Senate passes tax bill, bringing business and individual tax changes into view

This article, originally published June 3, has been updated to reflect that the Senate on July 1 passed its version of the broad taxation-and-spending bill.

Executive summary: Senate passes its tax bill; House of Representatives to consider Senate version

The U.S. Senate on July 1 passed its version of the broad taxation-and-spending bill commonly known as the One Big Beautiful Bill Act (OBBBA).

The bill now returns to the House for reconsideration before final passage. It extends or makes permanent many provisions from the Tax Cuts and Jobs Act (TCJA) and introduces additional tax measures summarized below.

Whether the House of Representatives will approve the Senate bill, however, remains uncertain as members consider differences between it and the version of the OBBBA  that the House approved May 22. For the OBBBA to become law, the House and the Senate need to approve an identical version. Republican leaders hope enactment will be on or just after July Fourth.

Key differences between the tax provisions the Senate and House approved on July 1 and May 22, respectively, include:

• The Big Three business provisions: The Senate bill permanently improves tax treatment of various business expenses, including those for qualified property (bonus depreciation), research and development (section 174), and business interest (section 163(j)). The House-approved version applies the more favorable treatment only through 2029.
• Additional R&D relief: The Senate bill allows for accelerated amortization for domestic research costs capitalized in 2022, 2023, and 2024. The House-approved version requires taxpayers to continue to amortize previously capitalized domestic research costs over the remaining five-year period.
• State and local tax deduction limitation (SALT cap): The SALT limitation in the Senate bill is increased to $40,000 (half that amount, or $20,000, for married separate filers) beginning in 2025 through tax year 2029, after which the limitation reverts to $10,000 ($5,000 for married separate filers). The cap would increase by 1% each year after 2025 and before 2030. Additionally, for tax years 2025 through 2029, the limitation would be phased down for taxpayers with modified adjusted gross income (AGI) over $500,000. Under this phasedown, the $40,000 limitation is reduced by 30% of the excess of modified AGI over the threshold amount, not to be reduced below $10,000. The House bill would not revert back to the $10,000 cap after 2029 but rather remain at $40,000 permanently with similar income phase downs.
• Qualified business income: The Senate bill makes this deduction (section 199A) permanent at 20%, rather than the House bill proposal to increase it to 23%.
• U.S. international taxation: The Senate version replaces foreign-derived intangible income (FDII) and global intangible low-taxed income (GILTI), tightens the base erosion and anti-abuse tax (BEAT) rules, and modifies other rules—including some affecting foreign tax credits. The House bill makes permanent certain international effective tax rates—including FDII, GILTI and BEAT—with slight modifications.
• Clean energy: The Senate approved different phaseouts of the clean energy tax credits and incentives than the House approved.

Senate’s final tax bill brings potential tax changes into clearer view for taxpayers

The U.S. Senate on July 1 approved a package of proposed tax benefits and revenue raisers that would affect businesses and individuals.

The tax items the Senate updated from its initial set of proposals on June 16 include:

• State and local tax deduction limitation (SALT cap): Increased amount and modified timing
• Modified U.S. international tax provisions
• Removal of the proposed remedies for unfair foreign taxes under new section 899 of the tax code
• Greater restrictions on clean energy tax credits and incentives
• Removal of limitations on deductibility of state and local pass-through entity taxes paid by pass-through entities
• Excess business losses (EBLs): The Senate removed language that would have subjected carried-over EBLs to ongoing EBL limitations rules, rather than as net operating losses (NOLs)
• Removal of the litigation financing excise tax

The Senate did not change the following key tax items in its final legislation from the earlier Senate proposals:

• Permanence of favorable tax treatment of various business expenses, including those related to R&D, qualified property and business interest (commonly known as the Big Three).
• Extension of the individual tax cuts

Here is a rundown of key tax provisions in the bill the Senate passed, and an overview of the tax policy road ahead.

