolled in an educational program for at least half of the time;
  • some combination of the prior four activities amounting to at least 80 hours; or
  • showing a monthly income of the national minimum wage (currently $7.50/hour) multiplied by 80 hours.
• If a state is unable to verify that a person has met “Community Engagement” requirements, the state should:
  • provide that person with a notice of noncompliance;
  • provide that person 30 days from the date of receipt of the notice of noncompliance to show that they either had met the requirements or were subject to an exception;
  • if the person is unable to make such a showing, deny the person’s application for Medicaid or disenroll the person from Medicaid no later than the end of the month following the month in which the 30-day period ends.
• The Community Engagement requirement is subject to both Mandatory Exceptions (where a person will be deemed to have demonstrated that they met the “Community Engagement” requirements for the prior month) and Optional Exceptions (where a person will be deemed to have met their requirement for the prior month if they endured certain “short-term hardship events”).

2. Sec. 71120. Modifying cost sharing requirements for certain expansion individuals under the Medicaid program.

• State Medicaid plans may, effective October 1, 2028, begin imposing deductions, cost sharing, or similar charges determined appropriate by the state for certain care, items and services rendered to Medicaid beneficiaries who have a family income that exceeds the poverty line. This does not allow the imposition of premiums.
• Cost sharing cannot be applied to certain services, including but not limited to: (i) services rendered to those under 18-years old; (ii) people receiving inpatient services in a hospital, nursing facility, or intermediate care facility who are required to spend all but a minimal amount of income on medical care; (iii) emergency services; (iv) hospice services; (v) COVID-19 testing; and (vi) vaccines recommended by the CDC.
• Cost share portion must not exceed $35 for any individual item or service except for prescription drugs, which are subject to the cost share amounts permitted under Section 1916(A).
• The maximum aggregate amount of deductions, cost sharing, or similar charges imposed for all members of a family cannot exceed five percent of the family income.
• Providers are entitled to make the provision of services contingent on payment of deductions, cost-sharing, or similar charges. Providers are also permitted to reduce or waive such deductions and cost-sharing on a case-by-case basis.

Expanding access to care

1. Sec. 71121. Making certain adjustments to coverage of home or community-based services under Medicaid.

• Expands the ability of state Medicaid plans to provide home and community-based services as an alternative to institutional services for individuals who otherwise would require admission to a nursing facility of intermediate care facility.
• Establishes additional “waivers” of requirements under § 1396(a) that normally would require state Medicaid plans to ensure consistency and comparability of services statewide.
• Starting July 1, 2028, the HHS Secretary may approve waivers pursuant to which state plans can cover part or all of the cost of home or community-based services (other than room and board).
• The state’s ability to obtain such a waiver will be contingent on the state establishing needs-based criteria for determining who will be eligible for care under the state plan provided under such waiver, as well as on the state establishing that the average per capita expenditure for medical assistance provided pursuant to these waivers will not exceed the comparable amounts expended for individuals receiving institutional care.

Health Care —Medicare

Strengthening eligibility requirements

1. Sec. 71201. Limiting Medicare coverage of certain individuals.

• Section 71201 limits Medicare coverage to United States citizens and other individuals lawfully residing in the United States.
• For current Medicare enrollees, this limitation begins to apply 18 months after the date of the OBBBA’s enactment.

Improving services for seniors

1. Sec. 71202. Temporary payment increase under the Medicare physician fee schedule to account for exceptional circumstances.

• Section 71202 provides a temporary one-year increase of 2.5% to the Physician Fee Schedule (PFS) conversion factor for all services furnished between January 1, 2026, and January 1, 2027. The PFS conversion factor is one factor used to determine PFS rates and is updated annually.

2. Sec. 71203. Expanding and clarifying the exclusion for orphan drugs under the Drug Price Negotiation Program.

• Section 71203 expands the Orphan Drug Exclusion under the Inflation Reduction Act of 2022 (IRA) Medicare Drug Price Negotiation Program. Under IRA, excluded from the negotiations are so-called “orphan drugs,” drugs that are designated for only one rare disease or condition and approved for an indication (or indications) only for that disease or condition.
• The orphan drug exclusion is modified to include drugs designated for one or more rare diseases or conditions and where the only approved indication or indications are for one or more rare diseases or conditions.

