Republicans take major step forward on taxes in ‘megabill’

Republicans in the House of Representatives took a major step forward on the tax section of the economic policy “megabill” that they hope to pass into law this year.

The tax legislation, the largest piece of the overall package officially titled the One Big Beautiful Bill Act, was modified before passage by the entire House of Representatives on May 22 in a 215-214 vote. Changes to make the state and local tax (SALT) deduction cap more generous, accelerate repeal of some of the Inflation Reduction Act energy credits, and tweaks to multinational taxation were inserted into the final House draft. See our story on the full House vote for an update covering those provision changes.

The House Ways and Means Committee, on a party-line 26-19 vote, agreed to advance the nearly $4 trillion tax section of the mega-bill introduced by Committee Chair Jason Smith, R-Mo., on May 12. The committee action tees up a potential vote by the full House of Representatives as early as next week, which aligns with a timeline set by House Speaker Mike Johnson, R-La., of passing the major tax and funding legislation out of the chamber prior to Memorial Day.

Major policy sunsets scheduled for the end of this year were the catalyst for the legislation, as expiring provisions from the 2017 Tax Cuts and Jobs Act mean that individual tax rates, as well as taxes for businesses ranging from single owner pass-throughs to multinational corporations, would increase next year. The Ways and Means vote is the first step towards preventing that, as well as an opportunity for the current crop of congressional Republicans and the second Trump administration to make their own tweaks to the tax code.

While changes to make the SALT cap more generous appear to have swayed several House Republicans representing high-tax districts, fiscal conservatives remain concerned that the bill does not do enough to curb the government’s own debt trajectory, though accelerated energy credit repeals may shrink some of the increase to deficits made by the bill. The overall megabill as drafted at publication would add about $2.8 trillion to the deficit over the next 10 years, according to at least one estimate by an independent think tank, the Committee for a Responsible Federal Budget (though that number increases significantly if increased federal borrowing costs and extensions of policies created in the bill are accounted for). The Congressional Budget Office, Congress’s largest nonpartisan economic and budgetary analysis office, has not yet provided the official budgetary score for the bill; the Joint Committee on Taxation, the official nonpartisan tax analysts, project the tax section as advanced by Ways and Means on May 12 would be a net revenue loss of over $3.8 trillion to the federal government over 10 years.

Individual benefits

• Section 199A would be made permanent and, with the QBI deduction increased to 23% (from 20%) for all applicable business income.
  
  However, calculation of the benefit would also change to a two-step process. First, a taxpayer must limit the deductible amount for a qualified trade or business to the greater of W-2 wages or W-2 wages and capital investment for each trade or business, similar to current law. But in a new second step, a taxpayer would compare that amount (or amounts) to a new phase-in rule where the taxpayer takes 23% from all qualified trades or businesses without regard to the W-2 wages and capital limitation and reduces the amount in the first step by a limitation phase-in amount equal to 75% of the excess of taxable income over the threshold amount. The taxpayer then compares the two totals and takes the greater amount. While more complex calculation is required, this may result in more generous deductions for qualified business income, including for certain taxpayers who are in specified service trades or businesses. 
  
  In another change, taxpayers with business development company (BDC), real estate investment trust (REIT) and publicly-traded partnership income could include qualified business development company interest dividends with the aggregated qualified REIT dividends and partnership income to calculate their combined qualified business amount. 
  
  Thresholds for the deduction would also be inflation-adjusted. All of these changes would take place beginning in tax year 2026. 
  
  
• Individual TCJA rates would be extended, with inflation adjustments according to the difference in chained Consumer Price Index between 2016 and 2025, and made permanent. This would avoid scheduled increases to marginal tax rates for all individuals, set to take effect next year. Those in the top (37%) income bracket would see a slightly smaller inflation adjustment, based on the difference from 2017 to 2025 instead, but the legislation avoids a tax increase on them and does not include President Donald Trump’s proposal to tax income for individuals earning $2.5 million or more and joint filers earning $5 million or more at a 39.6% rate. The doubled standard deduction would also be maintained (and increased temporarily for seniors, while itemized deductions limitations would also be maintained, largely carrying over policy from the TCJA. See below for more)
  
  If passed into law, tax brackets in 2026 would look like this: 

Individual filers

Heads of household

Joint filers

• Trump campaign promises - Breaks on tips, overtime pay,  increased standard deduction for seniors: 
  
