"The One Big Beautiful Bill" Key Tax Takeaways

On May 22, 2025, the House passed the legislation entitled "The One Big Beautiful Bill" (the "BBB").¹ The BBB makes permanent, extends and, in certain cases, modifies, a number of provisions from the 2017 Tax Cuts and Jobs Act ("TCJA"), enacts a number of new provisions and phases out many of the green energy provisions from the 2022 Inflation Reduction Act.

The following is a summary of some of the key provisions from the BBB:

BUSINESS TAX PROVISIONS

Some of the key provisions impacting businesses include the following:

1. Extension and Increase of Deduction for Qualified Business Income, REIT Dividends and MLP Income. Under current law, an individual generally may deduct 20 percent of qualified business income from a partnership, S corporation, or sole proprietorship, as well as 20 percent of certain real estate investment trust dividends and publicly traded partnership income. For taxpayers with taxable income in excess of certain specified threshold amounts, the deduction for qualified business income is limited based on (1) the W-2 wages and unadjusted basis of tangible, depreciable, property of each relevant business and (2) whether each relevant business is a specified service trade or business. This deduction is set to expire for taxable years beginning after December 31, 2025.
   The BBB would (i) make the deduction permanent, (ii) increase the deduction percentage from 20% to 23% for taxable years beginning after December 31, 2025, (iii) expand the deduction to include dividends from eligible business development companies which are attributable to net interest income of the business development company, and (iv) make relatively minor modifications to the manner in which the limitations are phased in for taxpayers with taxable income above the threshold amounts for such taxable years.
2. Extension of "Bonus" Depreciation Allowance for Certain Property. The BBB would extend the "bonus" depreciation provisions in the TCJA allowing taxpayers to immediately expense 100% of the cost of qualified property (including most equipment and machinery) acquired after January 19, 2025 and before January 1, 2030.
3. Increased Dollar Limitations for Expensing of Certain Depreciable Business Assets. Under current law (IRC section 179) a taxpayer may elect to expense the cost of qualifying property, rather than to recover such costs through depreciation deductions, up to a maximum amount of $1 million (plus inflation adjustments) for the taxable year. This $1 million limitation is reduced by the amount by which the cost of such property placed in service during the taxable year exceeds $2.5 million (plus inflation adjustments).
   For taxable years beginning after December 31, 2024, the BBB would increase the $1 million limitation and $2.5 million phase-out threshold to $2.5 million and $4.0 million, respectively, adjusted for inflation.
4. Deduction of R&E Expenditures. Current law requires that qualifying domestic research and experimental expenditures be amortized over 5 years. The BBB would allow taxpayers to immediately deduct domestic research or experimental expenditures paid or incurred in taxable years beginning after December 31, 2024, and before January 1, 2030.
5. Special Depreciation Allowance for Qualified Production Property. The BBB includes a provision that would allow taxpayers to immediately deduct 100% of the cost of certain depreciable real property used as an integral part of a qualified production activity if, among other things, (i) the property is placed in service in the U.S. or a U.S. territory, (ii) the original use of the property begins with the taxpayer, (iii) the construction of the property begins after January 19, 2025, and before January 1, 2029 and (iv) the property is placed in service after the date of enactment and before January 1, 2033. A "qualified production activity" generally means the manufacturing, chemical or agricultural production, or refining of tangible personal property. An activity generally does not count as a qualified production activity unless it results in a substantial transformation of the property comprising a product.
6. Modified Calculation of Adjusted Taxable Income for Purposes of Business Interest Deduction. Under current law, the deduction for business interest expense for a taxable year is generally limited to 30% of the taxpayer's "adjusted taxable income" (plus the taxpayer's business interest income and "floor plan financing interest") for the taxable year. "Adjusted taxable income" generally corresponds to earnings before interest and taxes (EBIT).
   The BBB would for tax years, beginning after December 31, 2024 and before January 1, 2030, modify the "adjusted taxable income" definition so that it is computed without taking into account deductions for depreciation, amortization, or depletion (which generally corresponds to earnings before interest, taxes, depreciation and amortization (EBITDA)).