Health Care —Affordable Care Act

Improving eligibility criteria

1. Sec. 71301. Permitting premium tax credit only for certain individuals.

• Section 71301 limits the availability of premium tax credits under the ACA only to certain “eligible aliens.”
• An “eligible alien” is defined as an individual who is an alien lawfully admitted for permanent residence, an alien who has been granted the status of Cuban and Haitian entrant, or an individual who lawfully resides in the United States in accordance with a Compact of Free Association.
• These changes will go into effect on January 1, 2027.

2. Sec. 71302. Disallowing premium tax credit during periods of Medicaid ineligibility due to alien status.

• Section 71302 eliminates premium tax credit eligibility under the ACA for lawfully present immigrants with income below 100% of the poverty line who are ineligible for Medicaid due to their immigration status.
• This change will become effective for taxable years beginning after December 31, 2025.

Preventing waste, fraud, and abuse

1. Sec. 71303. Requiring verification of eligibility for premium tax credit.

• Section 71303 requires health insurance exchanges to annually verify, using applicable enrollment information, an applicant’s eligibility before enrollment in a plan or receipt of premium tax credits.
• Applicable enrollment information includes affirmation of the following: (i) household income and family size, (ii) whether the individual is an eligible alien, (iii) any health coverage status or eligibility for coverage, (iv) place of residence, or (v) such other information as may be determined by the Secretary as necessary to the verification.
• These requirements become effective with taxable years beginning after December 31, 2027.

2. Sec. 71304. Disallowing premium tax credit in case of certain coverage enrolled in during special enrollment period.

• Section 71304 disallows premium tax credits in the case of certain coverage that is enrolled during a special enrollment period (SEP).
• An SEP provides an opportunity for enrollment in a health plan outside a standard open enrollment period. SEPs are usually temporary and come with restrictions on those that may be eligible to enroll, such as requiring a qualifying life event (e.g., marriage, birth of a child, etc.). The Biden administration significantly expanded the opportunity for individuals to enroll in coverage at any point through new SEPs.
• Section 71304 eliminates the SEP for individuals claiming income between 100-150% of the federal poverty line.
• This change will go into effect during plan years beginning December 31, 2025.

3. Sec. 71305. Eliminating limitation on recapture of advance payment of premium tax credit.

• Section 71305 eliminates caps on the IRS’s recapture of excess Advanced Premium Tax Credits (APTCs) and requires individuals who misreport income to fully account for overpayments.
• There are limits to the amount of APTCs the government may recover if an enrollee receives excess APTCs. Since the ACA Premium Tax Credit is based on income, brokers have incentive to advise enrollees to underestimate income and increase overpayments.
• Section 71305 allows the government to recover the entirety of the overpayments.
• This change will go into effect during taxable years beginning December 31, 2025.

Protecting Rural Hospitals and Providers

1. Sec. 71401. Rural Health Transformation Program.

• Section 71401 establishes a $50 billion rural health relief fund called the Rural Health Transformation Program.
• The Rural Health Transformation Program aims to support rural health by dispersing funds to eligible states, which then have the discretion, subject to certain limitations, to determine how to allocate such funds.
  • $10 billion will be administered annually by CMS to eligible states for years 2026-2030. To be eligible to access this funding, states must submit an application, including a rural health transformation plan, to CMS by December 31, 2025.

Health Care —Health Saving Accounts (HSA)

• Permanent extension of safe harbor for absence of deductible for telehealth services
  • Section 71306 makes permanent the CARES Act telehealth safe harbor for HSA eligible health plans that allow provision of telehealth and remote care services without a deductible.).

Health Care —Research

• Section 70302 allows research or experimental expenditures paid or incurred by the taxpayer in connection with the taxpayer’s trade or business to be immediately deductible and repeals the previous Section 174 that had required amortization of research expenses over a five-year period. Foreign research expenditures still retain a 15-year amortization period.

Christopher Kenny, Partner, Washington, D.C., ckenny@kslaw.com; Kyle Gotchy, Partner, Sacramento, kgotchy@kslaw.com

Tax, Including Energy Credit Provisions

The Act extends and modifies several taxpayer-favorable provisions of the 2017 tax reform legislation known as the “Tax Cuts and Jobs Act” (“TCJA”) and introduces a host of new measures impacting individuals and businesses. A portion of the OBBBA’s cost is offset by a cutback to the energy tax credit legislation enacted under the Biden administration as part of the Inflation Reduction Act of 2022 (the “IRA”).

