Client Alert: Inside the One Big Beautiful Bill Crucial Tax Updates for Individuals, Business Owners, and Nonprofits
Date: June 3, 2025
Overall, the Act would prevent tax increases on 62% of taxpayers that would occur if the sunsetting provisions of the TCJA were permitted to expire. However, the introduction of certain narrowly targeted tax provisions and ultimately sunsetting pro-growth provisions, like bonus depreciation and research and development expensing, could spur economic growth.
As the Senate returns from recess on June 2nd to make its own amendments and possibly finalize the bill, it is vital for individuals, business owners, and advisors to evaluate the impact of the Act’s key provisions that could result in changes to effective tax rates for U.S. taxpayers. Taxpayers, business owners, and advisors should understand how the Act encourages certain business investments, curtails other types of investment, impacts the taxation of international business operations conducted by U.S. persons, and accelerates the phase-out date of certain Inflation Reduction Act (“IRA”) clean energy tax credits.
Congressional leaders have set a goal of sending a final version of the Act to President Trump before Congress begins its July 4th recess. This means the House and Senate will have to agree on a final identical version of the Act that was independently approved by both chambers. This alert provides an overview of the Act and explains where it stands in the legislative process.
Key TCJA Provision Extenders and Amendments
The Act extends or amends several key provisions of the TCJA that would otherwise sunset at the end of 2025. The major extensions and expansions include:
Individual Taxpayers
- Individual Income Tax Rate Reductions (Section 1(j)): The Act seeks to permanently extend the lower tax rates and thresholds for individuals, estates, and trusts established by the TCJA, with the highest tax rate being 37% (as opposed to the pre-TCJA rate of 39.6%). These brackets would continue to be adjusted for inflation but would maintain the existing rates.
- Child Tax Credit (Section 24(h)): The Act extends the increased child tax credit, with an increase from $2,000 to $2,500 per qualifying child for 2025 through 2028. The proposal requires Social Security numbers to be provided and that all individuals claiming the credit be U.S. citizens (or have other specified legal status).
- Standard Deduction (Section 63(c)(7)): The TCJA’s standard deduction changes would be increased for certain taxpayers for 2025 through 2028. The Act proposes a standard deduction of $16,000 for single filers; $24,000 for the heads of household; and $32,000 for married joint filers.
- SALT Deduction Cap (Section 164(b)(6)): The $10,000 cap on individuals’ state and local tax (SALT) deductions, would be increased to $40,000 ($20,000 in the case of married individuals filing separately) for tax years beginning after December 31, 2024. The cap would be reduced for individuals with income above $500,000 ($250,000 in the case of married individuals filing separately), but not below $10,000 ($5,000 in the case of a married individual filing separately). This cap is set to increase by 1% each year from 2026 through 2033, providing incremental relief to taxpayers in high-tax states.
- Mortgage Interest Deduction (Section163(h)): The Act permanently disallows any mortgage interest deduction for home equity indebtedness and generally permits interest deductions for acquisition indebtedness up to $750,000 ($375,000 for married individuals filing separately).
- Alternative Minimum Tax (“AMT”) Exemption (Section 55(d)): The increased AMT exemption amounts and phaseout thresholds from the TCJA are made permanent. The AMT exemption amount for single filers is $88,100 and starts to phase out at $626,350. The AMT exemption amount for married filers is $137,000 and starts to phase out at $1,252,700.
- Qualified Opportunity Zones (Sections 1400Z, 6039K, 6939L, 6726): The Act creates a new round of opportunity zone (“OZ”) investment opportunities for capital gains (and up to $10,000 of ordinary income) invested in OZs after 2026 and before 2034, with a focus on revitalizing rural OZs. The Act would allow for deferral of invested gain and income, while requiring enhanced information reporting and filing obligations for OZ investments and increased penalties for noncompliance.
- Estate and Gift Tax Exclusion Thresholds (Section 2010(c)(3)(C)): The current elevated exclusion thresholds for estate and gift taxes would be extended and increased, with the exclusions increased to $15 million for single filers, and $30 million for married couples starting in 2026.
Business Taxpayers
- Pass-Through Business Income Deduction (Section 199A): The 20% deduction for qualified business income from pass-through entities is made permanent and increased to 23%. The revised provision extends the deduction to certain qualified interest dividends from qualified business development companies.
- Limitation on Excess Business Losses of Noncorporate Taxpayers (Section 461(l)): The Act permanently extends the disallowance of a deduction for excess business losses and applies to losses arising in tax years after 2025. Further, the carryover rule is amended to treat losses carried forward as an excess business loss rather than as a net operating loss.
- Interest Deduction Limits (Section 163(j)): Currently, business interest deductions are capped at 30% of the entity’s “adjusted taxable income.” The Act modifies the calculation of “adjusted taxable income” to the pre-2022 methodology. This change would allow businesses to earn greater benefits from interest deductions.
