House Narrowly Passes Budget Bill with Wide-Ranging Tax Changes

(Parker Tax Publishing May 2025)

On May 22, the House of Representatives narrowly passed H.R. 1, the One, Big, Beautiful Bill Act ("the Bill") with a vote of 215-214. In addition to making permanent most of the TCJA changes that were scheduled to sunset at the end of the year, the Bill also includes a new $40,000 SALT cap and a wide array of new and enhanced tax breaks. The Bill repeals most of the clean energy tax credits enacted by the Inflation Reduction Act of 2022.

Observation: The official PDF version of H.R. 1 does not reflect the text of the Manager's Amendment (pages 20-31 of the Rules Committee Report) adopted by the Rules Committee before referring the Bill to the House floor. The Manager's Amendment includes changes to the SALT cap (pages 29-30), the termination dates for several clean energy credits (pages 27-29), and a few other tax provisions.

The sweeping tax and spending bill now heads to the Senate, where changes are expected. Republicans have stated that they plan on having the Bill ready for President Trump's signature by July 4th.

Part A. Summary of Key Provisions

SALT Limitation. The Bill increases the SALT cap to $40,000 ($20,000 for married taxpayers filing separate returns) but reduces the deduction by 30 percent of the excess of the taxpayer's MAGI over $500,000 ($250,000 for MFS), but not below $10,000 ($5,000 for MFS). The Bill also implements new restrictions on SALT cap workarounds for pass-through entities.

Individual Tax Rates and Standard Deduction. The Bill makes permanent the lower individual tax rates implemented by the TCJA along with the 2017 law's higher standard deduction. For tax years 2025 through 2028, it also increases the standard deduction by an additional $1,000 for a single filer, $1,500 for head of household, and $2,000 for married filing jointly.

Qualified Business Income Deduction. The Bill permanently extends the deduction for qualified business income under Code Sec. 199A. For tax years beginning after December 31, 2025, it also increases the deduction percentage from 20 percent to 23 percent and changes the calculation of limitations for specified services and trade businesses (SSTBs).

Child Tax Credit. The Bill temporarily increases the maximum child tax credit from $2,000 to $2,500 for the 2025 through 2028 tax years. For tax years beginning after December 31, 2028, the maximum child tax credit will revert to a permanent amount of $2,000, but with the amount indexed for inflation using 2024 as the base year. The income phaseout threshold amounts of $400,000 for taxpayers filing jointly and $200,000 for all other taxpayers are also made permanent.

Deduction for Tip Income. The Bill creates a new deduction for qualified tips received by an individual in an occupation which traditionally and customarily receives tips (aka, "no tax on tips"). The deduction is not limited in amount, but it is not available to individuals with more than $160,000 in earned income. For individuals who do not elect to itemize their deductions, the tip deduction is allowed in addition to the standard deduction. The deduction is allowed for the 2025-2028 tax years.

Deduction for Overtime Pay. The Bill creates a new deduction for "qualified overtime compensation" (defined as overtime compensation paid to an individual required under Section 7 of the Fair Labor Standards Act) and identified as such on their Form W-2 (aka, "no tax on overtime"). The deduction is not limited in amount, but it is not available to individuals with more than $160,000 in earned income. For individuals who do not elect to itemize their deductions, the deduction for overtime pay is allowed in addition to the standard deduction. The deduction is allowed for the 2025-2028 tax years.

Bonus Deduction for Seniors. The Bill adds a deduction ("bonus additional amount for seniors") for all individuals who have attained age 65 before the end of the tax year. The deduction amount is $4,000 per individual. The amount is reduced by four percent of modified AGI above $150,000 for married taxpayers filing jointly ($75,000 for all others). The deduction is available regardless of whether the taxpayer itemizes or claims the standard deduction. The deduction is allowed for the 2025-2028 tax years.

Deduction for Car Loan Interest. The Bill creates a new above-the-line deduction of up to $10,000 for interest paid or accrued on indebtedness incurred after December 31, 2024 for the purchase of a personal use passenger vehicle that was assembled in the United States (aka, "no tax on car loan interest"). The deduction is reduced by 20 percent of modified AGI above $200,000 for married taxpayers filing jointly ($100,000 for all others). The deduction is allowed for the 2025-2028 tax years.

Trump Accounts. The Bill creates "Trump accounts," a new type of tax-exempt savings account administered by banks and other financial institutions. Starting January 1, 2026, parents of any child under age 8 may open a Trump account for their child. These accounts are eligible to receive contributions from parents, relatives, and other taxable entities as well as non-profit and government entities. Taxable entities may contribute up to $5,000 annually. Contributions from tax-exempt entities, such as private foundations, are not subject to the $5,000 annual limit. Beginning at age 18, account holders may access up to 50 percent of funds for a limited set of purposes, including higher education. At age 25, the 50 percent limitation is lifted. At age 30, account holders have access to the full balance of the account for any purpose. The Bill also creates a new pilot program for Trump accounts. For U.S. citizens born between January 1, 2024, and December 31, 2028, the federal government will contribute $1,000 per child into every eligible account.

Health Savings Accounts. The Bill increases the limit on deductions related to aggregate HSA contributions for a year by $4,300 for taxpayers with self-only coverage and by $8,550 for those with family coverage (doubling the limits under current law). The increased amount is phased out above certain income levels. The Bill also implements several new taxpayer-friendly rules for HSAs, such as one that allows individuals who enrolled only in Medicare Part A to continue making deductible HSA contributions. The changes are effective for tax years beginning after December 31, 2025. See the section titled "Healthcare Provisions" below for a discussion of HSA-related provisions.

Bonus Depreciation. The Bill allows 100 percent additional first-year depreciation deduction for qualified property placed in service after January 19, 2025, and before January 1, 2030 (January 1, 2031, for longer production period property and certain aircraft).

Section 179 Expensing. The Bill increases the maximum amount a taxpayer may expense under Code Sec. 179 to $2.5 million, reduced by the amount by which the cost of qualifying property exceeds $4 million. The $2.5 million and $4 million amounts are adjusted for inflation for tax years beginning after 2025. The change applies to property placed in service in tax years beginning after December 31, 2024.

Research or Experimental Expenses Deduction. The Bill allows taxpayers to elect to immediately deduct domestic research or experimental expenditures paid or incurred in tax years beginning after December 31, 2024, and before January 1, 2030.

Business Interest Deduction. The Bill increases the cap on the deductibility of business interest expense for tax years beginning after December 31, 2024, and before January 1, 2030. Specifically, it provides that "adjusted taxable income" is computed without taking into account deductions for depreciation, amortization, or depletion. It also modifies the definition of "motor vehicle" to include trailers and campers, allowing interest on floor plan financing for such assets to be deducted.

Clean Energy Tax Credits. The Bill terminates an array of clean energy tax credits enacted by the Inflation Reduction Act of 2022. The credit for new plug-in vehicles under Code Sec. 30D is repealed for vehicles placed in service after December 31, 2025, but with a special rule for 2026 that allows vehicles produced by manufacturers that have not sold 200,000 new clean vehicles as of December 31, 2025 to qualify for the credit. See the section titled "Termination and Restrictions on Clean Energy Credits" below for a full list of the tax credits repealed and effective termination dates.

Part B. In-Depth Explanation

I. SALT Cap

Increased SALT Deduction for Individuals

The Bill increases the limit on the deduction for state and local taxes (SALT) and provides a phase down of the limit based on the taxpayer's modified adjusted gross income (MAGI).

For 2025, the Bill amends Code Sec. 164(b)(6) to increase the SALT cap to $40,000 ($20,000 for married taxpayers filing separate returns). A phasedown applies for taxpayers with MAGI over $500,000 ($250,000 for married filing separately). For these taxpayers, the SALT cap is reduced by 30 percent of the excess of the taxpayer's MAGI over $500,000, but not below $10,000 ($5,000 for married filing separately).

Beginning in 2026, the SALT cap is provided under Code Sec. 275, and is $40,000 ($20,000 for married filing separately), with the phasedown applicable to taxpayers with MAGI of $505,000 ($252,500 for married filing separately), but not below $10,000 ($5,000 for married filing separately). For years 2027 through 2033, the SALT cap amount and the phasedown threshold are increased one percent per year over the amount for the preceding year. After 2033, the cap and the phasedown threshold equal the amounts in effect for 2033.