Some of the more notable changes wrought by the OBBBA will impact significant domestic and international tax rules, including those relating to:

• qualified small business stock (QSBS) benefits;
• qualified opportunity zone (QOZ) investments;
• taxable REIT subsidiary (TRS) limitations;
• state and local tax (SALT) deductions;
• the “qualified business income” deduction under section 199A;
• research and development expenses;
• bonus depreciation;
• the limitation on interest deductibility under section 163(j);
• global intangible low-taxed income (GILTI), foreign-derived intangible income (FDII), base erosion anti-abuse tax (BEAT) and controlled foreign corporation (CFC) rules;
• accelerated expiration of, and new restrictions on, certain energy credits;
• charitable deductions; and
• investment income of certain tax-exempt organizations.

Also notable are several items not included in the OBBBA, most importantly the proposed section 899 “retaliatory tax” provision that had been included in the House and Senate version of the bill. In addition, the OBBBA does not include a previously proposed new tax on proceeds received under litigation funding arrangements. The OBBBA also declines to eliminate tax credit transferability, which had been proposed in prior versions of the legislation. Finally, the OBBBA does not impact the taxation of carried interest, which remains eligible for preferential tax rates, subject to the existing 3-year holding period requirement.

Below we provide a high-level summary of some of the key OBBBA changes that will primarily impact business clients.

Qualified Small Business Stock

• Under prior law, taxpayers were required to hold qualified small business stock (“QSBS”) for at least five years prior to disposition in order to exclude gain on the sale of QSBS under section 1202. The OBBBA shortens the holding period by allowing a 50% exclusion of eligible gain on sales of QSBS held for three years and a 75% exclusion of eligible gain on QSBS held for four years. QSBS held for five or more years at the time of sale will continue to qualify for 100% exclusion of eligible gain.
• Under prior law, stock would not be QSBS if the issuing corporation’s aggregate gross assets exceeded $50 million at any point before and immediately after the stock issuance. The OBBBA increases the aggregate gross asset limit to $75 million.
• Prior to the OBBBA, excludible gain was generally limited to the greater of (i) $10 million ($5 million for married taxpayers filing separate returns) and (ii) ten times the taxpayer’s aggregate adjusted basis in QSBS. The OBBBA increases the $10 million cap to $15 million.
• These changes generally apply to QSBS acquired after July 4, 2025.

Qualified Opportunity Zones

• The OBBBA eliminates the previously applicable investment sunset of December 31, 2026, and makes the QOZ program permanent, with certain changes.
• There will be a new census tract designation process commencing in 2026, which will go into effect on January 1, 2027. The new QOZs will be effective for ten years, and new designations will be made on each ten-year anniversary.
• The OBBBA adds a new “rolling” five-year gain deferral period (as opposed to a fixed trigger date of December 31, 2026, under the prior QOZ rules) as well as an automatic 10% basis step-up that crystallizes at the end of the five-year period (30% for an investment in a rural area).
• The OBBBA eliminates the 2047 program sunset provision, such that a 30-year rolling sunset will apply with respect to post-10-year dispositions of qualifying investments.
• The OBBBA enacts new, enhanced reporting requirements applicable to QOZs.
• Most of the QOZ changes are set to take effect after December 31, 2026. Various uncertainties remain regarding the interplay of the “old” and “new” QOZ designations and timelines.

Taxable REIT Subsidiaries

• Section 856 establishes a limit on the percentage of a REIT’s assets that can be held in securities of TRSs. The OBBBA increases the limit from 20% to 25%.