  • The legislation includes a temporary deduction in computing taxable income for recipients of overtime pay and “qualified tips”; the provision expires Dec. 31, 2028.
  • The term “qualified tip” means any cash tip received by an individual in an occupation which traditionally and customarily received tips on or before Dec. 31, 2024, as provided by the Treasury Secretary (“highly compensated employees” are excluded). Treasury will publish a list of occupations traditionally and customarily receiving tips within 90 days of enactment.
  • The standard deduction, already increased by the TCJA, would be extended and increased an additional $4,000 per year for seniors in tax years 2025 through 2028, as an indirect approach to fulfilling Trump’s campaign promise of “no tax on Social Security payments.”
  • Auto loan interest deduction: interest on loans for qualified passenger vehicles would be deductible for tax years 2025 to 2028, with certain restrictions. The loan interest that taxpayers could account for would be limited on an annual basis to $10,000, and begin phasing out at AGI of $100,000, completely ending at $150,000 AGI. Indebtedness beginning after Dec. 31, 2024, is eligible.
    Any passenger vehicle manufactured with final assembly in the U.S., and primarily for use on public streets, roads, and highways, with at least two wheels, is eligible. That includes cars, minivans, vans, sport utility vehicles, pickup trucks, or motorcycles, all-terrain vehicles designed for use on land, and trailers, campers, or other recreational vehicles designed to provide temporary living quarters on land and designed to be towed by or affixed to a motor vehicle.
    Types of loans or financing prohibited from accessing the credit are:
    • Loans to finance fleets
    • Personal cash loans using previously purchased vehicles as collateral
    • Commercial vehicle loans
    • Lease financing
    • Loans to purchase salvage title vehicles
    • Loans to purchase a vehicle for scrap or parts
• Slight enhancement and permanent extension of estate and gift tax exemption. Under current law, the estate and lifetime gift tax exemption amount is set to expire after December 31, 2025.  This exemption, currently at $13.99 million per individual, would be permanently increased to $15 million for individuals (reflecting an increase for married couples of $27.98 million to $30 million) in 2026.  This new exemption would also be indexed for inflation.
• Child tax credit: The credit increases to $2,500 until 2029, then drops to $2,000 after 2029, and requires a Social Security number to claim the credit.

Business benefits

• Previously “sunsetted” business benefits would be restored, with minor retroactivity:
  • Section 163(j): A more generous calculation (earnings before interest, taxes, depreciation, and amortization (EBITDA) instead of earnings before interest and taxes (EBIT)) is restored beginning after Dec. 31, 2024, until before Jan. 1, 2030. The benefit also extended to trailers and campers that can be attached to motor vehicles. 
  • Section 174 R&E expensing: A similar window but only partial restoration, solely for domestic research and experimentation (R&E) activities under new Section 174A. For domestic R&E, taxpayers may immediately deduct R&E expenses or elect under Section 59(e) to capitalize and recover them over 10 years. Alternatively, domestic R&E that is not chargeable to property of a character subject to the allowance under Section 167 may be capitalized and recovered over a period of at least 60 months, starting with the tax year of expenditure. Software development continues to be deemed to be R&E. As these and other differences indicate, the restoration of expensing is not the same as the pre-TCJA Section 174, and thus is not a true restoration. Several concurring amendments are made to coordinate with other provisions, such as Section 280C(c), which generally would require the deduction under Section 174A to be reduced by any research credit taken under Section 41.  It would remove the prohibition on the recovery of unamortized basis in capitalized domestic R&E upon disposition.
    Foreign R&E expenditures would still be capitalized and amortized over a 15-year window. Beginning May 12, 2025 (the date of introduction), the prohibition on immediately recovering the unamortized basis in foreign capitalized R&E expenses for any property abandoned, disposed, or retired is expanded to prohibit recovery as a reduction to the amount realized, therefore requiring R&E to continue to be amortized.
    
  • 100% bonus depreciation restored after Jan. 19, 2025, and before Jan. 1, 2030 (Jan. 1, 2031, for some longer-production period property and aircraft). Rules around allocation for long-term contracts using the percentage-of-completion method would be made permanent. 
     
• New 100% depreciation for manufacturing-related “qualified production property” 
  Defined as any nonresidential real property subject to depreciation under Section 168 used by a taxpayer as an integral part of a qualified production activity (defined as manufacturing, production, or refining of a qualified product to constitute substantial transformation of property comprising of the product), in the U.S. (or territories), construction beginning after Jan. 19, 2025, and before Jan. 1, 2029, and placed in service before Jan. 1, 2033. The term “production” is limited to agricultural production and chemical production.
  Offices, research, administrative services, lodging, parking, sales, software development, and other activities unrelated to manufacturing are excluded. The qualified production property 100% depreciation allowance also cannot be used on property already qualifying for 100% bonus depreciation, or was already classified as a qualified reuse and recycling property or second-generation biofuel plant.
  The property must continue to be used for qualified production for a 10-year period or be subject to strict recapture rules. 