New Restrictions on SALT Cap Workarounds for Pass-Through Entities

Several changes are included in the Bill to prevent the avoidance of the SALT cap. Beginning in 2026, the Bill limits the deduction for the taxpayer's aggregate of "specified taxes," defined to comprise:

(1) state and local and foreign property taxes, other than disallowed foreign real property taxes and state and local property taxes paid or accrued in a trade or business or an activity described in Code Sec. 212;

(2) state and local income, war profits, excess profits, and general sales taxes, other than income, etc. taxes paid or accrued by a partnership or S corporation in carrying on a qualified trade or business (within the meaning of Code Sec. 199A(d)(1)) if at least 75 percent of the gross receipts (within the meaning of Code Sec. 448I) of all trades or businesses under common control with such partnership or S corporation are derived from qualified trades or business;

(3) real estate taxes paid by a cooperative housing corporation; and

(4) "substitute payments."

A "substitute payment" is generally defined as any amount (other than a tax already defined as a specified tax) paid, incurred, or accrued to a state or local jurisdiction if, by reason of the payment, one or more persons are entitled to "specified tax benefits" equal to or exceeding 25 percent of the payment. Specified tax benefits are benefits determined with respect to such payment and allowed against, or determined by reference to, a tax already defined as a specified tax. In determining whether a payment is a substitute payment, the following two assumptions apply: First, the value of a tax credit or refund is assumed to be the amount of such credit or refund, and the value of a tax deduction or exclusion is assumed to be 15 percent of the amount of such deduction or exclusion. Second, in the case of a payment by a partnership or S corporation, it is assumed that all the owners of such entity are individuals resident in the jurisdiction of the entity or entities providing the specified tax benefits (and otherwise eligible for such benefits).

For example, if a taxpayer makes a charitable payment to a state or local entity described in Code Sec. 170I and receives a state or local tax credit in the amount of at least 25 percent of the payment, or a deduction equal to at least 167 percent of the payment, then the payment is a substitute payment and is included in the taxpayer's aggregate of specified taxes. Likewise, if a partnership not engaged in a qualified trade or business pays a gross receipts tax or personal property tax imposed on the partnership by a state, and by reason of such payment the partnership's partners receive credits against their state personal income tax liabilities, the partnership tax payment is a substitute payment and is included in the partnership's aggregate of specified taxes.

The Bill also modifies the list of items for which a partner of a partnership must separately take into account such partner's distributive share under Code Sec. 702(a). The Bill requires separate accounting of a partner's distributive share of the partnership's: (1) foreign income, war profits, and excess profits taxes, (2) income, war profits, and excess profits taxes paid or accrued to U.S. possessions, (3) specified taxes (other than income, etc. taxes paid or accrued to U.S. possessions), and (4) disallowed foreign real property taxes. The Bill further denies the partnership a deduction for any such taxes or payments in computing its taxable income.

Observation: The Bill abrogates the guidance provided in Notice 2020-75, in which the IRS announced that it would issue proposed regulations to clarify that state and local income taxes imposed on and paid by a partnership or S corporation are allowed as a deduction by the partnership or S corporation in computing its non-separately stated taxable income or loss for the tax year of payment.

An addition to the tax owed by an individual, estate, or trust is provided in the case of a "state and local tax allocation mismatch." Such a mismatch occurs whenever (1) a partnership of which the taxpayer is a direct or indirect partner pays or accrues a specified tax, (2) the taxpayer is entitled to specified tax benefits with respect to the partnership specified tax payment, and (3) such specified tax benefits exceed the taxpayer's distributive share of the partnership specified tax payment. For these purposes, a specified tax benefit is any benefit determined with respect to the partnership specified tax payment and allowed against, or determined by reference to, a specified tax (other than a substitute payment) owed by the taxpayer.

The addition to tax equals the product of (1) the 37 percent income tax rate and (2) the taxpayer's aggregate state and local tax allocation mismatches for the tax year. For purposes of computing the value of an allocation mismatch, any specified tax benefit received by the taxpayer is deemed to equal the increase in specified tax liability (or reduction in credit or refund) that the taxpayer would incur in the tax year if such benefit were not taken into account, plus, in the case of any carryforward of some or all of the specified tax benefit, the amount of such carryforward (in the case of a credit or refund) or the amount of such carryforward multiplied by the highest rate imposed on individuals under the relevant State or local tax (in the case of a deduction or exclusion). In lieu of the foregoing computation, the taxpayer may elect to determine the value of a specified tax benefit under the following simplified approach: The value of a credit or refund is the amount of such credit or refund, and the value of a deduction or exclusion is 15 percent of such deduction or exclusion.

Example: Partnership P is a State S partnership. P's two partners are Irving, an individual, whose specified taxes exceed his federal deduction limitation for the year; and C, a C corporation. P pays an entity-level income tax imposed by S, by reason of which Irving is entitled to a credit against his state personal income tax liability. For federal tax purposes, P allocates the entire entity-level income tax payment to C, which is not subject to a federal deduction limitation on specified taxes. Unless P is compelled to modify the allocation for lack of substantial economic effect under Code Sec. 704(b)(2), the new addition to tax under the Bill increases Irving's federal income tax liability to approximately the amount that Irving would have owed had P allocated the entity-level state income tax payment to Irving in proportion to his S-level tax credit (relative to C's S-level tax credit, if any).

II. Extension of TCJA Tax Breaks and Other Provisions Affecting Individuals

TCJA Tax Brackets and Rates Made Permanent

The Bill makes permanent the regular income tax rate schedules for individuals, estates, and trusts enacted by the Tax Cuts and Jobs Act. The rates are 10%, 12%, 22%, 24%, 32%, 35%, and 37%.

In addition, the Bill modifies the indexing for inflation for bracket thresholds by providing one additional year of inflation in the cost-of-living adjustment. The cost-of-living adjustment for the regular income tax brackets for 2026 is generally the percentage by which the chained CPI for 2025 exceeds the chained CPI for 2016. The bracket thresholds are thus larger than they would otherwise be absent this additional year of inflation.

However, the dollar amount at which the 37 percent rate bracket begins and the 35 percent bracket ends is not provided this additional year of inflation in the cost of living adjustment. Thus, the cost-of-living adjustment for the 37-percent rate bracket for 2026 is the percentage by which chained CPI for 2025 exceeds the chained CPI for 2017.

Increased Standard Deduction Made Permanent

The TCJA temporarily increased the basic standard deduction for tax years beginning after December 31, 2017, and before January 1, 2026. For 2025, the amount of the basic standard deduction is $15,000 for an unmarried individual (other than a head of household or a surviving spouse) and a married individual filing a separate return, $22,500 for a head of household, and $30,000 for married individuals filing a joint return and a surviving spouse.

The Bill strikes the expiration date of the temporary increases to the standard deduction enacted by the TCJA. In addition, the Bill temporarily increases the amount of the standard deduction by $2,000 in the case of married individuals filing a joint return and a surviving spouse, $1,500 in the case of a head of household, and $1,000 in any other case for tax years beginning after December 31, 2024, and before January 1, 2029. These temporary amounts are not indexed for inflation.

As a result, the amount of the basic standard deduction for tax years beginning in 2025 will increase to $16,000 for an unmarried individual (other than a head of household or a surviving spouse) and a married individual filing a separate return, $24,000 for a head of household, and $32,000 for married individuals filing a joint return and a surviving spouse. For tax years in beginning in 2026 the standard deduction is projected to be $16,300 for an unmarried individual (other than a head of household or a surviving spouse) and a married individual filing a separate return, $24,500 for a head of household, and $32,600 for married individuals filing a joint return and a surviving spouse.

Extension of Increased Child Tax Credit and Temporary Enhancement

Under the TCJA, taxpayers are allowed a child tax credit (CTC) of $2,000 for each qualifying child. The aggregate amount of otherwise allowable child tax credit is phased out for taxpayers with income over a threshold amount of $400,000 for taxpayers filing jointly and $200,000 for all other taxpayers. The otherwise allowable child tax credit amount is reduced by $50 for each $1,000 (or fraction thereof) of modified adjusted gross income ("modified AGI") over the applicable threshold amount.