State and Local Tax Deductions

• The TCJA capped the itemized deduction for payments of state and local taxes (“SALT”) by individual taxpayers to $10,000 ($5,000 for married taxpayers filing separate returns). The TCJA’s $10,000 SALT cap was set to expire on December 31, 2025.
• The OBBBA increases the SALT cap to $40,000 for taxable years beginning in calendar year 2025. The OBBBA further increases the SALT cap to $40,400 for taxable years beginning in calendar year 2026, and then by an additional 1% for 2027, 2028, and 2029.
• The OBBBA also phases out the SALT deduction for taxpayers with modified adjusted gross income (“MAGI”) greater than $500,000 in 2026. In 2026, the phaseout threshold increases to $505,000, and then by an additional 1% annually. For taxpayers with MAGI above the threshold amount, the SALT cap is reduced (but not below $10,000) by 30% of the excess of the taxpayer’s MAGI over the threshold amount.
• The SALT cap will revert to $10,000 for taxable years beginning after December 31, 2029.
• The pass-through entity tax workaround enacted in many states was not affected directly by Othe BBBA.

Qualified Business Income Deduction

• The TCJA added a deduction for certain non-corporate taxpayers equal to 20% of qualified business income (“QBI”) derived from partnerships, S corporations, and sole proprietorships. For this purpose, QBI is generally active trade or business income (other than income as an employee or from certain specified service businesses). Ordinary REIT dividends and certain publicly traded partnership income also qualify for the 20% deduction. The deduction is subject to a limitation based in part on W-2 wages paid by the qualifying trade or business, which limitation is phased in for single filers with taxable income of at least $50,000 and married taxpayers filing joint returns with taxable incomes of at least $100,000. The deduction was set to expire on December 31, 2025.
• The OBBBA makes the 20% deduction for QBI permanent. OBBBA also sets a $400 minimum deduction for active QBI and requires a taxpayer to have at least $1,000 of QBI in order to claim the deduction.
• Effective for taxable years beginning after December 31, 2025, the OBBBA increases the phase-in threshold to $75,000 for single filers and $150,000 for married taxpayers filing joint returns, with both thresholds indexed for inflation starting in 2027.

Research and Development Expenses

• Under prior law, research and development (“R&D”) expenditures (called “research and experimental” expenditures under section 174) incurred in taxable years beginning after December 31, 2021, were required to be capitalized and amortized ratably over a 5-year period (15 years in the case of expenditures related to foreign research).
• The OBBBA permanently allows for immediate expensing of domestic R&D expenses paid or incurred in taxable years beginning after December 31, 2024. Foreign R&D expenses remain subject to capitalization and amortization over a 15-year period.
• In addition, the OBBBA allows taxpayers to elect to deduct unamortized domestic R&D expenditures capitalized in taxable years beginning after December 31, 2021, and before January 1, 2025, in either the first taxable year beginning after December 31, 2024, or ratably over the first two taxable years beginning after December 31, 2024.

Bonus Depreciation

• The TCJA amended section 168(k) to permit taxpayers to elect to immediately expense 100% of the cost of qualified property (including machinery, equipment and other tangible personal property with a recovery period of 20 years or less). The 100% bonus depreciation added by the TCJA was subject to a phase-out of 20 percentage points per year beginning in 2023 and was scheduled to expire after 2026.
• The OBBBA permanently reinstates 100% bonus depreciation for qualified property acquired after January 19, 2025.
• The OBBBA also allows taxpayers to elect 100% bonus depreciation for “qualified production property,” defined to include nonresidential real property used in the manufacturing, production or refining of certain products in the United States (excluding certain food and beverage products), if the following requirements are met: (i) the original use of the property commences with the taxpayer; (ii) construction of the property begins after January 19, 2025, and before January 1, 2029; and (iii) the property is placed in service in the United States by December 31, 2030.

Business Interest Expense Limitation

• Under section 163(j), which was added by the TCJA, the amount of business interest expense that a taxpayer can deduct generally is limited to 30 percent of the taxpayer’s adjusted taxable income (“ATI”) (equal to taxable income with certain modifications). Following enactment of the TCJA, for taxable years beginning before January 1, 2022, ATI was determined based on an EBITDA standard. For subsequent taxable years, a less-favorable EBIT standard was used in computing ATI, resulting in lower ATI (and a correspondingly lower cap on interest deductions).
• The OBBBA restores the more favorable pre-2022 EBITDA rule, effective for taxable years beginning after December 31, 2024.
• Under the OBBBA, the section 163(j) limitation will also apply to certain capitalized interest, effective for taxable years beginning after December 31, 2025.