• Opportunity zones
  The legislation would move up the expiration of current qualified opportunity zones to Dec. 31, 2026, from Dec. 31, 2028, but allows for the designation of additional qualified opportunity zones, in effect from Jan. 1, 2027, through Dec. 31, 2033, under rules similar to those for the initial designation, though with some modification. For purposes of the additional qualified opportunity zones, the timing of the election for tax benefits and recognition of the deferred gains is modified from Dec. 31, 2026, to Dec. 31, 2033. There are lengthy administrative tweaks, but the substance of the program remains similar, with changes effective on date of enactment under current legislative language. 

Revenue raisers

• The state and local tax (SALT) deduction cap would be made permanent and includes provisions that would prevent the ability of individual partners in partnerships and S corporation shareholders to take deductions for certain taxes paid a the entity level (i.e., the so-called “pass-through entity taxes” viewed as a state-by-state work-around to the SALT cap), The cap is raised to $15,000 for taxpayers that are married filing separately and $30,000 for all other filers. However, relatively quick phasedowns of the cap would apply once income thresholds are exceeded. Specifically, the increases would be reduced by 20% of the excess of modified AGI at $200,000 for a married individual filing a separate return and $400,000 for all other filers, until a floor deduction of $5,000 and $10,000, respectively, is reached. All of these changes, and the ones described below, would take effect beginning in the 2026 tax year.
  
  This is one of the major policy areas that could see significant change from the version the Ways and Means Committee approved, to the version the full House may pass, and to the version that ultimately may become law after consideration by the Senate. Republicans representing districts in high-tax states already want to change this provision, and there are enough Republican members in the House to hold up the overall bill based on this issue alone.
  
  Under the legislation, no deduction is allowed for “disallowed foreign real property taxes” and “specified taxes” in the aggregate may not exceed the cap. Generally, certain foreign real property taxes, state property taxes and local property taxes that are paid or accrued in a trade or business or an activity described in Section 212 are still allowed. Additionally, income taxes paid or accrued by a partnership or S corporation in carrying on a qualified trade or business (within the meaning of Section 199A(d)(1)) if at least 75% of the gross receipts (within the meaning of Section 448(c)) of all trades or businesses under common control with such partnership or S corporation are derived from qualified trades or business) would also still be allowed without being restricted by the SALT deduction cap.
  
  The specified taxes that generally are restricted by the SALT deduction cap include:
  • Income and other similar taxes paid or incurred by a partnership or S corporation (e.g., pass-through entity taxes) other than in carrying on a qualified trade or business noted above (e.g., certain specified service trades or businesses (SSTBs)).
  • State and local and foreign property taxes not paid or accrued in a trade or business or an activity described in Section 212.
  • Real estate taxes paid by a housing cooperative corporation.
  • “Substitute payments,” which are targeted at amounts (other than those included in the bullets above) “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% of the payment.” A specified tax benefit could include a tax credit, refund, deduction, etc. to be used against one of the above specified taxes. An example would be making a charitable contribution to a state or local government and receiving a tax credit for one of the specified taxes.

An individual’s specified taxes, including substitute payments, are not allowed to be capitalized and therefore, individuals cannot avoid the limitation by taking future-year deductions of capitalized amounts.

Partnerships and S corporations must separately state, and not deduct, specified taxes, which include: (i) foreign income, war profits, and excess profits taxes; (ii) income, war profits, and excess profits taxes paid or accrued to U.S. possessions; (iii) specified taxes (other than income, etc. taxes paid or accrued to U.S. possessions); and (iv) disallowed foreign real property taxes. Partnerships would also be denied a deduction for these taxes in calculating taxable income. This effectively repeals guidance previously provided in IRS Notice 2020-75. Specified taxes from SSTBs are subject to the $15,000/$30,000 SALT deduction cap described above; thus, Partnerships and S corporations would be required to report whether they derived any gross receipts from SSTBs (within Section 199A(d)(2)) on both their own returns and those of their owner.

Individual, trust and estate taxpayers are required to increase their federal income taxes owed in situations where such taxpayer receives a credit on their state income tax return that exceeds their share of the deduction for entity-level taxes. 