The Bill temporarily increases the maximum child tax credit to $2,500 for tax years beginning after December 31, 2024, and before December 31, 2028. For tax years beginning after December 31, 2028, the maximum child tax credit will revert to a permanent amount of $2,000. This amount is indexed for inflation in tax years beginning after 2028. The inflation adjustment is the percentage by which chained CPI for the preceding calendar year exceeds the chained CPI for 2024.

The Bill makes permanent the maximum amount of the additional child tax credit per qualifying child of $1,400 adjusted for inflation ($1,700 in 2025). The Bill also makes permanent the earned income threshold of $2,500 for the purposes of the earned income formula. The income phaseout threshold amounts of $400,000 for taxpayers filing jointly and $200,000 for all other taxpayers are also made permanent. Under the Bill, the $500 nonrefundable credit for each dependent of the taxpayer other than a qualifying child is permanent. This credit is not adjusted for inflation.

The Bill provides that the social security number (SSN) of the taxpayer, the taxpayer's spouse (if married filing jointly), and the qualifying child must appear on the return. The SSN for each individual must be issued before the due date of the return. Each SSN also must be issued to a citizen or national of the United States or pursuant to a provision of the Social Security Act relating to the lawful admission for employment in the United States.

Under the Bill, rules similar to the rules of Code 32(d) apply, meaning married individuals must file a joint return in order to receive the child tax credit. Marital status is determined under Code Sec. 7703(a). The Bill, an individual is not treated as married if the individual (1) is married and does not file a joint return for the tax year, (2) resides with a qualifying child for more than one-half of the tax year, and (3) either does not have the same principal place of abode as their spouse during the last six months of the tax year or has a decree, instrument, or agreement (other than a decree of divorce) described in Code Sec. 21(d)(3)(C) with respect to their spouse and is not a member of the same household of their spouse by the end of the tax year.

Limit on Tax Benefit of Itemized Deductions

Beginning in 2026, the Bill provides a new limitation on the benefit of itemized deductions. Specifically, the Bill amends Code Sec. 68 to provide that the amount of an individual taxpayer's itemized deductions is reduced by the sum of:

(1)5/37 of the lesser of (A) the amount of the deduction allowed to the taxpayer under Code Sec. 164 or (B) the excess of (i) the taxpayer's taxable income over (ii) the dollar amount at which the 37 percent tax bracket begins with respect to the taxpayer; plus

(2)2/37 of the lesser of (A) so much of the taxpayer's itemized deductions as exceed the amount described in (1)(A) above, or (B) the excess of (i) the amount described in (1)(B)(i) over (ii) the sum of the amounts described in (1)(A) and (1)(B)(ii).

The Bill provides that the limit on the tax benefit of itemized deductions applies after the application of any other limitation on the allowance of any itemized deduction (such as the adjusted-gross-income-based limitation on the charitable contribution deduction).

Observation: The above Bill replaces the so-called "Pease limitation" that applied before 2018 and would otherwise become effective again after 2025 under the TCJA. The Pease limitation generally limited the total amount of itemized deductions for individual taxpayers whose adjusted gross income exceeded statutorily prescribed "applicable amounts." The otherwise allowable amount of an individual taxpayer's itemized deductions for a tax year was reduced by the lesser of three percent of the amount by which the taxpayer's adjusted gross income exceeded the applicable amount or 80 percent of the amount of the taxpayer's itemized deductions otherwise allowable for that year.

Enhanced Employer-Provided Child Care Credit

The Bill increases the employer-provided child care credit to 40 percent of qualified child care expenditures (50 percent for eligible small businesses) in addition to 10 percent of qualified referral expenses allowed under present law. The total credit limit is increased to $500,000 ($600,000 for small businesses), adjusted for inflation.

The Bill provides for a small business gross receipts test of less than or equal to $25 million (inflation adjusted) based on the 5-year period (rather than 3-year period) preceding the tax year. In 2025, the small business gross receipts threshold is $31 million.

The definition of qualified child care expenditures is expanded to include amounts paid or incurred under a contract with a third-party that contracts with one or more qualified child care facilities to provide child care services. In addition, the definition of qualified child care facilities is expanded to allow for qualified child care facilities that are jointly owned or operated by the taxpayer and other entities or persons.

This provision is effective for amounts paid or incurred after December 31, 2025.

Enhanced Paid Family and Medical Leave (PFML) Credit

The Bill extends the paid family and medical leave credit permanently and makes three modifications. First, it expands the credit allowing employers to claim the credit for a portion of paid family leave (PFL) insurance premiums. PFL insurance is a newer offering that is primarily utilized by smaller businesses to offer paid leave benefits to their employees and is available in a growing number of states. Second, it makes the credit available in all states. Third, it lowers the minimum employee work requirement from one year to six months.

This provision applies to tax years beginning after December 31, 2025.

Enhanced Adoption Credit

The Bill treats up to $5,000 of the adoption tax credit as refundable. This $5,000 maximum refundable amount is indexed for inflation starting in 2026.

The Bill also limits the maximum amount of the present law five-year carryforward of the portion of an adoption tax credit that a taxpayer is not permitted to use because it is exceeds the taxpayer's tax liability limitation. Under the Bill, the maximum amount of an unused adoption tax credit that may be carried forward is limited to the maximum amount of the adoption tax credit that is nonrefundable ($12,280 in 2025 (which equals the $17,280 maximum credit minus the $5,000 refundable portion)).

These changes are effective for tax years beginning after December 31, 2024.

Recognition of Indian Tribal Governments for Adoption Credit Purposes

The Bill provides parity to Indian tribal governments, giving them the same ability as state governments to determine whether a child has special needs for the purposes of the adoption tax credit.

Additional Expenses Treated as Higher Education Expenses for Purposes of 529 Accounts

The Bill allows tax-exempt distributions from 529 savings plans to be used for additional educational expenses in connection with enrollment or attendance at an elementary, secondary, or home school, including curriculum and curricular materials, books or other instructional materials, online educational materials, tutoring or educational classes outside the home, testing fees, fees for dual enrollment in an institution of higher education, and educational therapies for students with disabilities.

Section 529 Plan Distributions Allowed for Postsecondary Credentialing Expenses

The Bill allows tax-exempt distributions from 529 savings plans to be used for additional qualified higher education expenses, including "qualified postsecondary credentialing expenses" in connection with "recognized postsecondary credential programs" and "recognized postsecondary credentials."

Exclusion of Employer Payments of Student Loans

The Bill makes permanent the exclusion from gross income for qualified education loan payments under Code Sec. 127(c)(1)(B). It also indexes for inflation the maximum exclusion from gross income for educational assistance programs under Code Sec. 127(a)(2).

Disaster-Related Personal Casualty Losses Available to Non-Itemizers

The Bill extends the rule allowing taxpayers to claim disaster-related personal casualty losses without having to itemize, which currently applies for disasters occurring through February 10, 2025, through the date of enactment.

Other TCJA Individual Provisions Made Permanent

The bill makes permanent the following TCJA provisions without making substantive changes:

(1) Personal exemption is permanently reduced to $0

(2) Repeal of miscellaneous itemized deductions

(3) Alternative minimum tax (AMT) exemption amounts and phaseout thresholds

(4) Limit on personal casualty losses in Code Sec. 165(h)(5)

(5) Limit on home mortgage interest deduction

(6) Limit on deduction of wagering losses

(7) Permanent repeal of deduction for moving expenses, except for members of the Armed Forces

(8) Exclusion from gross income for discharge of student loans due to death or disability

III. New Tax Breaks for Individuals

Deduction for Tip Income

The Bill provides a federal income tax deduction (the "tip deduction") equal to the qualified tips that an individual receives during any tax year that are included on Form W-2's, 1099-K's or 1099-NECs, or reported by the taxpayer on Form 4317 (or successor).