- Bonus Depreciation for Qualified Property (Section 168(k)): The Act reinstates 100% bonus depreciation for property acquired after January 19, 2025, and placed in service after such date, but before 2030, as well as for specified plants that are planted or grafted within this timeframe.
- R&E Expensing (Sections 174 and 174A): The Act suspends the current requirement to capitalize and amortize domestic-only research and experimental (“R&E”) expenditures for amounts paid or incurred after 2024 but before 2030. This would mean that taxpayers could choose to (i) immediately deduct R&E expenditures; (ii) elect to capitalize and recover such expenditures over the useful life of the research (with a minimum period of 60 months); or (iii) elect to capitalize and recover expenditures over 10 years. Note that foreign R&E expenditures would continue to be amortized over 15 years.
International Tax Provisions
- GILTI and FDII (Section 250(a)): The Global Intangible Low-Taxed Income (“GILTI”) effective tax rate (applicable to U.S. shareholders of foreign corporations considered to be “Controlled Foreign Corporations” (“CFCs”)) is currently set to rise from 10.5% to 13.125% in 2026. Likewise, the Foreign-Derived Intangible Income (“FDII”) effective tax rate (which is both a component of the GILTI calculation and a separate export regime) is set to increase from 13.125% to 16.406%. The Act would extend the lower effective tax rates with slight modifications to the respective so-called percentage deductions related to a U.S. taxpayer’s GILTI inclusion and its FDII income. The proposed deduction for GILTI is decreased from 50% to 49.2% of a taxpayer’s GILTI inclusion (including its corresponding “gross up amount”) and from 37.5% to 36.5%. The small adjustments to GILTI and FDII rates raise revenue. Also, because the U.S. indirect foreign tax credit rules applicable to the GILTI calculation are not modified under the Act, the effective rate on GILTI is actually increased. The Act also corrects an error under the TCJA and would now exclude “qualified Virgin Islands services income” from GILTI.
- Base Erosion & Anti-Abuse Tax Rate (Section 59A): The Base Erosion and Anti-Abuse Tax (the “BEAT”) regime applies to companies with average annual gross receipts of at least $500 million that make base-eroding deductible payments, such as interest, royalties, and certain intercompany payments to non-U.S. affiliates. The Act expands BEAT to include two rates, a standard 10.1% increase from 10%, and a Super BEAT rate of 12.5%, which could be applied to countries imposing “unfair foreign taxes, Digital Service Taxes, and diverted profits taxes.” Banks and certain financial institutions or service entities may be subject to an 11% BEAT rate. Additionally, there was a cap on deductible-related party payments (3% of all deductions). The proposed change to BEAT eliminates the 3% threshold on deductible-related party payments, resulting in the potential for triggering BEAT even for minor deductible payments, as part of the new U.S. Surtax, discussed below.
New Tax Provisions
In addition to extending and amending the TCJA provisions, the Act introduces several new tax provisions aimed at providing targeted tax relief, addressing policy priorities, and raising tax revenue.
Individual Taxpayers
- No Tax on Qualifying Tips and Overtime (Section 225): Qualifying tips and overtime pay would not be subject to federal income tax. Both provisions would expire at the end of 2028.
- No Tax on Car Loan Interest (Section 163(h)(3)(F)): The Act creates a deduction for interest paid on qualified car loans related to personal use vehicles that are made in the United States. This provision also expires at the end of 2028.
- Enhanced Deduction for Seniors (Section 63(f)): The Act includes a deduction for seniors (age 65 or older) of $4,000 per eligible filer with a modified adjusted gross income that does not exceed $75,000 for single filers ($150,000 for married filing jointly). The senior deduction would be available to both itemizers and non-itemizers, with the deduction allowed for tax years between 2025 and 2028.
Business Taxpayers
- Partial Structure Expensing (Section 168(n)): The Act introduces a 100% bonus depreciation deduction for qualified production property (“QPP”). QPP includes non-residential structures (such as commercial real estate) utilized as an integral part of qualified manufacturing, agricultural, chemical production, or refining of a qualified product. The QPP must be placed into service in the U.S. before January 1, 2033, provided that construction begins between January 19, 2025, and January 1, 2029. Note that under the Act, if QPP is disposed of at a gain the taxpayer would be required to recapture 100% of the depreciation claimed as ordinary income if the property ceases to be utilized as an integral part of the qualified production activity with 10 years of being placed in service. This rate differs from the conventional real estate recapture rate of 25%.
- Increased Small Business Expensing of Depreciable Assets (Section 179(b)): The Act increases the prior $1 million cost limitation of qualifying property to $2.5 million, and increases the limitation reduction amount under Section 179(b)(2) from $2.5 million to $4 million, for property placed in service in tax years beginning after December 31, 2024. Thus, the Act makes it easier for small businesses to immediately deduct the cost of qualifying property.
