An overview of the most significant tax changes in the One Big Beautiful Bill Act
This bulletin follows our previous update on evolving U.S. tax reform, which highlighted the competing House and Senate proposals, particularly the introduction and scope of proposed Section 899 targeting "unfair foreign taxes." The current legislative process has concluded with President Trump signing the One Big Beautiful Bill Act (OBBB)1 on July 4.
This update provides an overview of the most significant tax changes in the OBBB. We begin with international tax, especially relevant for those with cross-border interests, and then highlight some of the more prominent domestic changes. Although this update focuses on the most notable items, there are additional provisions and effective dates that are not covered here.
Notable International Tax Provisions
One of the more closely watched proposals, Section 899, which would have targeted "unfair foreign taxes," was ultimately removed from the final bill following high-level discussions with the G-7 nations. This decision was made because those nations agreed to implement certain exceptions under Pillar Two, but the Senate has indicated that Section 899 could be revisited if those exceptions are not implemented soon.
The OBBB includes several changes to key international tax provisions, such as the following:
- Base erosion and anti-abuse tax (BEAT):
- An increase of the base rate to 10.5%, from 10%, instead of the previously scheduled increase to 12.5%.
- The OBBB repeals the scheduled change under Section 59A(b)(2)(B), allowing companies to continue using general business credits to reduce regular tax liability without increasing BEAT exposure.
- Global intangible low-taxed income (GILTI) and foreign derived
intangible income (FDII):
- A reduction of the deductions for GILTI (now referred to as "net CFC tested income") and FDII (renamed as "foreign-derived deduction eligible income"), setting the deduction rates at 40% and 33.35%, respectively. For GILTI, this results in a tax rate of 12.6%, and for FDII, an effective U.S. tax rate of 14%, beginning after 2025.
- U.S. corporations currently receive a foreign tax credit for up to 80% of foreign taxes paid or accrued on a CFC's tested income (i.e., a 20% foreign tax credit haircut). The OBBB decreases the haircut to 10%, allowing a credit for up to 90% of foreign taxes paid. As a result, if a CFC pays foreign taxes at a rate of at least 14%, the net CFC tested income tax liability is fully offset by the foreign tax credit.
- The OBBB eliminates the Qualified Business Asset Investment (QBAI) exclusion so that U.S. shareholders will be taxed on their full pro rata share of the CFC's net tested income.
- Reinstatement of the limitation on downward attribution for purposes of CFC status, precluding downward attribution from a foreign person to a U.S. person. This long-awaited rule will reduce the number of entities classified as CFCs merely because there is a U.S. entity included in a group of foreign entities with minority (or no) U.S. beneficial ownership. However, new Section 951B permits this type of downward attribution, but only for purposes of a "foreign controlled U.S. shareholder" of a "foreign controlled foreign corporation." This Section applies the CFC income inclusions by taking into account downward attribution, except that the ownership threshold for a U.S. shareholder is increased to more than 50%, from 10% or more.
- The Section 954(c)(6) lookthrough rule for subpart F income of CFCs is made permanent. This rule generally prevents non-subpart F income of a subsidiary of a CFC from becoming subpart F income when paid as a dividend to the CFC.
- The OBBB eliminates the one-month deferral election (under Section 898 of the Code) for taxable years of CFCs beginning after November 30, 2025, and provides a transition rule for a CFC's first tax year beginning after that date. The Secretary of the Treasury is directed to issue guidance for allocating foreign taxes appropriately during the transition.
- Revised "pro rata share" rules for U.S. shareholders of CFCs, requiring CFC income inclusions based on stock ownership at any time during the CFC's taxable year, not just on the last day that the corporation is a CFC.
- For the Section 163(j) limitation on business interest deductions, EBITDA returns as the base for calculating adjusted taxable income, effective for tax years beginning on or after January 1, 2025. In addition, the OBBB excludes subpart F income, net CFC tested income, and Section 78 gross-up amounts from the definition of adjusted taxable income once the base returns to EBITDA.
- Up to 50% of the taxable income from the sale of U.S.-produced inventory may be treated as foreign source for purposes of calculating the foreign tax credit limitation.
Notable Domestic Tax Provisions
On the domestic front, the OBBB makes permanent many provisions of the Tax Cuts and Jobs Act (TCJA) that would otherwise have expired at the end of 2025, and altered the application of other TCJA provisions after 2025. As a result, most OBBB provisions take effect for tax years beginning after December 31, 2025.
Some of the more significant changes include the following:
- The OBBB makes the TCJA individual rate structure permanent, maintaining seven brackets (10%–37%). Brackets are indexed for inflation.
- Instead of the current complete suspension of the overall limitation on itemized deductions, for taxable years beginning after December 31, 2025, individuals are required to reduce the amount allowable for itemized deductions by 2/37 of the lesser of (a) the individual's otherwise allowable itemized deductions and (b) the excess of the individual's taxable income (before reduction for any itemized deductions) over the dollar amount at which the 37% rate bracket begins with respect to the individual. This limitation applies only to individuals in the highest bracket, effectively limiting the benefit of their itemized deductions to 35 cents on the dollar.
- The state and local tax (SALT) deduction cap is increased to $40,000 through 2029, with a phaseout for high-income taxpayers.
- The estate and gift tax exclusion amount is permanently raised to $15 million starting in 2026, and is indexed for inflation.
- 100% bonus depreciation is made permanent, and Section 179 expensing limits are increased to $2.5 million, with a $4 million phaseout threshold.
- The 20% deduction for qualified business income (Section 199A) is made permanent, with higher phase-in thresholds.
- Section 174 previously required taxpayers to capitalize and amortize most specified R&D expenditures over a five-year period, effective after 2021. The OBBB permanently allows taxpayers to immediately deduct domestic research or experimental expenditures paid or incurred in taxable years beginning after December 31, 2024.
- The Opportunity Zone program, originally set to expire in 2026, has been made permanent. The updated framework, which introduces new requirements and eligibility rules, will apply starting January 1, 2027
Note that the OBBB does not repeal the corporate alternative minimum tax (CAMT), and it continues to apply to applicable corporations under the thresholds and rules established in prior law.
Congressional Outlook: Reconciliation and Further Legislation
Congress is expected to pursue at least one additional reconciliation bill in the near term. This forthcoming legislation may include both spending cuts and new revenue measures, potentially revisiting tax policy debates left unresolved by the OBBB, including the possible revival of the Section 899 proposal, particularly if implementation of a parallel system to the OECD Pillar Two rules is delayed.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