"Qualified tips" are defined as any cash tip received by an individual in an occupation which traditionally and customarily received tips on or before December 31, 2024, as provided by the Treasury Secretary. The list of such occupations is to be published by the Secretary of the Treasury (or the Secretary's delegate) within 90 days of enactment. Qualified tips do not include any amount received by an individual unless: (1) such amount is paid voluntarily without any consequence in the event of nonpayment, is not the subject of negotiation, and is determined by the payor; (2) the trade or business in the course of which the individual receives such amount is not a specified service trade or business; (3) such individual is not a highly compensated employee of any employer for the calendar year in which the tax year begins, and does not receive earned income in excess of the dollar amount in effect for such calendar year ($160,000 for 2025); and (4) such other requirements as may be established by the Secretary in regulations or other guidance are satisfied.

In the case of qualified tips received by an individual during any tax year in the course of any trade or business of such individual, such qualified tips are taken into account only to the extent that the gross receipts of the taxpayer from such trade or business for such tax year (including such qualified tips) exceeds the sum of: (1) the cost of goods sold that are allocable to such receipts, plus (2) other expenses, losses, or deductions (other than the deduction allowed under this provision), which are properly allocable to such receipts.

For individuals who do not elect to itemize their deductions, the tip deduction is allowed in addition to the standard deduction.

Any amount for which a tip deduction is allowable is excluded from being considered qualified business income under Code Sec. 199A.

Tip deductions to employees are only allowed for qualified tips reported by the employer on Form W-2. With respect to returns related to wages reported to the IRS and the employee, the total amount of tips reported by the employee to the employer is provided.

Independent contractors and sole proprietors are only eligible for the tip deduction in the following situations: (1) with respect to returns for payments made in the course of a trade or business reported to the IRS and the payee, in the case of compensation to nonemployees, there is a separate accounting of the portion of payments that have been properly designated as tips and whether such tips are received in an occupation which traditionally and customarily tips is noted; (2) with respect to returns for payments made for services and direct sales reported to the IRS and the payee, there is a separate accounting of the portion of payments that have been properly designated as tips and whether such tips are received in an occupation which traditionally and customarily tips is noted; and (3) with respect to returns and payments relating to third party settlement organizations reported to the IRS and the payee, there is a separate accounting of the portion of the reportable payment transactions that have been properly designated by payors as tips and whether such tips are received in an occupation which traditionally and customarily tips is noted.

The tip deduction applies to tax years beginning after December 31, 2024. No tip deduction is allowed for any tax year beginning after December 31, 2028.

Deduction for Overtime Pay

The Bill provides a federal income tax deduction (the "overtime deduction") equal to the qualified overtime compensation that an individual receives during the tax year. Amounts excluded from the overtime deduction include (1) any qualified tips and (2) any amount received by an individual during a tax year if such individual is a highly compensated employee of any employer for the calendar year in which the tax year begins, or receives earned income in excess of the dollar amount in effect for such calendar year ($160,000 for 2025).

"Qualified overtime compensation" means overtime compensation paid to an individual required under section seven of the FLSA that is in excess of the regular rate (as used in that section) at which such individual is employed. Such term does not include any qualified tips as defined in the provision of the Bill titled "No tax on tips." As a result, there is no double tax benefit provided to qualified tips for which a deduction is permitted under that section and then used to determine qualified overtime compensation for purposes of calculating the overtime deduction under this section of the bill.

For individuals who do not elect to itemize their deductions, the overtime deduction is allowed in addition to the standard deduction.

Overtime deductions to employees are only allowed for qualified overtime compensation if the total amount of qualified overtime compensation is reported separately on the Form W-2.

The overtime deduction applies to tax years beginning after December 31, 2024. No overtime deduction is allowed for any tax year beginning after December 31, 2028.

Enhanced Deduction for Seniors

The Bill adds a deduction for a bonus additional amount for all individuals who have attained age 65 (for each spouse meeting the applicable criteria in the case of a joint return) for tax years beginning after December 31, 2024, and before January 1, 2029. This additional amount is $4,000 per individual, the "senior bonus amount." The senior bonus amount phases out for taxpayers with income over a threshold amount of $150,000 for taxpayers filing jointly and $75,000 for all other taxpayers. The senior bonus amount is reduced by four percent of modified AGI in excess of the applicable threshold amount. For purposes of this limitation, modified AGI means AGI increased by any amount excluded from gross income under Code Sec. 911 (foreign earned income exclusion), Code Sec. 931 (exclusion of income for a bona fide resident of American Samoa), or Code Sec. 933 (exclusion of income for a bona fide resident of Puerto Rico).

The deduction for the senior bonus amount is allowed to taxpayers who claim the standard deduction and to taxpayers who elect to itemize deductions. The senior bonus amount is not indexed for inflation.

Deduction for Car Loan Interest

For 2025 through 2028, the Bill excludes from the definition of personal interest qualified passenger vehicle loan interest. As a consequence, unless another rule disallows a deduction, for years 2025 through 2028 a deduction is allowed for qualified passenger vehicle loan interest. The deduction is allowed in determining a taxpayer's adjusted gross income.

For purposes of this rule, qualified passenger vehicle loan interest means any interest that is paid or accrued on indebtedness incurred by the taxpayer after December 31, 2024 for the purchase of, and that is secured by a first lien on, an applicable passenger vehicle for personal use (referred to below as "auto acquisition indebtedness"). The Bill limits the amount of interest that a taxpayer may take into account per year as qualified passenger vehicle loan interest to $10,000.

The Bill reduces the amount that is otherwise allowable as a deduction for qualified passenger vehicle loan interest (after taking into account the $10,000 limitation) by 20 percent of the amount by which a taxpayer's modified adjusted gross income (modified AGI) exceeds $100,000 (or, in the case of married individuals filing a joint return, $200,000). Accordingly, for a taxpayer with an otherwise allowable deduction of $10,000, the deduction is fully eliminated when modified AGI is at least $150,000 ($250,000 in the case of a joint return). For purposes of this income-based phaseout, modified AGI is adjusted gross income increased by the amount excluded from gross income under Code Secs. 911, 931, or Code Sec. 933.

For purposes of this exclusion, an applicable passenger vehicle is any vehicle that is manufactured primarily for use on public streets, roads, and highways; that has at least two wheels; and that is a car, minivan, van, sport utility vehicle, pickup truck, or motorcycle. An all-terrain vehicle designed for use on land is also an applicable passenger vehicle. For this purpose an all-terrain vehicle is defined as any motorized vehicle that has three or four wheels, a seat designed to be straddled by the operator, and handlebars for steering control, An applicable passenger vehicle also includes any trailer, camper, or vehicle (designed for use on land) that is designed to provide temporary living quarters for recreational, camping, or seasonal use and that is a motor vehicle or is designed to be towed by, or affixed to, a motor vehicle.

A vehicle is an applicable passenger vehicle only if the vehicle's final assembly occurs in the United States. For purposes of the U.S. final assembly requirement, final assembly is the process by which a manufacturer produces a vehicle at, or through the use of, a plant, factory, or other place from which the vehicle is delivered to a dealer or importer with all component parts necessary for the mechanical operation of the vehicle included with the vehicle, whether or not the component parts are permanently installed in or on the vehicle.

Interest on indebtedness may be considered qualified passenger vehicle loan interest if the indebtedness is incurred to refinance acquisition indebtedness, but only to the extent that the amount of this refinancing indebtedness does not exceed the amount of the acquisition indebtedness and only if the refinancing indebtedness is secured by a first lien on the applicable passenger vehicle with respect to which the acquisition indebtedness was incurred.

Indebtedness that is owed to a person related to the taxpayer within the meaning of Code Sec. 267(b) or Code Sec. 707(b)(1) is not qualified passenger vehicle loan interest.

The deduction for qualified passenger vehicle loan interest is allowed for purposes of the alternative minimum tax.

Tax Credit for Contributions to Scholarship Granting Organizations

The Bill creates a new tax credit for individuals beginning in calendar year 2026 for charitable contributions to tax-exempt organizations that provide scholarships to elementary and secondary school students. Such students who benefit from the scholarships must be members of a household with incomes not greater 300 percent of the area median gross income and be eligible to enroll in a public elementary or secondary school. Under this provision, the tax credit program runs through calendar year 2029.

Partial Deduction for Charitable Contributions by Non-Itemizers

The Bill creates a temporary deduction for non-itemizing taxpayers up to $150 for single filers ($300 for married filing jointly) for charitable cash contributions for tax years 2025 through 2028. The charitable contribution must be made to a qualified charity and cannot be made to donor-advised funds or supporting organizations.

