Sweeping Tax Legislation Signed into Law

On July 4, President Trump signed into law H.R. 1, (the “One Big Beautiful Bill Act” (“OBBBA”)), a sweeping legislation package featuring significant changes to U.S. tax law. The OBBBA was passed via a budget reconciliation process, with Vice President JD Vance casting the tie-breaking vote in the Senate, and a razor-thin margin of four votes in the House of Representatives.

Broadly, the OBBBA 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 section¹ 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 base less 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 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.

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.