Global Intangible Low-Taxed Income (now “Net CFC Tested Income”)

• The Global Intangible Low-Taxed Income (“GILTI”) regime was introduced by the TCJA, in effect, to impose a minimum tax on U.S. shareholders of controlled foreign corporations (“CFCs”). Under that regime, U.S. shareholders were taxed on their share of a CFC’s foreign earnings exceeding a 10% return on the CFC’s tangible property. Domestic corporations are allowed to deduct 50% of their GILTI income and claim a foreign tax credit (“FTC”) for 80% of foreign taxes paid on the GILTI income. This results in an effective tax rate of 10.5% (or 13.125% when factoring in the FTC limitation) on earnings exceeding the 10% threshold. Starting in 2026, the deduction was scheduled to decrease to 37.5%, raising the effective tax rate to 13.125% (or 16.4% when accounting for the FTC limitation).
• The OBBBA eliminates the rule excluding CFC earnings up to a 10% return on its tangible property from the GILTI calculation, resets the deduction for domestic corporations permanently at 40%, and increases the FTC limitation to 90%. These changes will result in an effective tax rate of 12.6% (or 14% when accounting for the FTC limitation) on CFC earnings without any threshold. Furthermore, the OBBBA disallows 10% of the deemed paid FTC for distributions of previously taxed Net CFC Tested Income, which applies to foreign income taxes paid or accrued after June 28, 2025. The OBBBA also renames GILTI as “Net CFC Tested Income.”
• The OBBBA also introduces a new limitation on expenses allocable to foreign source income in the “Net CFC Tested Income” FTC basket to the 40% deduction for Net CFC Tested Income and any other deduction that is directly allocable to Net CFC Tested Income. Additionally, no amount of interest expense or research and experimental expenditures will be allocable to the Net CFC Tested Income basket. Instead, such expenses will be allocated to U.S. source income.
• The OBBBA’s changes to the GILTI regime apply for taxable years beginning after December 31, 2025.

Foreign-Derived Intangible Income (FDII)

• The TCJA also established the Foreign-Derived Intangible Income (“FDII”) regime, which allows domestic corporations to deduct 37.5% of certain income derived from foreign sources exceeding a 10% return on the corporation’s tangible property. This deduction results in an effective tax rate of 13.125% on earnings exceeding the 10% threshold. Beginning in 2026, the deduction was scheduled to be reduced to 21.875%, increasing the effective tax rate to 16.4% on earnings exceeding the 10% threshold.
• For taxable years beginning after December 31, 2025, the OBBBA eliminates the rule excluding earnings up to a 10% return on tangible property from the FDII calculation and renames the regime “Foreign-Derived Deduction Eligible Income” (“FDDEI”). The deduction for domestic corporations is permanently set at 33.34%, resulting in an effective tax rate of 14% on earnings without any threshold. This aligns with the effective tax rate for Net CFC Tested Income when factoring in the FTC limitation.
• Additionally, the OBBBA modifies the calculation of FDDEI compared to FDII by implementing restrictions on expense apportionment and excluding certain types of income from deduction eligibility. Specifically, gains from the sale of certain intangible property, as well as property that is depreciable or amortizable, are excluded from deduction eligible income. This exclusion applies to amounts received or accrued on or after June 16, 2025.

Base Erosion Anti-Abuse Tax (BEAT)

• The Base Erosion & Anti-Abuse Tax (“BEAT”), which was added by the TCJA, is a minimum tax regime designed to prevent large U.S. corporations from eroding their U.S. tax base by making related party payments to foreign affiliates. The BEAT applies to multinational corporations with average gross receipts of $500 million or more over the three preceding taxable years and deductions for payments to related foreign corporations in excess of 3% of total deductions (the “BEAT Threshold”).
• Under the TCJA, the BEAT tax rate was set to 10% for 2025 and was set to increase to 12.5% beginning in 2026. The base erosion minimum tax amount is due in addition to regularly owed U.S. corporate tax and is calculated as the applicable BEAT rate multiplied by a modified income baseless the adjusted regular tax liability.
• The OBBBA permanently sets the BEAT rate at 10.5% for taxable years beginning in 2026 (11.5% for banks and certain securities dealers), but maintains the BEAT Threshold at 3% of total deductions. The OBBBA also retains the current treatment of certain tax credits (e.g., R&D credits), whereby “regular tax liability” calculated for BEAT purposes would not be reduced by such credits for taxable years beginning after Dec. 31, 2025.