Business taxation in the Senate tax bill

Senate Republicans approved tax changes with wide-ranging business implications. Areas of focus and the corresponding proposals include:

• Capital expenditures and investments: Reinstate 100% expensing of qualified assets in the year they were put into service—also known as bonus depreciation—for property acquired beginning Jan. 20, 2025. The proposals would expand the scope of qualified assets to cover manufacturing buildings, but only for buildings placed in service before Jan. 1, 2031. The Senate provision would be permanent, while the House-approved version applies to property put into service only through 2029.
• Business interest: Restore TCJA’s original, more favorable EBITDA-type calculation of the business interest deduction limit for tax years beginning in 2025. The Senate provision would be permanent, while the House-approved version is effective only through 2029. The Senate version also provides specific rules for how the business interest expense limitation interacts with other tax provisions that capitalize interest.
• Innovation and research and development: Allow for immediate expensing of domestic research costs, while providing an ability to accelerate the remaining unamortized amounts of previously capitalized research costs incurred in 2022 through 2024. Small business taxpayers with average annual gross receipts of $31 million or less would generally be permitted to apply this change retroactively to tax years beginning after Dec. 31, 2021. The Senate provision would be permanent, while the House-approved version applies to R&D costs only through 2029.
• Pass-through businesses: Make permanent the section 199A qualified business income (QBI) deduction, with no change to the current 20% deduction percentage (a deviation from the House bill, which proposed to increase the deduction rate to 23%). Additionally, the bill would expand the limitation phase-in window from $50,000 for single filers ($100,000 for married filing jointly) to $75,000 for single filers ($150,000 for married filing jointly). The new itemized deduction threshold does not impact determination of deduction for QBI purposes.
• Charitable contribution deduction: Retains the House approved 1% floor on corporate charitable deductions, allowing deductions only for contributions exceeding 1% of taxable income. The Senate also adds a 0.5% floor for individual itemizers.
• Employer-provided meals: Amend the TCJA rule, effective for 2026, that will disallow deductions for various expenses related to on-premises employer-provided meals, so that certain businesses would be exempt from the disallowance.
• Moving expenses: Permanently repeal the income exclusion and deduction, except for certain members of the Armed Forces.
• Taxable real estate investment trust subsidiaries (TRS): Increase the percentage of a REIT’s total assets that may be represented by securities of one or more TRSs from 20% to 25% effective for taxable years beginning after Dec. 31, 2025.

International taxation in the Senate tax bill

The Senate tax bill proposes to modify several key areas of international taxation, including some common deductions. Areas of focus and corresponding proposals include:

• Foreign tax credits (FTCs)

  • Increase deemed paid credits under section 960 from 80% to 90%
  • Disallow FTC on 10% of foreign taxes related to distributions of previously taxed income (PTEP) derived from section 951A, aligning with the increased 90% deemed paid credit. This applies to distributions made on or after June 28, 2025.
  • Limited sourcing rule applies to U.S.-produced inventory sold abroad via foreign branches to the extent the income is attributable to the foreign sales functions. Only up to 50% of such income may be treated as foreign-source.

• Global intangible low-tax income (GILTI)

  • Permanently decrease the section 250 GILTI deduction to 40%
  • Rename GILTI to “net CFC tested income” (NCTI)

• Foreign derived intangible income (FDII)

  • Permanently decrease the section 250 FDII deduction to 33.34%
  • Rename FDII to “foreign-derived deduction eligible income” (FDDEI)
  • Exclude income recognized on an outbound transfer of an intangible subject to section 367(d) and other property of a type that is subject to depreciation, amortization or deletion by the seller from deduction eligible income
  • Limit expense apportionment to properly allocable deductions, no interest or research and experimentation (R&E) included

• Base erosion and anti-abuse tax (BEAT)

  • Change the BEAT rate to 10.5%
  • Permanently continue the taxpayer-favorable status of the R&D credit, the low-income housing tax credit, the renewable electricity production credit, and the section 48 credit for BEAT taxpayers with regular tax liability
  • Omit the base erosion exclusion for payments subject to a foreign effective tax rate of more than 18.9% that was included in the initial Senate draft
  • Omit a provision that would have treated capitalized interest as a base eroding payment
  • Maintain the current base erosion percentage threshold at 3%. The Senate initially proposed reducing it to 2% for all taxpayers.

• Look-through rule

  • Make permanent the section 954(c)(6) subpart F look-through rule for related party payments

• Specified foreign corporations. (SFCs)

  • Repeal one-month deferral election under section 898(c)(2) for SFCs and provide transition rules to align taxable years with the required year.