7. Renewal and Enhancement of Opportunity Zone Tax Benefits. Current law provides tax benefits for investments in qualified opportunity funds or "QOFs", which generally are funds which invest in qualified opportunity zones. These tax benefits include temporary deferral of taxation of existing capital gains that are invested in a QOF, tax basis step-up, and exclusion of certain taxable gain ultimately realized on the QOF investment. These are set to expire at the end of 2026.
   The BBB would provide for a second round of QOFs beginning on January 1, 2027 and ending on December 31, 2033, subject to narrower eligibility requirements. The second round of QOFs would have similar but modified benefits, including temporary deferral of taxes on existing capital gains, tax basis step-up (including an increased basis step-up for investments in "qualified rural opportunity funds") and exclusion of certain taxable gain ultimately realized on the QOF investment.
8. Increase in Threshold for Requiring Information Reporting With Respect to Certain Payees. Under current law, the reporting threshold for payments by a business for services performed by an independent contractor or subcontractor and for certain other payments is generally $600.
   The BBB generally would increase the threshold to $2,000 for payments made after December 31, 2025, and adjust the threshold for inflation for calendar years after 2026.
9. Limitation on Individual Deductions for State and Local Taxes. Under current law, in the case of an individual, the itemized deduction for state and local taxes is capped at $10,000 ($5,000 for a married taxpayer filing a separate return) (the "SALT cap") for taxable years beginning before January 1, 2026.
   The BBB would permanently extend the SALT cap, increasing it to $40,000 ($20,000 for a married taxpayer filing a separate return) for taxable years beginning after December 31, 2024, subject to a phasedown in the case of taxpayers with modified adjusted gross income above specified thresholds (but the SALT cap would not be reduced below $10,000, or $5,000 for a married taxpayer filing a separate return). The BBB would also generally increase the SALT cap by 1% each year for taxable years beginning after December 31, 2025, and before January 1, 2034. The BBB also includes several changes to prevent the avoidance of the SALT cap, including the denial of deductions for state and local taxes paid under pass-through entity tax, or "PTET", regimes of states and localities, by entities performing services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, investing services, investment management services, and trading or dealing in securities, partnership interests, or commodities, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees.
10. Limitation on Excess Business Losses of Noncorporate Taxpayers. The BBB would (i) permanently extend the limitations in effect under current law on deductions for "excess business losses" and (ii) provide that any excess business losses that are carried forward are taken into account in the determination of the taxpayer's excess business losses in subsequent taxable years.
11. 1% Floor on Deduction of Charitable Contributions Made By Corporations. The BBB would generally allow corporations to deduct charitable contributions for taxable years beginning after December 31, 2025 only to the extent the amount of such contributions exceeds 1% of the corporation's taxable income for the taxable year.
12. Phase Out/Elimination of Clean Energy Tax Incentives. The BBB would phase out or eliminate many of the green energy tax credits enacted as part of the 2022 Inflation Reduction Act. Please click here for a more detailed discussion of these BBB provisions.
13. Payments from Partnerships for Property or Services. Under current law (IRC section 707(a)(2)), certain payments or transfers to partners from a partnership for property or services may be treated as transactions between the partnership and a non-partner "[u]nder regulations prescribed by the Secretary." The BBB would make IRC section 707(a)(2) self-effecting "[e]xcept as provided" by the Secretary.
14. No Carried Interest Provisions in the BBB. The BBB does not include any provisions directly changing the taxation of carried interests.
15. Expansion of MLP Qualifying Income. The BBB would expand the definition of "qualifying income" under IRS section 7704 to include certain income from an electricity generating facility that satisfies certain carbon capture requirements and would restore to "qualifying income" status the income from transportation or storage of two products that were inadvertently eliminated by TCJA.