Subpart F Income Inclusions

• Under current law, a U.S. shareholder of a CFC is required to recognize their share of the CFC’s subpart F income only if it owns stock in the CFC on the last day of the taxable year.
• Effective for taxable years beginning after December 31, 2025, the OBBBA requires any U.S. shareholder who owns stock in a CFC at any point during the taxable year to include its pro rata share of the CFC’s subpart F income in its taxable income for that year, regardless of whether it owns stock in the CFC on the last day of the year.

Stock Ownership for CFC Purposes

• Prior to the TCJA, section 958(b)(4) prevented the downward attribution from foreign persons to U.S. persons for purposes of determining whether the U.S. person is the owner of CFC stock by providing that sections 318(a)(3)(A) through 318(a)(3)(C) are not to be applied to consider a U.S. person as owning stock owned by a foreign person. The TCJA repealed section 958(b)(4).
• The OBBBA restores section 958(b)(4), reinstituting restrictions on the downward attribution of stock ownership. Thus, a U.S. corporation wholly owned by a foreign corporation will not necessarily be treated as owning the stock of the foreign parent’s wholly owned foreign subsidiary. The OBBBA also introduces a new Section 951B which allows downward attribution in limited circumstances. Sections 958(b)(4) and 951B are effective beginning in taxable years after December 31, 2025.
• The OBBBA also grants the Treasury Secretary the authority to issue regulations to treat foreign controlled U.S. shareholders and foreign controlled foreign corporations as U.S. shareholders and CFCs, respectively, for other tax purposes, including reporting requirements and determining the treatment of foreign controlled foreign corporations that are passive foreign investment companies.

Enforcement of Remedies Against Unfair Foreign Taxes (Proposed Section 899)

• Prior versions of the OBBBA passed by the House and introduced in the Senate proposed a new section 899 which caused much consternation among legal professionals, industry stakeholders, and taxpayers. Proposed section 899 would have raised tax rates on certain categories of U.S. source income paid to foreign individuals, entities, and governments with connections to countries imposing taxes (such as a global minimum tax and a digital services tax previously negotiated by the OECD) deemed to be “unfair foreign taxes.”.
• The proposed section 899 was removed from the OBBBA after the Treasury Department and the G7 countries reached an agreement not to apply the global minimum tax of the OECD’s Pillar II to U.S.-parented corporate groups.