• Repeal of Inflation Reduction Act (IRA) energy tax credits:
  The Ways and Means instructions would largely accelerate or outright repeal many IRA tax benefits for a variety of clean energy projects and products, including the relatively novel transferability of tax credits for projects, credits related to the purchase of electric vehicles (EVs), and credits for the investment in clean energy technology or energy production from a variety of energy sources. 
  • The clean electricity investment tax credit (Section 48E), clean electricity production tax credit (Section 45Y), and nuclear electricity production tax credit (Section 45U) begin phasing out after 2028 and finish phasing out by the end of 2031. The clean hydrogen production credit (Section 45V) is repealed for facilities beginning construction after Dec. 31, 2025.
  • Transferability of credits, which allowed taxpayers to monetize credits without complex structuring, is limited by the bill and in general ends around 2028 (phased out Dec. 31, 2027, or two years after the enactment of the legislation, depending on the credit).
  • The advanced manufacturing credit (Section 45X), for the manufacture and sale of clean energy components and critical minerals would phase out for components sold after Dec. 31, 2031 (including for critical minerals which is permanent under the IRA). However, the credit for wind energy components would end for components sold after Dec. 31, 2027.  The bill includes further restrictions around an eligible component such that the credit would not apply to any component for which the taxpayer receives material assistance from or produces subject to a material licensing agreement with a prohibited foreign entity.
  • The retail EV tax credit would now expire at the end of the year for most manufacturers, but be extended another year for those who have sold 200,000 vehicles or less. The previously owned EV tax credit would be fully repealed for vehicles acquired after Dec. 31, 2025. The commercial EV tax credit would also be fully repealed for vehicles acquired after Dec. 31, 2025. The alternative fuel vehicle refueling property credit (Section 30C), which includes EV charging stations, would be repealed for property placed in service after Dec. 31, 2025. 
  • In contrast to the direction on other credits, the clean fuel production credit (Section 45Z), related to clean transportation fuels, would be extended until Dec. 31, 2031, four years past its current expiration date of Dec. 31, 2027, but foreign feedstocks (with the notable exceptions of those from Canada and Mexico) would not be eligible. Foreign-influenced entities (as defined in Section 7701(a)(51)(D)) would not be eligible for the credit two years after enactment, and there would also be changes to the calculation of emissions for purposes of the credit, making it easier for certain biofuels to qualify. However, transferability would be repealed for fuel produced after Dec. 31, 2027.

• New investment income taxes on higher education endowments and private foundation assets
  • Tiered excise taxes on net investment income of private college and university endowments, beginning in tax year 2026:
    • 1.4% in the case of an institution with a student adjusted endowment in excess of $500,000, and not in excess of $750,000
    • 7% in the case of an institution with a student adjusted endowment in excess of $750,000, and not in excess of $1.25 million
    • 14% in the case of an institution with a student adjusted endowment in excess of $1.25 million and not in excess of $2 million
    • 21% in the case of an institution with a student adjusted endowment in excess of $2 million institutions with fewer than 500 tuition-students appear to be exempted
  • Tiered excise taxes on net investment income of certain private foundations (Changes to apply to taxable years beginning after the date of the enactment of this bill):
    • assets of less than $50 million, 1.39%
    • assets of at least $50 million, and less than $250 million, 2.78%
    • assets of at least $250 million and less than $5 billion, 5%
    • assets of at least $5 billion, 10%
  • Assets of any private foundation shall be determined with respect to any taxable year as being the aggregate fair market value of all assets of such private foundation, as determined as of the close of such taxable year.
     
  • Expanding application of tax on excess compensation within tax-exempt organizations
    Section 4960 imposes two types of excise taxes — (1) the “excess remuneration excise tax,” and (2) the “excess parachute payment excise tax” — and provides that an applicable tax-exempt organization (ATEO) that pays remuneration in excess of $1 million or any excess parachute payments to a covered employee is subject to an excise tax on the amount of the excess remuneration and excess parachute payments equal to 21%. Under current law, covered employees are generally defined to include (i) the five highest compensated employees of the ATEO for the current tax year, and (ii) all covered employees for any preceding tax year beginning after 2016. Beginning with the 2026 tax year, the legislation would significantly expand the definition of covered employees to include all employees (including former employees) of the ATEO and any related organizations or governmental entities.
    
    
  • Retaliatory measures to foreign corporate taxes
    The legislation creates a new Section 899, which provides a series of retaliatory measures targeting countries that implement “unfair foreign taxes.” This includes significant changes to how BEAT applies to groups in scope of the rules aimed at increasing the BEAT tax rate and broadening the base. The section also includes a set of rules, similar in concept to current Section 891, that would increase the U.S. tax rates (and withholding tax rates) imposed by certain sections of the Code on residents of jurisdictions that have enacted “unfair foreign taxes.” The term “unfair foreign tax” is broadly defined and includes: “an undertaxed profits rule (UTPR), digital services tax, diverted profits tax, and, to the extent provided by the [Treasury] Secretary, an extraterritorial tax, discriminatory tax, or any other tax enacted with a public or stated purpose indicating the tax will be economically borne, directly or indirectly, disproportionately by United States persons.” Though largely a discretionary measure that is dependent on actions of other countries, the JCT estimates this would raise approximately $116 billion over 10 years. That increases the odds that the measures could survive the Senate, where the parliamentarian will evaluate whether policies make enough budgetary impact to fit within the special process Republicans are using to pass their megabill along party lines in that chamber.
    