INTERNATIONAL TAX PROVISIONS

Some of the key international tax provisions include the following:

1. Changes to FDII and GILTI Deduction Rates. Under current law, a U.S. corporation is allowed a deduction equal to 37.5% of its foreign-derived intangible income ("FDII") and 50% of its inclusions with respect to global intangible low-taxed income ("GILTI"). These deductions are scheduled to be reduced to 21.875% and 37.5%, respectively, for taxable years beginning after December 31, 2025. Senator Tillis had previously introduced a bill adding a new Section 966 that aimed to permit U.S. companies to repatriate intellectual property tax-free. The House bill does not include this provision, but it is worth considering whether this could form part of the changes discussed in the Senate.
   The BBB would permanently set the deduction amount for FDII and GILTI to 36.5% and 49.2%, respectively, for taxable years beginning after December 31, 2025. As proposed, the effective tax rate for FDII would change from 13.125% to approximately 13.335% and the effective tax rate on GILTI would change from 10.5% to approximately 10.668%. While the change in effective rates are small, there is speculation that these changes are an indication from the House that they may be willing to include these rate changes in further refinements by the Senate.
2. Extension of Base Erosion Minimum Tax (BEAT) Amount. Under current law, BEAT applies to corporations with annual gross receipts in excess of $500 million and base erosion payments above a certain threshold and imposes an additional tax to the extent that 10% of an applicable corporation's modified taxable income exceeds its regular tax liability (reduced by certain tax credits). For taxable years beginning after December 31, 2025, the 10% rate is scheduled to increase to 12.5% and credits will no longer be allowed in computing the regular tax liability.
   The BBB would permanently reduce the rate from 12.5% to 10.1% and retain the current treatment of tax credits for taxable years beginning after December 31, 2025.
3. Enforcement of Remedies Against Unfair Foreign Taxes. The BBB would add a new Section 899 that would provide for increased rates of certain income, withholding, and excise taxes on individuals and entities that are residents of, and governments of, countries that impose an undertaxed profits rule (the enforcement mechanism for the OECD's 15% global minimum tax), digital services tax, diverted profits tax, and, (subject to regulations) an extraterritorial tax, discriminatory tax, or any other "unfair" foreign tax enacted with a public or stated purpose that the tax will be economically borne, directly or indirectly, disproportionately by U.S. persons. Such tax rates generally are increased by 5% for each year of the unfair foreign tax up to 20% maximum. The provision also applies to certain domestic entities that are owned by a tax resident of a foreign jurisdiction that imposes an unfair tax. These domestic entities are subject to certain modifications to the base erosion anti-abuse tax (BEAT) that expands the scope of entities subject to the minimum tax, increases the applicable rate, reduces the benefits of certain credits, and expands the taxable base to include certain payments that are currently excluded.
   The provision applies a delayed effective date to allow time for negotiations and provides discretion for the Secretary of the Treasury to expand or narrow the definition of unfair taxes. Deputy assistant secretary of the Treasury has publicly stated that the U.S. system should be viewed as side-by-side with Pillar II and has advocated for a permanent safe harbor for the U.S. Proposed Section 899 appears to build a deadline for these negotiations and the automatic implementation of additional taxes without an agreed solution. The provision requires the Secretary of the Treasury to provide a list unfair taxes to aid withholding agents, who are permitted to rely on the published list in determining appropriate withholding rates and are granted relief from penalties and interest with respect to errors until January 1, 2027, if they demonstrate best efforts were made at compliance.
4. Section 954(c)(6) "Look Through Rule" Extension Not Included. Section 954(c)(6) is set to expire for tax years beginning on or after January 1, 2026 and the current bill does not include an extension of the provision. The "look-through rule" in Section 954(c)(6) currently exempts from foreign personal holding company income dividends, interest, rents, and royalties between related controlled foreign corporations. It bears watching if this is included in the Senate discussions. If Section 954(c)(6) is not extended, it could require multinational corporations to significantly reconsider their intercompany operational structures.

TAXATION OF INDIVIDUALS

Some of the other key provisions impacting individuals include the following:

• The BBB would make permanent the reduction in the individual income tax rates made by the TCJA. Those rate reductions are otherwise scheduled to expire for taxable years beginning after December 31, 2025.
• The BBB would increase the estate and lifetime gift tax exemption amount to $15 million for single filers, and $30 million for married filing jointly, in 2026, and index the exemption amounts for inflation going forward.
• The BBB would make permanent the increased individual alternative minimum tax exemption amounts and exemption phase-out thresholds included in the TCJA. Such exemption amounts and phase-out thresholds are otherwise set to expire for taxable years beginning after December 31, 2025.
• The BBB would make permanent the elimination of deductions for miscellaneous itemized deductions made by the TCJA and which currently exists.
• The BBB would reduce other itemized deductions of individual taxpayers who have taxable incomes in excess of the dollar amount at which the 37% rate bracket begins ($751,600 for married couples filing joint returns in 2025). The reduction would equal:
• 5/37ths of the lesser of (i) the excess of (x) the amount of the taxpayer's taxable income for the taxable year, over (y) the dollar amount at which the 37% bracket begins or (ii) the taxpayer's itemized state and local tax deductions for the taxable year, plus
• 2/37ths of the lesser of (i) the excess of (x) the amount of the taxpayer's taxable income for the taxable year, over (y) the sum of the dollar amount at which the 37% bracket begins and the taxpayer's itemized state and local tax deductions for the taxable year or (ii) 2/37ths of the taxpayer's itemized deductions for the taxable year other than itemized state and local tax deductions.

* * * *

The BBB will face further negotiation and likely modifications in the Senate before being sent to the President for approval, at which point it would be expected to become law. We will continue monitoring the BBB's progress. Baker Botts would be pleased to assist you in your analysis of the upcoming legislative changes.

Footnote

1. The BBB was amended in connection with its passage in a manner not yet reflected in the published text of the bill. The amendment is available here: Rules Committee amendment.

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.