Trump Accounts

The Bill creates "Trump accounts" (referred to in earlier versions of the Bill as "MAGA accounts"). Trump accounts are a new kind of tax-exempt savings account administered by a bank or similar financial institution. Starting January 1, 2026, parents of any child under age 8 may open a Trump account for their child. These accounts are eligible to receive contributions from parents, relatives, and other taxable entities as well as non-profit and government entities. Taxable entities may contribute up to $5,000 annually (indexed for inflation) of after-tax dollars to a Trump account. Trump account holders may not take distributions until age 18. Contributions from tax-exempt entities, such as private foundations, are not subject to the $5,000 annual limit. Account holders may access up to 50 percent of funds for higher education, training programs, small business loans, or first-time home purchases. At age 25, account holders may withdraw any amount up to the full balance of the account for these limited purposes. At age 30, account holders have access to the full balance of the account for any purpose.

The Bill also creates a new pilot program for Trump accounts. For U.S. citizens born between January 1, 2024, and December 31, 2028, the federal government will contribute $1,000 per child into every eligible account. If the Treasury Secretary determines that an eligible individual does not have an account opened for them by the first tax return where the child is claimed as a qualifying child, the Treasury Secretary will establish an account on the child's behalf, taking into account, to the extent possible, the parents' preferred custodian and investment fund. Parents may opt out of the account.

IV. Permanent Enhancement of Estate and Gift Tax Exemption

Under the TCJA, the estate and gift tax exemption for year 2018 through 2025 is $10 million, adjusted for inflation. For 2025, the exemption amount is $13.99 million.

Under the Bill, the estate and gift tax exemption is permanently increased to an inflation-indexed $15 million for tax years beginning after December 31, 2025. Accordingly, the generation-skipping transfer tax exemption is also permanently increased to an inflation-indexed $15 million. The $15 million exemption amount is indexed for inflation with a base year of 2025. Thus, the exemption amount is $15 million for decedents dying and gifts made in calendar year 2026 and increases with inflation thereafter.

V. Healthcare Provisions

Increase in HSA Contribution Limits

Subject to limitations based on income, the Bill increases the limit on deductions related to aggregate HSA contributions for a year by $4,300 for taxpayers with self-only coverage and by $8,550 for those with family coverage. These amounts are subject to an inflation adjustment. The increased amount is phased out above certain income levels. For eligible individuals with self-only coverage or filing a return as a single filer, married filing separately, or head of household, the increased amount phases out ratably over a range beginning at $75,000 and ending at $100,000 of adjusted gross income. For eligible individuals with family coverage and who are filing as married filing jointly the increased amount phases out ratably over a range beginning at $150,000 and ending at $200,000 of adjusted gross income. These income limitations are subject to inflation adjustment. For purposes of the income limitation and phaseout, adjusted gross income is determined in the same manner as under Code Sec. 219(g), related to retirement plan contributions, except that this amount excludes any deduction allowed for a contribution to an HSA. The increased limit applies only to the deductible amount. There is no increase in the limit for employer contributions to an employee's HSA, including contributions made under a cafeteria plan. This provision is effective for tax years beginning after December 31, 2025.

Individuals Entitled to Part A of Medicare by Reason of Age Allowed to Contribute to HSAs

Under the Bill, with respect to an individual who is Medicare eligible but enrolled only in Medicare Part A, such coverage does not cause the allowable deduction for contributions to a health savings account (HSA) to become zero during any month for such individual. Such coverage also does not cause an individual to be considered as having a health plan or other coverage that would cause that individual to fail to be an eligible individual for purposes of making contributions to an HSA. Thus, an individual eligible for Medicare but enrolled only in Medicare Part A would not fail to be treated as eligible to make HSA contributions merely by reason of enrollment in Medicare Part A. In addition, the Bill provides that individuals who have attained age 65 and who are eligible to contribute to an HSA generally may not use HSA funds to pay for health insurance, unlike other individuals who have attained age 65, and that the 20-percent additional tax on HSA distributions that otherwise does not apply to individuals who have attained age 65 continues to apply if the individual is an eligible individual. This provision applies to months beginning after December 31, 2025.

Contributions Permitted If Spouse Has Health Flexible Spending Arrangement

The Bill provides that for purposes of determining whether an individual is eligible to contribute to an HSA, coverage under the employee's spouse's health FSA for any plan year of such FSA is disregarded, provided that certain requirements are met. In order to qualify for this exception, the aggregate reimbursements under the health FSA for the plan year must not exceed the aggregate expenses that would be eligible for reimbursement under the FSA if the expenses were determined without regard to any expenses paid or incurred with respect to the otherwise HSA-eligible individual. This provision is effective for plan years beginning after December 31, 2025.

Both Spouses May Make Catch-up Contributions to the Same HSA

Under the Bill, if both spouses of a married couple are eligible for catch-up contributions (i.e., both spouses are at least age 55) and either has family coverage under a high deductible health plan as of the first day of any month, the annual contribution limit that can be allocated between them (after being reduced by the aggregate amount paid to the Archer MSAs of the spouses) includes the catch-up contribution amounts of both spouses. Thus, for example, the spouses may agree to have their combined basic and catch-up contribution amounts allocated to one spouse to be contributed to that spouse's HSA. This provision is effective for tax years beginning after December 31, 2025.

Allowance of Bronze and Catastrophic Plans in Connection with HSAs

Under the Bill, any bronze or catastrophic plan offered in the individual market on an Affordable Care Act Exchange is treated as a high deductible health plan (HDHP). The provision is applicable to months beginning after December 31, 2025.

Treatment of Direct Primary Care Service Arrangements

Under the Bill, a direct primary care service arrangement is not treated as a health plan that makes an individual ineligible to contribute to an HSA. For this purpose, a direct primary care service arrangement means, with respect to any individual, an arrangement under which such individual is provided medical care consisting solely of primary care services provided by primary care practitioners if the sole compensation for such care is a fixed periodic fee. With respect to any individual for any month, the aggregate fees for all direct primary care service arrangements for such individual for such month cannot exceed $150 per month (in the case of an individual with any such arrangement that covers more than one individual, twice such dollar amount). The aggregate limit is adjusted annually for inflation. For this purpose, the term "primary care services" does not include (1) procedures that require the use of general anesthesia, (2) prescription drugs other than vaccines (therefore, vaccines are permitted primary care services), and (3) laboratory services not typically administered in an ambulatory primary care setting. The Treasury Secretary, after consultation with the Secretary of Health and Human Services (HHS), is required to issue regulations or other guidance related to application of this rule. Finally, fees paid for any direct primary care service arrangement are treated as medical expenses (and not the payment of insurance). The provision applies to months beginning after December 31, 2025.

On-Site Employee Clinics

The Bill allows individuals who utilize discounted health care services at a health clinic at their worksite to contribute to an HSA. This provision applies to months in tax years beginning after December 31, 2025.

Gym Membership Fees Treated as Amounts Paid for Medical Care

The Bill allows individuals to use their HSA for physical fitness memberships and instructional physical activity up to $500 per year for an individual and $1,000 per year for a family with up to 1/12th of such expenses allowed per month. This provision is effective for tax years beginning after December 31, 2025.

FSA and HRA Terminations or Conversions to Fund HSAs

The Bill allows employees, at the employer's discretion, to convert flexible spending arrangement (FSA) and health reimbursement arrangement (HRA) balances into an HSA contribution upon enrolling in an HDHP-HSA. The conversion amount is capped at the annual FSA contribution limit ($3,300 in 2025). This provision is effective for distributions made after December 31, 2025.

Special Rule for Certain Medical Expenses Incurred Before Establishment of HSA

Under the Bill, if an HSA is established during the 60-day period beginning on the date that an individual's coverage under an HDHP begins, then, solely for purposes of determining whether an amount paid is used for a qualified medical expense, the HSA is treated as having been established on the date that coverage under the HDHP begins. Thus, if a taxpayer establishes an HSA within 60 days of the date that the taxpayer's coverage under an HDHP begins, any distribution from an HSA used as a payment for a qualified medical expense incurred during that 60-day period after the HDHP coverage began is excludable from gross income as a payment for a qualified medical expense even though the expense was incurred before the date that the HSA was established. This provision is effective with respect to coverage beginning after December 31, 2025.