• Downward attribution

  • Restore section 958(b)(4), a pre-TCJA provision, which generally prohibits downward attribution from a foreign person for purposes of determining U.S. shareholder and CFC status.
  • Introduce section 951B, which would allow “foreign controlled U.S. shareholders” to be taxed on subpart F and GILTI from a CFC based on downward attribution from a common foreign parent. A “foreign controlled U.S. shareholder” is a U.S. person that would be a U.S. shareholder if the definition of U.S. shareholder applied with a threshold of more than 50% (rather than 10% or more).

• Pro rata share inclusion rules

  • Require pro rata subpart F income to be allocated based on actual stock ownership during the controlled foreign corporation’s (CFC) income generating period. The bill also coordinates section 951A and section 951 pro rata rules to reflect the new income sourcing and ownership timing mechanics.

Clean energy tax credits and incentives in the Senate tax bill

The Senate bill ’s final tax package would phase down clean energy tax credits and incentives more aggressively than it initially proposed. Areas of focus and corresponding proposals include:

• Phaseout of certain credits: Accelerate the phaseout for primarily wind, solar, and electric vehicle clean energy tax incentives created or modified by the Inflation Reduction Act (IRA). In some instances, the Senate bill provides a longer timeframe before implementing credit phaseouts compared to the House bill.

• Clean fuel producer credit: Extend the section 45Z clean fuel producer credit through Dec. 31, 2029, with modifications, including:

  • Prohibiting feedstocks other than those produced in the U.S, Canada or Mexico
  • Prohibiting negative emissions rates, except in the case of transportation fuel derived from animal manure
  • Removing indirect land use change penalties for emissions
  • Reducing the credit rate for sustainable aviation fuel and extending the SAF excise tax blender’s credit through Sept. 30, 2025 (with coordinating section 45Z rules)
  • Extending the small producer biodiesel credit through 2026
  • Directing the U.S. Department of the Treasury to issue regulations on other areas needing clarification, including sales to related persons and preventing “double credits”

• Clean hydrogen producer credit: Phase out the section 45V clean hydrogen production credit by requiring construction on facility to commence before Jan. 1, 2028.

• Carbon oxide and sequestration credit: Provide parity in credit rates ($17 per metric ton base credit; $85 per metric ton if labor requirements met) for all carbon capture processes including sequestration, utilization, enhanced oil recovery operations, and direct air capture for facilities and equipment placed in service after the date of enactment.

• Energy generation and storage credits: Permit credits for nuclear, geothermal and energy storage and provide an increased credit for certain advanced nuclear facilities in communities with a threshold amount of employment at such facilities.

• Wind and solar investment and production credits: End wind and solar investment and production tax credits for facilities placed in service after Dec. 31, 2027. There is an exception for facilities that begin construction within 12 months from the date of enactment.

• Critical mineral addition to advanced manufacturing production credit: Include metallurgical coal that is suitable for use in the production of steel as a critical mineral produced and sold before Jan. 1, 2030, for purposes of the section 45X advanced manufacturing production credit. The credit rate is 2.5% of the costs incurred by the taxpayer for production of such coal.  Additionally, the bill modifies the definition of battery module for purposes of this credit, modifies rules for integrated components, and applies restrictions related to material assistance from prohibited foreign entities.

• Energy-efficient commercial buildings: Terminate the section 179D deduction for energy-efficient commercial buildings for property the construction of which begins after June 30, 2026.

• New energy efficient home credit: Terminate the section 45L credit for qualified property acquired after June 30, 2026.

• Alternative fuel vehicle refueling property: Terminate the section 30C credit for property placed in service after June 30, 2026.

• Qualified commercial clean vehicles credit: Terminate the section 45W credit for vehicles acquired after Sept. 30, 2025.

• Transferability of clean energy credits: Generally allow taxpayers to transfer credits under section 6418 as long as the underlying credits are still available. The House bill would have terminated the transferability of some credits prior to the bill’s termination of the underlying credits themselves.

• Foreign entity of concern rules: Make additional changes to the proposed foreign entity of concern rules applicable to most energy credits, including certain facilities where construction begins after Dec. 31, 2025.