Abraham (Hap) Shashy, Partner, Washington, D.C., hshashy@kslaw.com

Tax-Energy Credit Provisions

• Clean Electricity Investment/Production Tax Credits (Section 48E/45Y)
  • These credits are phased out for facilities that begin construction after December 31, 2032, except for solar and wind. No credits under section 48E/45Y are available for solar and wind projects that are placed in service after December 31, 2027, unless they begin construction within 12 months of the enactment of the OBBBA. Previously, under the IRA, the phase-out would have been automatically extended beyond 2032 if U.S. greenhouse gas emissions were not reduced to 25% of 2022 levels.
  • For facilities that begin construction starting June 16, 2025, higher thresholds for domestic content requirements apply for purposes of section 48E.
  • Section 48E was revised to provide a flat 30% credit to qualified fuel cell property that begin construction after December 31, 2025, which will not be eligible for bonus credits (i.e., the domestic content and energy community bonuses).
• Carbon Capture and Sequestration Credit (Section 45Q)
  • Under prior law, the credit rate varied based on how the sequestered carbon oxide was stored or used.
  • Under the OBBBA, the credit rate is same across the different uses of sequestered carbon oxide. As revised, both enhanced oil recovery and commercial utilization can qualify for an inflation-indexed credit of initially up to $85 per metric ton.
• Clean Hydrogen Production Tax Credit (Section 45V)
  • This credit, created by the IRA, is eliminated for facilities that begin construction after December 31, 2027.
• Clean Fuel Production Tax Credit (Section 45Z)
  • Under prior law, the credit was set to expire at the end of 2027.
  • The OBBBA extends the credit through December 31, 2029, but eliminated the special credit rate for sustainable aviation fuel.
  • Additionally, fuel produced after December 31, 2025, must be from feedstock produced or grown in the United States, Mexico, or Canada.
• Transferability (Section 6418) and Direct Pay (Section 6417)
  • The OBBBA generally preserves transferability and direct pay of certain tax credits, features added by the IRA.
  • The OBBBA does, however, prohibit transfer of credits to specified foreign entities. For this purpose, “specified foreign entities” generally include entities with certain ties to China, Iran, North Korea, and Russia.
• Foreign Entities of Concern (FEOC) Restrictions
  • FEOC restrictions disallow many tax credits for
    • taxpayers that are “prohibited foreign entities” for tax years beginning after December 31, 2025, and
    • facilities that begin construction after December 31, 2025, receive “material assistance from a prohibited foreign entity.”
  • The FEOC restrictions are intended to limit the ownership of and control over U.S. energy projects by individuals and entities from China, Iran, North Korea, and Russia. The material assistance restrictions, which apply to credits under sections 45Y, 48E, and 45X, prohibit a project from qualifying for a tax credit if the total direct costs exceed specified thresholds related to products or components from those jurisdictions. The FEOC restrictions are likely to significantly impact credit eligibility for projects with Chinese-owned suppliers in particular.
  • The OBBBA introduces accuracy-related penalties due to overstating the “material assistance cost ratio” where applicable. Additionally, the OBBBA extends the period for assessment to 6 years material assistance issues.
• Beginning of Construction
  • For purposes of the FEOC restrictions, the OBBBA codifies the beginning of construction rules under IRS Notices 2013-29 and 2018-59 (as well as any subsequently issued guidance clarifying, modifying, or updating either such Notice), as in effect on January 1, 2025.
  • A recent executive order directs the Treasury Department to more strictly define when a project begins construction for other purposes, including by restricting the use of existing broad safe harbors “unless a substantial portion of the project has been built.”

Charitable Contribution Deductions

• The TCJA increased the limit on deductibility of cash contributions by individuals to certain tax-exempt organizations described in section 170(b)(1)(A) from 50% of the taxpayer’s contribution base (which is, generally, adjusted gross income (“AGI”)) to 60% of the taxpayer’s contribution base. The TCJA’s increased 60% contribution ceiling for those cash gifts was set to expire on December 31, 2025.
• The OBBBA permanently extends the TCJA’s 60% ceiling for cash gifts made by individuals to tax-exempt organizations described in section 170(b)(1)(A).
• Additionally, the OBBBA imposes a floor on the charitable contribution deduction equal to 0.5% of the taxpayer’s contribution base (in the case of individuals) or 1% of the taxpayer’s taxable income (in the case of corporations). Thus, qualifying charitable contributions by individuals will now be deductible only to the extent their aggregate contributions exceed 0.5% of the taxpayer’s contribution base, and qualifying charitable contributions by corporations will now be deductible only to the extent the aggregate contributions exceed 1% of the corporation’s taxable income. These new floors apply for taxable years beginning after December 31, 2025.

Excise Tax on Investment Income of Private Colleges and Universities

• The TCJA imposed a flat 1.4% excise tax on the income earned on endowments of private educational institutions with at least 500 students (more than half of whom are located in the United States) with an endowment of at least $500,000 per student at the end of the preceding tax year.
• The OBBBA replaces the pre-existing flat 1.4% endowment excise tax on “applicable educational institutions” (as defined below) with a new tiered rate structure, effective for taxable years beginning after December 31, 2025. For this purpose, an “applicable educational institution” is defined to mean an eligible educational institution with at least 3,000 tuition paying students more than 50% of which are located in the U.S., a student adjusted endowment of at least $500,000, and which is a not a state college or university.
• The new excise tax rate ranges from 1.4% to 8% based on the size of the “student adjusted endowment.” The maximum rate of 8% is applied to institutions with a student adjusted endowment exceeding $2,000,000. The “student adjusted endowment” is defined as the aggregate fair market value of the assets of such institution (determined as of the end of the preceding taxable year), other than those assets which are used directly in carrying out the institution’s exempt purpose, divided by the number of students of such institution.

Dan Feldman, Partner, Abu Dhabi, dfeldman@kslaw.com; John Taylor, Partner, London, jtaylor@kslaw.com