Treatment of Health Reimbursement Arrangements Integrated with Individual Market Coverage

The Bill generally codifies the final rules issued in T.D. 9867 in 2019 permitting employers to offer individual coverage health reimbursement arrangements (HRAs) - renamed as Custom Health Option and Individual Care Expense, or "CHOICE," arrangements - without violating the group health plan requirements.

Participants in CHOICE Arrangement Eligible for Purchase of Exchange Insurance under Cafeteria Plan

The Bill permits employees enrolled in a CHOICE arrangement in conjunction with a cafeteria plan to use salary reduction to purchase health insurance coverage on an Affordable Care Act Exchange. Therefore, employees participating in a CHOICE arrangement that is available in conjunction with a cafeteria plan may now purchase individual Exchange coverage using a cafeteria plan election, similar to CHOICE arrangement participants not using salary reduction.

Employer Credit for CHOICE Arrangement

The Bill creates a two-year tax credit for small businesses with fewer than 50 employees offering coverage through CHOICE arrangements for the first time. The general business credit amount is $100 per employee, per month in the first year and $50 per employee, per month in the second year.

VI. Permanent Extension and Enhancement of Section 199A Deduction

The Bill makes permanent the deduction for qualified business income under Code Sec. 199A and increases the deductible amount for each qualified trade or business from 20 percent to 23 percent of the taxpayer's qualified business income. The Bill also increases the percentage of the aggregate amount of the taxpayer's qualified REIT dividends and qualified PTP income for the tax year used to calculate the combined qualified business income amount from 20 percent to 23 percent. Similarly, the percentage of the excess of taxable income over net capital gain used in determining the maximum allowable deduction for qualified business income is increased from 20 percent to 23 percent.

The Bill also adjusts the phase-in of limitations by replacing the existing phase-in of W-2 wages and capital investment and SSTBs with a two-step process. Step one requires a taxpayer whose taxable income exceeds the threshold amount to apply the greater of the W-2 wages or W-2 wages and capital investment test to calculate the deductible amount for each qualified trade or business. Unlike current law, there is no phase in of W-2 wages or W-2 wages and capital investment (i.e., the limitations apply in full to each qualified trade or business of a taxpayer whose taxable income exceeds the threshold amount). Under step two, the taxpayer reduces the sum of the deductible amounts (but not below zero) from all trades or businesses (including specified service trades or businesses), by a limitation phase-in amount, equal to 75 percent of the excess of taxable income over the threshold amount. The taxpayer calculates the deductible amounts under step two without regard to the W-2 wages or W-2 wages and capital investment limitations. The taxpayer then compares the aggregate deductible amounts under steps one and two, and applies the greater of the two amounts.

Example: Assume that a taxpayer's (1) taxable income is $483,900, (2) threshold amount is $383,900, (3) and qualified business income from one SSTB is $700,000. Under step one, the taxpayer's aggregate deduction is $0 because the taxpayer does not receive any qualified business income from a qualified trade or business. Under step two, the taxpayer's aggregate deduction is $86,000 [($700,000 qualified business income x 23 percent) - (75 percent x ($483,900 taxable income - $383,900 threshold amount))]. The taxpayer compares the aggregate deductible amounts under step one ($0) to step two ($86,000) and applies the larger of the two amounts (in this case $86,000).

In addition, the Bill allows a taxpayer to include qualified BDC interest dividends in the aggregated qualified REIT dividends and qualified PTP income used to calculate the combined qualified business amount. The Bill defines a qualified BDC interest dividend as any dividend received from a business development company that has elected to be treated as a regulated investment company, to the extent that the dividend is attributable to that company's net interest income derived from a qualifying trade or business. The Bill also excludes qualified BDC interest dividends from the calculation of qualified business income for a qualified trade or business.

VII. Bonus Depreciation, Section 179 Expensing, and Other Key Business Provisions

Bonus Depreciation

The Bill extends and modifies the additional first-year depreciation deduction through 2029 (through 2030 for longer production period property and certain aircraft). The allowance is increased to 100 percent for property acquired and placed in service after January 19, 2025, and before January 1, 2030 (January 1, 2031, for longer production period property and certain aircraft), as well as for specified plants planted or grafted after January 19, 2025, and before January 1, 2030. The Bill makes permanent the rules under the percentage-of-completion method for the allocation of bonus depreciation to a long-term contract. The Bill generally applies to property acquired527 and placed in service after January 19, 2025, and to specified plants planted or grafted after such date.

Section 179 Expensing

The Bill increases the maximum amount a taxpayer may expense under Code Sec. 179 to $2,500,000 and increases the phaseout threshold amount to $4,000,000. The Bill provides that the maximum amount a taxpayer may expense for tax years beginning after 2024 is $2,500,000 of the cost of Code Sec. 179 property placed in service for the tax year. The $2,500,000 amount is reduced (but not below zero) by the amount by which the cost of Code Sec. 179 property placed in service during the tax year exceeds $4,000,000. The $2,500,000 and $4,000,000 amounts are indexed for inflation for tax years beginning after 2025. The Bill applies to property placed in service in tax years beginning after December 31, 2024

Special Depreciation Allowance for "Qualified Production Property"

The Bill provides for an elective 100 percent depreciation allowance under Code Sec. 168 for qualified production property, defined as that portion of any nonresidential real property that meets the following requirements: (1) subject to depreciation under Code Sec. 168; (2) used by the taxpayer as an integral part of a qualified production activity (generally, agricultural production and chemical production); (3) placed in service in the United States or any possession of the United States; (4) original use commences with the taxpayer; (5) construction begins after January 19, 2025, and before January 1, 2029; (6) subject to an election by the taxpayer to treat such portion as qualified production property; and (7) placed in service after the date of enactment and before January 1, 2033. Qualified production property does not include the portion of any nonresidential real property used for offices, administrative services, lodging, parking, sales activities, software engineering activities, or other functions unrelated to manufacturing, production, or refining of tangible personal property.

A qualified production activity is the manufacturing, production, or refining of a qualified product. Such activities of the taxpayer must result in a substantial transformation of the property comprising the product. Production does not include activities other than agricultural production and chemical production. A qualified product is any tangible personal property. Qualified production property does not include any property subject to a special allowance for bonus depreciation, qualified second generation biofuel plant property, or qualified reuse and recycling property. Qualified production property does not include any property to which the alternative depreciation system applies.

Deduction of Domestic Research and Experimental Expenditures

The Bill suspends required capitalization of domestic research or experimental expenditures under Code Sec. 174 for amounts paid or incurred in tax years beginning after December 31, 2024, and before January 1, 2030. Under the Bill, taxpayers may (1) deduct domestic research or experimental expenditures, (2) elect to capitalize and recover domestic research or experimental expenditures ratably over the useful life of the research (but in no case less than 60 months) beginning with the midpoint of the tax year in which such expenditures are paid or incurred, or (3) elect to capitalize and recover domestic research or experimental expenditures over 10 years beginning with the tax year of the expenditure.

Taxpayers must continue to capitalize and amortize foreign research or experimental expenditures over 15 years beginning with the midpoint of the tax year in which they pay or incur the expenditures. Taxpayers may recover domestic capitalized research or experimental expenditures upon the disposition, retirement, or abandonment with respect to which such expenditures are paid or incurred. However, taxpayers may not recover foreign capitalized research or experimental expenditures, either as a deduction or a reduction to the amount realized for any property disposed, retired, or abandoned after the date of introduction (i.e., May 12, 2025).

The Bill requires taxpayers to reduce their domestic research or experimental expenditures (whether expensed or capitalized) by the amount of the research credit allowed under Code Sec. 41 for tax years beginning after December 31, 2024, and before January 1, 2030. Similar to current law, taxpayers may instead elect to claim a reduced Code Sec. 41 research credit.