Individual taxation in the Senate tax bill

The Senate proposes to modify and/or make permanent several individual tax provisions that the TCJA established. Areas of focus and the corresponding tax proposals include:

• Individual state and local tax deduction limitation (SALT cap): ·     The SALT limitation is increased to $40,000 ($20,000 for married separate filers) and indexed for inflation through tax year 2029, after which the limitation would revert to $10,000 ($5,000 for married separate filers). The limitation is phased down for taxpayers with modified adjusted gross income over $500,000—under this phase down, the $40,000 limitation is reduced by 30% of the excess of modified AGI over the threshold amount, not to be reduced below $10,000.  For tax years after 2029, the limitation returns to $10,000.
• Pass-through entity tax (PTET) elections: No new limitations are placed on pass-through entity taxes.
• Excess business loss limitations: Make permanent the current limitations on business losses allowed to offset other income.
• Personal income tax: Make permanent the tax rates and brackets enacted by the TCJA effective Dec. 31, 2025, with certain inflation adjustments.
• Standard deduction: Make permanent the standard deductions enacted by the TCJA effective Dec. 31, 2025, and further increase to $15,750 for a single filer, $23,625 for a head of household filer, and $31,500 for married individuals filing jointly, adjusted for inflation for taxable years beginning after 2024.
• Itemized deductions: Simpler overall limitation on itemized deductions in comparison to the House proposal. Fully aligned with the House bill with respect to eliminating miscellaneous itemized deductions, except for expansion of itemized deductions for educator expenses.
• Personal exemptions: Permanently eliminate personal exemptions other than a temporary $6,000 senior deduction for qualified individuals over the age of 65 with phaseouts for modified adjusted gross income exceeding $75,000 ($150,000 married filing jointly).
• Alternative minimum tax (AMT): Fully aligned with House proposal to make permanent the increased AMT exemption and phaseout thresholds, effective Dec. 31, 2025. Revert the exemption phaseout thresholds to 2018 levels of $500,000 ($1,000,000 in the case of a joint return), indexed for inflation thereafter. Phaseouts have also been adjusted to phase out this exemption more quickly for high income taxpayers.
• Child tax credit: Make permanent the TCJA-increased child tax credit and make permanent the additional child tax credit ($1,700 in 2025) adjusted for inflation thereafter. The nonrefundable child tax credit is increased to $2,200 effective in 2026.
• Charitable deductions: Starting in 2026, individuals who do not itemize deductions can claim a charitable deduction of up to $1,000 (or $2,000 for married couples filing jointly). For those who do itemize, charitable contributions are deductible to the extent they exceed 0.5% of AGI. The disallowed portion may be carried forward if the taxpayer has other charitable carryforwards from the year. In addition, the 60% AGI limitation for cash contributions to public charities would be made permanent.
• Tips and overtime pay: Introduce above-the-line deductions for 2025–2028 tax years, up to certain dollar amounts, for tips ($25,000 per individual) and overtime compensation ($12,500 per individual or $25,000 for joint filers), phased out at certain adjusted gross income levels.
• Individual trust accounts (Trump accounts):  A new type of tax-favored account designed to benefit children under age 18 for education, small business investments and first home purchases. The annual contribution limitation to the accounts would be $5,000. This provision also includes a one-time government funded $1,000 deposit for qualifying children born between Dec. 31, 2024, and Jan. 1, 2029, and enables employers to make tax free contributions to such accounts annually.
• Clean energy provisions:  Similar to the House bill, the Senate bill terminates the individual clean energy credits, including those for electric vehicles, residential clean energy property (including solar energy property) and EV charging equipment, generally effective after December 31, 2025.
• Qualified elementary and secondary scholarships tax credit: Establishes a tax credit for U.S. citizen or U.S.-resident individuals that is equal to the individual’s qualified contributions to a scholarship-granting organization, taking into account various requirements and restrictions.

Estate taxation in the Senate tax bill

The Senate bill addresses estate tax provisions that were established by the TCJA and are scheduled to expire at the end of 2025.

• Estate planning: Fully aligned with House-approved proposal to increase the estate, gift, and generation-skipping tax exemption amounts to $15 million, adjusted for inflation, and make them permanent, compared to the TCJA's temporary $10 million exemption that was adjusted for inflation to $13.99 million in 2025, effective Dec. 31, 2025.

Taxation of exempt organizations in the Senate tax bill

With slight modifications, the Senate bill follows two of the six items from the House bill that would directly affect exempt organizations including:

• Increased private college and university endowment excise tax: The section 4968 endowment excise tax would increase from 1.4% to as much as 8% for large endowments. However, this is lower than the top rate of 21% proposed by the House. Pursuant to Senate rules, the Senate bill removes the qualified religious institution exemption and exclusion of foreign students. The Senate bill would also require a school to have at least 3,000 tuition-paying students (up from 500 under current law) to be subject to the excise tax.
• Expanded definition of covered employee: Nearly identical to the House bill, covered employees, for purposes of the section 4960 excise tax on excess remuneration, would include all current and former employees of an applicable tax-exempt organization rather than the five highest compensated in each year. The Senate bill further clarifies that the look-back for former employees is limited to taxable years beginning after Dec. 31, 2016.