    
  • Controlled foreign corporations (CFCs) ‘look-through’ expiration
    Notably, the proposed legislation does not include an extension of the “look-through” exception for controlled foreign corporations under Section 954(c)(6), which is set to expire at the end of 2025.  Legislative history indicates that the Section 954(c)(6) exception was intended to make U.S.-based multinational corporations more competitive with foreign-based multinationals by allowing active foreign earnings to be reinvested across CFCs without giving rise to immediate taxation under Subpart F. Without extension, CFCs reinvesting active foreign earnings in related CFCs may trigger immediate U.S. taxation under Subpart F.
    
    If this extension is not ultimately included in the final bill, U.S. multinationals may need to significantly revise how they do business overseas—including potentially eliminating many intercompany transactions between CFCs.
    
    
  • Increased threshold for Form 1099 reporting
    Under current law, a service recipient that pays remuneration aggregating $600 or more during the calendar year to any person for services is required to report the aggregate amount of the payment to the service provider and government on a Form 1099-NEC. The legislation would increase that threshold to $2,000 for payments made beginning in 2026, as adjusted for inflation after 2026. A similar payment threshold would apply for other Form 1099 reporting requirements. 
• 5% tax on remittance payments
  The Ways and Means instructions would create a 5% excise tax generally imposed on any remittance transfer, to be paid by the sender of the international payment. If the payment is not paid at the time of transfer by the sender, then the remittance payment service provider must pay the tax. Providers would also be responsible for collection of the excise tax and payment to the IRS. However, the legislation would also exempt U.S. citizens and nationals, if verified by the service provider.
• Termination of miscellaneous itemized deductions
  The TCJA temporarily suspended miscellaneous itemized deductions for tax years 2018 through 2025. The legislation would permanently terminate miscellaneous itemized deductions beginning with the 2026 tax year. Unreimbursed employee expenses are one type of miscellaneous itemized deduction that would no longer be deductible by employees. To minimize the adverse tax consequences from this permanent elimination, an employer could consider establishing an accountable plan under Regulations section 1.62-2 so that employees could exclude any employer reimbursements of such expenses from their taxable compensation.
  
  
  • Section 162(m) $1M deduction limit
    Section 162(m) limits a publicly held corporation’s tax deduction to $1 million per year per covered employee. The new legislation would make it clear that a public company’s covered employee group can include employees of its controlled group, and compensation paid to a covered employee by all members of its controlled group is aggregated when determining if the compensation is in excess of $1 million. A controlled group is determined under sections 414(b), (c), (m) and (o) for this purpose. The current section 162(m) regulations already apply an “affiliated group” rule, based on section 1504. This change would be effective for taxable years beginning after Dec. 31, 2025.
    
    
  • UBTI increase for qualified transportation fringe and parking
    The legislation would increase a tax-exempt organization’s (except church organizations) unrelated business taxable income (“UBTI”) by any amount the organization paid for a qualified transportation fringe or any parking facility that is not deductible under section 274. This change would apply to amounts paid or incurred after Dec. 31, 2025
    
    
  • Narrowing the exclusion for research
     Currently, Section 512(b)(9) broadly excludes from UBTI fundamental research of which the results are made freely available to the public.  The proposed change limits the definition to only exclude income derived directly from the fundamental research made freely available.  This change would apply to amounts paid or incurred after Dec. 31, 2025.
    
    
  • Limitation on amortization of sports franchises to 50% of the adjusted basis
    Upon enactment, 50% of the adjusted basis of amortizable Section 197 assets (workforce in place, patent, copyright, computer systems, etc.) would be excluded from amortization “in the case of a franchise engaged in professional football, basketball, baseball, hockey, soccer, or other professional sport, or any item acquired in connection with such franchise.”
    
    
  • Limitation on charitable deductions for corporations
    The Ways and Means reconciliation instructions would create a floor based on taxable income for charitable deductions by corporations, meaning a corporation’s charitable contributions would need to exceed 1% of income in order to qualify for a deduction (and could not exceed 10%). This limitation would become effective after Dec. 31, 2025.