Modified Calculation of Adjusted Taxable Income for Purposes of Business Interest Deduction

The Bill increases the cap on the deductibility of business interest expense for tax years beginning after December 31, 2024, and before January 1, 2030. Specifically, it provides that "adjusted taxable income" is computed without taking into account deductions for depreciation, amortization, or depletion. As a result, "adjusted taxable income" corresponds with the financial accounting concept of earnings before interest, taxes, depreciation, and amortization (EBITDA). This provision also permanently modifies the definition of "motor vehicle" to include certain trailers and campers designed to be towed by or affixed to a motor vehicle. This change allows interest on floor plan financing for such trailers and campers to be deducted.

VIII. Termination and Restrictions on Clean Energy Credits

Termination of Previously-Owned Clean Vehicle Credit

The Bill repeals the previously-owned clean vehicle credit under Code Sec. 25E, effective for vehicles acquired after December 31, 2025.

Termination of Clean Vehicle Credit

The Bill terminates new clean vehicle credit under Code Sec. 30D for vehicles placed in service after December 31, 2026. The Bill also implements a special rule for 2026 that only allows vehicles produced by manufacturers that have not sold 200,000 new clean vehicles as of December 31, 2025 to qualify for the credit.

Termination of Qualified Commercial Clean Vehicle Credit

The Bill repeals the commercial clean vehicle credit under Code Sec. 45W, effective for vehicles acquired after December 31, 2025. An exception is provided for vehicles placed in service before January 1, 2033, which are acquired pursuant to a written binding contract entered into before May 12, 2025.

Termination of Alternative Fuel Vehicle Refueling Property Credit

The Bill repeals the alternative fuel refueling property credit under Code Sec. 30C, effective for property placed in service after December 31, 2025.

Termination of Energy Efficient Home Improvement Credit

The Bill repeals the Code Sec. 25C energy efficient home improvement credit, effective for property placed in service after December 31, 2025.

Termination of Residential Clean Energy Credit

The Bill repeals the Code Sec. 25D residential clean energy credit, effective for property placed in service after December 31, 2025.

Termination of New Energy Efficient Home Credit

The Bill generally repeals the new energy efficient home credit under Code Sec. 45L for any qualified new energy efficient home acquired after December 31, 2025. In the case of any home for which construction began before May 12, 2025, the credit is terminated for homes acquired after December 31, 2026.

Restrictions on Clean Electricity Production Credit

The Bill terminates the clean electricity production credit under Code Sec. 45Y, effective for facilities (1) the construction of which begins after the date which is 60 days after the date of enactment or (2) which are placed in service after December 31, 2028. The Bill also restricts access to this credit for certain prohibited foreign entities. In addition, the bill denies the credit for leased property where the lessee would qualify for the residential clean energy credit under Code Sec. 25D if the lessee owned such property.

Restrictions on Clean Electricity Investment Credit

The Bill terminates the clean electricity investment credit under Code Sec. 48E, effective for facilities (1) for which construction begins after the date that is 60 days after the date of enactment or (2) which are placed in service after December 31, 2028. The Bill also restricts access to this credit for certain prohibited foreign entities. In addition, the bill denies the credit for leased property where the lessee would qualify for the residential clean energy credit under Code Sec. 25D if the lessee owned such property.

Repeal of Transferability of the Clean Fuel Production Credit

The Bill terminates transferability of the clean fuel production credit under Code Sec. 45Z attributable to fuel produced after December 31, 2027.

Restrictions on Carbon Oxide Sequestration Credit

The Bill disallows any carbon oxide sequestration credit under Code Sec. 45Q for any tax year beginning after the date of enactment if the taxpayer is a specified foreign entity (as defined in Code Sec. 7701(a)(51)(B)). The credit is disallowed for any tax year beginning after the date that is two years after the date of enactment if the taxpayer is a foreign-influenced entity (as defined in Code Sec. 7701(a)(51)(D)). Transferability is terminated for carbon capture equipment that begins construction after the date that is two years after the date of enactment.

Termination of Zero-Emission Nuclear Power Production Credit

The Bill terminates the zero-emission nuclear power production credit under Code Sec. 45U for tax years beginning after December 31, 2031. The Bill also imposes restrictions relating to prohibited foreign entities.

Termination of Clean Hydrogen Production Credit

The Bill terminates the clean hydrogen production credit under Code Sec. 45V for facilities that begin construction after December 31, 2025.

Phaseout and Restrictions on Advanced Manufacturing Production Credit

The Bill makes modifications to the advanced manufacturing production credit under Code Sec. 45X and accelerates its termination. The Bill eliminates wind energy components sold after December 31, 2027, and eliminates the credit for all other components after December 31, 2031. Transferability is repealed for components sold after December 31, 2027. The Bill also restricts access to the credit for certain prohibited foreign entities.

Phaseout of Credit for Certain Energy Property

The Code Sec. 48 investment credit for geothermal heat pump property is terminated for property that begins construction after December 31, 2031. The base credit for geothermal heat pump property that begins construction before January 1, 2030, and is placed in service after December 31, 2021, is six percent. The base credit for geothermal heat pump property that begins construction in 2030 is 5.2 percent. The base credit for geothermal heat pump property that begins construction in 2031 is 4.4 percent. Access to the credit is restricted for certain prohibited foreign entities.

IX. Other Provisions

The Bill includes dozens of additional tax provisions as follows:

(1) Enforcement Provisions for COVID-Related Employee Retention Credits. The Bill increases the penalty for aiding and abetting the understatement of a tax liability by a COVID employee retention tax credit (ERTC) promoter. The provision makes clear that the pre-enactment standard for applying the aiding and abetting penalty remains unchanged despite the targeted increase in the amount of the penalty that applies solely to ERTC promoters. This section also requires a COVID-ERTC promoter to comply with due diligence requirements with respect to a taxpayer's eligibility for (or the amount of) an ERTC and applies a $1,000 penalty for each failure to comply. Under current law, taxpayers can claim COVID-related ERTC until April 15, 2025. This section bars the IRS from issuing any additional unpaid claims, unless a claim for such credit or refund was filed on or before January 31, 2024.

(2) Renewal and Enhancement of Opportunity Zones. The Bill creates a second round of opportunity zones (OZs), making adjustments and improvements to the previous policy enacted by the TCJA. This second round of OZs will begin on January 1, 2027, and end on December 31, 2033.

(3) Repeal of Revision to De Minimis Rules for Third Party Network Transactions. The Bill modifies requirements for third-party settlement organizations to eliminate their reporting requirement with respect to the transactions of their participating payees unless they have earned more than $20,000 on more than 200 separate transactions in an applicable tax period. This reverses the provision enacted in 2021 that lowered the reporting threshold to $600 with no minimum on the number of transactions.

(4) Extension of Deductions for FDII and GILTI. The Bill permanently increases the deduction amount for foreign-derived intangible income (FDII) from 21.875 percent to 36.5 percent and increases the deduction for global intangible low-taxed income (GILTI) from 37.5 percent to 49.2 percent for tax years beginning after December 31, 2025.

(5) Extension of Base Erosion Minimum Tax Amount. The Bill permanently reduces the rate from 12.5 percent to 10.1 percent beginning January 1, 2026. The provision also permanently retains the current treatment of tax credits for tax years beginning after December 31, 2025.

(6) Increased Reporting Threshold With Respect to Certain Payees. The Bill generally increases the threshold for reporting payments by a business for services performed by an independent contractor to $2,000 and adjusts it for inflation for tax years beginning after December 31, 2024. The new threshold is based on payments during the calendar year. This provision applies to payments made after December 31, 2024.

(7) Exclusion of Interest on Loans Secured by Rural or Agricultural Real Property. The Bill allows for a partial exclusion of interest on certain loans secured by rural or agricultural real estate. Specifically, it allows for the exclusion of 25 percent of interest received by a qualified lender on any qualified real estate loan.

(8) Treatment of Certain Sound Recording Productions. The Bill makes qualified sound recording productions placed in service before January 1, 2029, eligible for expensing under Code Sec. 168(k) and allow taxpayers to expense up to $150,000 (per tax year) of costs of qualified sound recording productions under Code Sec. 181. A "qualified sound recording production" is a sound recording produced and recorded in the U.S.