Unlike the House bill, the Senate proposals do not include any changes to the private foundation excise taxes (i.e., net investment income tax or excess business holdings) or unrelated business taxable income (i.e., qualified transportation fringes or the research exclusion).

Other notable proposals in the Senate tax bill

The Senate’s package of tax proposals addresses a variety of issues, including enforcement, economic development, disaster relief and more. Specifically, those areas and proposals include:

• Qualified small business stock (QSBS) provision of section 1202: Expand the section 1202 benefit in three ways:

  • Provide a tiered gain exclusion for QSBS, allowing a 50% exclusion shares held more than three years, a 75% exclusion for shares more than four years, and a 100% exclusion for shares held more five years.
  • Increase the per-issuer dollar cap from $10 million to $15 million    (indexed to inflation beginning in 2027).
  • Increase the corporate-level gross assets ceiling from $50 million $75 million (indexed to inflation beginning in 2027). The changes would be generally effective with regard to stock issued acquired on or after the date of enactment.

• Employee retention tax credits (ERTC): Expand the scope of existing penalties to address ERTC-specific misconduct after date of enactment, as well as expand 20% erroneous refund penalty under section 6676 to include employment tax refunds. Bar allowance of ERTC refunds for the third and fourth quarters of 2021 claimed after Jan. 31, 2024. The proposal would also extend the statute of limitations to 6 years from the date of the claim giving the IRS significant additional time to make adjustments to ERTC claims and related income tax deductions.
• Disaster relief and casualty losses: Makes TCJA rules related to casualty loss permanent. Designates any federally-declared disasters through date of enactment as “qualified disaster losses” for personal property. Casualty losses from state-declared disasters (even if not federally declared) would now qualify for personal property casualty loss deduction.
• Opportunity zones: Establish a permanent OZ policy that builds off the original OZ structure. The Senate proposes to create rolling, 10-year OZ designations beginning on Jan. 1, 2027. The bill updates definitions of low-income community (LIC) and eliminates the ability for contiguous tracts that are not LICs to be designated as OZs. The Senate proposes to narrow the LIC qualifications, expand the tax benefits and allow investors to receive incremental reduction in gain starting on the first anniversary of the investment. The bill creates special rules for investments in qualified rural opportunity funds. It also adds reporting requirements for the OZ program and provides funding to the IRS to carry out the requirements.
• Collected excise tax on remittance transfers: Establish a 1% collected federal excise tax on certain electronic transfers of money sent from within the U.S. to a foreign country where the sender provides cash, money order, cashier’s check or other similar physical instruments, with exception to tax for noncash transfers, such as those withdrawn from certain financial institutions or if such transfer is funded by a U.S.-issued debit or credit card.
• Taxes on transferring and making certain firearms:  Effectively eliminates federal excise tax imposed on short barrel shotguns, short barrel rifles and silencers.

Notable omissions from the Senate’s tax proposals

The Senate’s final bill does not address the following areas:

• Corporate tax rate changes
• Tax rate for domestic manufacturers
• Carried interest
• Capital gains tax rate
• A higher tax rate for high income individuals
• Corporate SALT limitations
• Countering unfair foreign taxes (section 899). Section 899 was removed from the Senate bill after the secretary of the U.S. Department of the Treasury announced a tax agreement with G7 countries regarding Pillar Two taxes, including the undertaxed profits rule (UTPR).
• Litigation financing excise tax
• Wind and solar facility excise tax

What’s next for the tax bill

The House of Representatives plans to take up the Senate-approved version of the OBBBA. The House and Senate must agree to identical versions of the legislation for it to become law.

A key discussion point figures to be the cost of the legislation. The nonpartisan Congressional Budget Office  estimated that the House-approved package would add $2.4 trillion to the federal deficit over the next 10 years, and that the Senate’s would add $3.4 trillion.

Republican leaders in Congress have earmarked July Fourth as their working deadline for enactment. We recommend that you work with your tax advisor to stay up to date on legislative developments and to understand how proposals would affect your tax profile.