- Curtailing SALT Deduction Cap (Section 164(b)(6)) Workarounds: The Act closes the workarounds on state and local tax (“SALT”) deductions for pass-through businesses, partially overturning 2020 IRS guidance that allowed for certain SALT deduction workarounds. However, some workarounds would still be permitted for specific types of businesses.
- U.S. Surtax on Certain Foreign Payments (Section 899): The Act would increase applicable withholding taxes and gross-basis tax rates on foreign payments made to certain countries by 5% per year, and in some cases, up to a maximum rate of 20% above the typical statutory rate. These increases would apply to payments of (i) U.S. sourced passive income (known as FDAP), (ii) income from the sale of U.S. real estate assets or real estate investment trusts (REITs), and related partnership distributions, (iii) income that is connected with an active U.S. business and related branch profits tax, and (iv) private foundation investment income. As alluded to above, this new provision (i) eliminates the $500 million gross receipts and 3% base erosion percentage threshold applicable under the BEAT regime, (ii) disallows and modifies deductibility and capitalization rules that would otherwise be applicable to certain foreign payments, and (iii) overall results in increasing the BEAT rate to 12.5% on U.S. companies with shareholders from applicable countries who own more than 50% of the vote or value of such corporations. The new U.S. Surtax could impact not just non-U.S. corporations, but partnerships, trusts, and private foundations. The rule contains a “Majority U.S. Owner Exception” that would generally apply to U.S. multinationals and U.S. funds owning a majority stake in non-U.S. corporations. It is unclear whether this new rule would apply to income that is otherwise exempt from U.S. tax, like portfolio interest.
- Inflation Reduction Act (“IRA”) Changes: To help pay for the tax cut extensions, the Act repeals certain clean energy credits for projects that begin 60 days after its enactment, phases out the advanced manufacturing credit, limits credit access to foreign entities of concern, and eliminates certain clean vehicle credits. Note that bonus credit rates under the IRA applicable to certain credits remain intact. Taxpayers can still benefit from higher credit amounts by satisfying the requirements for prevailing wage and apprenticeship requirements, domestic content requirements, and other location-based incentives.
Tax-Exempt Organizations
- Excise Tax on Private Colleges’ & Universities’ Investment Income (Section 4968): The Act replaces the endowment excise tax on applicable educational institutions with a new rate structure, effective for tax years beginning after December 31, 2025. The amount of tax imposed on an applicable educational institution for each tax year would be equal to the applicable percentages of the net investment income for such year. The Act makes other modifications to the current endowment excise tax provision, including amending the definition of an eligible student by including only students eligible for federal financial aid (i.e., to exclude certain foreign students). The applicable percentages are as follows:
- 1.4% in the case of an institution with a student-adjusted endowment in excess of $500,000 and not in excess of $750,000;
- 7% in the case of an institution with a student-adjusted endowment in excess of $750,000 and not in excess of $1,250,000;
- 14% percent in the case of an institution with a student-adjusted endowment in excess of $1,250,000 and not in excess of $2,000,000; and
- 21% in the case of an institution with a student-adjusted endowment in excess of $2,000,000.
- Tax on Net Investment Income of Private Foundations (Section 4940(a)): The Act increases the rate of tax on net investment income of certain private foundations, adding a progressive tax rate system for larger private foundations based on asset size.
- Increasing unrelated business taxable income (“UBTI”) of Tax-exempt Entities (Section 512(a)(7)): The Act increases UBTI for amounts related to employer-provided qualified transportation fringes and facilities for qualified parking.
The Legislative Process and Next Steps
The Act is advancing through Congress via the budget reconciliation process, a legislative pathway that allows for expedited consideration of certain tax and spending measures. Earlier in the year, the President submitted a budget request to Congress, outlining the administration’s fiscal priorities and setting the stage for subsequent legislative action. Next, both the House and Senate successfully passed a joint budget resolution. This resolution established a broad framework for federal revenue, spending, and debt levels over a specified period.
The reconciliation bill is currently under active consideration. The House passed the Act on May 22. The Senate will debate and mark up the bill after returning from recess on June 2nd. The reconciliation process is designed to streamline the passage of budget-related legislation by limiting debate and allowing the bill to move forward with a simple majority vote in the Senate, thereby bypassing the filibuster. Once the House and Senate have reconciled any differences between their respective versions of the bill, the final omnibus legislation will be sent to the President for approval.
The Act would extend and expand the TCJA’s tax provisions while introducing new policies aimed at addressing Republican priorities. As the legislative process unfolds, taxpayers should monitor developments closely and consult with their advisors to understand how these changes may affect their tax planning strategies. We will continue to provide updates as the bill advances through Congress and dive deeper into specific areas that affect our individual and business clients.
The information contained here is not intended to provide legal advice or opinion and should not be acted upon without consulting an attorney. Counsel should not be selected based on advertising materials, and we recommend that you conduct further investigation when seeking legal representation.