(9) Modifications to Low-Income Housing Credit (LIHTC). The Bill makes three changes to the low-income housing tax credit (LIHTC) program. Section 111109 restores the "9% LIHTC" to its 2021 level with a 12.5 percent allocation increase, lowers the bond-financing threshold to 25 percent for projects financed by bonds with an issue date before 2030, and designates Indian and rural areas as difficult development areas (DDAs).

(10) Increased Gross Receipts Threshold for Small Manufacturing Businesses. The Bill increases the gross receipts threshold for using the cash method of accounting for manufacturing taxpayers from $25 million to $80 million. This change applies to tax years beginning after December 31, 2025. The $80 million threshold is indexed for inflation and, in 2026, will be approximately $100 million. To qualify as a "manufacturing taxpayer" a business generally must derive substantially all of its gross receipts (over the prior three tax years) from the lease, rental, license, sale, exchange, or other disposition of tangible personal property produced or manufactured by the business.

(11) GILTI Determined Without Regard to Certain Income Derived from U.S. Virgin Islands. The Bill exempts certain income earned in the U.S. Virgin Islands from being considered tested income for the purposes of certain individuals' GILTI calculations.

(12) Extension and Modification of Clean Fuel Production Credit. The Bill makes certain modifications to the clean fuel production credit. The provision requires the credit is only available to fuel produced from feedstocks produced or grown in the U.S. The provision excludes indirect land use changes for the purposes of lifecycle greenhouse gas emissions. This provision extends the credit through December 31, 2031. It requires the Secretary of the Treasury to establish distinct emission rates for specific manure feedstocks. The provision eliminates transferability for fuel produced after December 31, 2027. The provision also restricts access to the credit for certain prohibited foreign entities.

(13) Income from Hydrogen Storage Added to Qualifying Income of Certain PTPs. The Bill expands the activities that can be categorized as qualifying income of a publicly traded partnership (PTP) to include the transportation or storage of liquified hydrogen or compressed hydrogen, and the generation of electricity or capture of carbon dioxide at a direct air capture or carbon capture facility.

(14) Limit on Amortization of Certain Sports Franchises. The Bill limits amortization deductions for certain sports-related intangibles.

(15) Excessive Employee Remuneration from Controlled Group Members. The Bill applies aggregation rules for the purposes of the deduction limitation and allocation of deduction applied under Code Sec. 162(m) as it relates to certain excessive employee remuneration.

(16) Expanded Tax on Excess Compensation Within Tax-Exempt Organizations. The Bill provides that a "covered employee" under Code Sec. 4960(c)(2) includes any employee of an applicable tax-exempt organization that receives remuneration in excess of $1 million.

(17) Modified Excise Tax on Investment Income of Private Colleges and Universities. The Bill amends the current excise tax on net investment income framework for certain private colleges and universities under Code Sec. 4968 with a tiered system based on an institution's student-adjusted endowment.

(18) Increased Tax on Net Investment Income of Certain Private Foundations. The Bill applies higher excise tax rates on private foundations reporting $50 million or more in total assets.

(19) Certain Purchases of Employee-Owned Stock Disregarded for Excise Tax Purposes. The Bill amends Code Sec. 4943 and states that shares of stock repurchased by a company from a retiring employee who participated in the company's Employee Stock Ownership Plan are treated as outstanding for purposes of calculating the share of that company owned by a private foundation.

(20) UBTI Increased by Certain Fringe Benefit Expenses. The Bill amends Code Sec. 512 to increase the unrelated business taxable income (UBTI) of a tax-exempt organization by including the amount paid or incurred for any qualified transportation fringe benefit.

(21) Name and Logo Royalties Treated as UBTI. The Bill amends Code Sec. 512 and Code Sec. 513 to increase the UBTI of a tax-exempt organization by including the income from any sale or licensing by an organization of its name or logo.

(22) Exclusion of Research Income Limited to Publicly Available Research. The Bill amends Code Sec. 512 to increase the UBTI of a tax-exempt organization by including the income generated from non-public research for an organization whose tax-exempt purpose is to provide publicly available research as unrelated business income.

(23) Limit on Excess Business Losses of Noncorporate Taxpayers. The Bill makes the limitation on excess business losses by noncorporate taxpayers permanent. The provision also provides that excess business losses disallowed in tax years beginning after December 31, 2024, are taken into account in determining a taxpayer's excess business losses in subsequent tax years.

(24) 1-Percent Floor on Charitable Deductions by Corporations. The Bill establishes a floor equal to one percent of taxable income for the deductibility of corporate charitable contributions. In the case of a corporation with charitable contributions exceeding the 10 percent limit, the provision allows taxpayers to add the amount disallowed under the one percent floor to the amount carried over to the subsequent year.

(25) Enforcement Remedies Against Unfair Foreign Taxes. The Bill provides a response to certain unfair taxes, which include both discriminatory and extraterritorial taxes imposed on U.S. persons (or certain foreign entities owned by U.S. persons) by a foreign government. The provision responds to unfair taxes by increasing the rate of tax generally applicable to certain taxpayers connected to the foreign jurisdiction. The provision also applies to certain domestic entities that are owned by a tax resident of a foreign jurisdiction that imposes an unfair tax.

(26) Reduction of Excise Tax on Firearms Silencers. The Bill eliminates the transfer tax on silencers.

(27) Modifications to De Minimis Entry Privilege for Commercial Shipments. The Bill repeals worldwide, effective July 1, 2027, the de minimis privilege that allows shipments bound for American businesses and consumers valued under $800 to enter the U.S. free of duties and taxes.

(28) Limitation on Drawback of Taxes Paid with Respect to Substituted Merchandise. The Bill limits the drawback of excise tax for tobacco products to scenarios in which excise tax has been paid on the exported goods that are used as the basis for the drawback claim.

(29) Removing Taxpayer Benefits for Illegal Immigrants. The Bill includes several provisions designed to ensure that illegal immigrants do not receive tax credits and other tax benefits.

(30) Preventing Fraud, Waste, and Abuse. The Bill includes numerous provisions designed to limit fraud, waste, and abuse within the federal tax system.

(31) Task Force on Termination of Direct File. The Bill terminates the current Direct File program at the IRS and establishes a public-private partnership between the IRS and private sector tax preparation services to offer free tax filing, replacing both the existing Direct File and Free File programs.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

Parker Tax Pro Library - An Affordable Professional Tax Research Solution. www.parkertaxpublishing.com

We hope you find our professional tax research articles comprehensive and informative. Parker Tax Pro Library gives you unlimited online access all of our past Biweekly Tax Bulletins, 22 volumes of expert analysis, 250 Client Letters, Bob Jennings Practice Aids, time saving election statements and our comprehensive, fully updated primary source library.

Try Our Easy, Powerful Search Engine

A Professional Tax Research Solution that gives you instant access to 22 volumes of expert analysis and 185,000 authoritative source documents. But having access won’t help if you can’t quickly and easily find the materials that answer your questions. That’s where Parker’s search engine – and it’s uncanny knack for finding the right documents – comes into play

Things that take half a dozen steps in other products take two steps in ours. Search results come up instantly and browsing them is a cinch. So is linking from Parker’s analysis to practice aids and cited primary source documents. Parker’s powerful, user-friendly search engine ensures that you quickly find what you need every time you visit Our Tax Research Library.

Dear Tax Professional,

My name is James Levey, and a few years back I founded a company named Kleinrock Publishing. I started Kleinrock out of frustration with the prohibitively high prices and difficult search engines of BNA, CCH, and RIA tax research products ... kind of reminiscent of the situation practitioners face today.

Now that Kleinrock has disappeared into CCH, prices are soaring again and ease-of-use has fallen by the wayside. The needs of smaller firms and sole practitioners are simply not being met.

To address the problem, I’ve partnered with a group of highly talented tax writers to create Parker Tax Publishing ... a company dedicated to the idea that comprehensive, authoritative tax information service can be both easy-to-use and highly affordable.

Our product, the Parker Tax Pro Library, is breathtaking in its scope. Check out the contents listing to the left to get a sense of all the valuable material you'll have access to when you subscribe.

Or better yet, take a minute to sign yourself up for a free trial, so you can experience first-hand just how easy it is to get results with the Pro Library!

Sincerely,

James Levey

Parker Tax Pro Library - An Affordable Professional Tax Research Solution. www.parkertaxpublishing.com