Tax Provisions In The One Big Beautiful Bill Act

On July 4, President Trump signed into law the One Big Beautiful Bill Act (the Act). While the Act covers a wide swath of territory, the core of the Act is its tax provisions. The Act (i) makes permanent many of the tax changes enacted as part of the tax legislation enacted in 2017 in President Trump's first term (the 2017 Act) that were otherwise set to expire, (ii) eliminates many clean energy tax credits enacted during the Biden administration, (iii) adds numerous new provisions and (iv) makes significant changes to others.

Notably, the Act does not include certain provisions that were in earlier versions of the legislation and that garnered significant controversy, including (i) the proposed Section 899 retaliatory tax on residents of jurisdictions that apply global minimum taxes and certain other taxes to entities controlled by US persons (see our alert Proposed IRC section 899 "revenge tax" targets residents of certain discriminatory/offending foreign countries), (ii) limitations on the deductibility of pass-through entity taxes, and (iii) a tax on income derived from litigation funding.

Set forth below is a high-level summary of many of the Act's key tax provisions.

Please contact a member of the HSF Kramer tax department to discuss these and other provisions contained in the Act.

1. Individual

Rates

The income tax rates and brackets, including the top 37% individual rate, have been made permanent. These were set to revert to pre-2018 rates at the end of 2025.

Miscellaneous itemized deductions

The Act makes permanent the 2017 Act's disallowance of miscellaneous itemized deductions, which was scheduled to expire at the end of 2025. However, the Act adds educator expenses to the list of items that are not miscellaneous itemized deductions.

Limitation on itemized deductions

For pre-2018 tax years, a taxpayer whose adjusted gross income exceeded an applicable amount was required to reduce the amount of otherwise allowable itemized deductions by the lesser of (i) 3% of the excess of adjusted gross income over the applicable amount and (ii) 80% of the amount of otherwise allowable itemized deductions. The 2017 Act eliminated that limitation for taxable years 2018-2025. The Act reintroduces a limitation on itemized deductions for taxable years beginning after December 31, 2025. The Act reduces the amount of the itemized deductions otherwise allowable by 2/37 of the lesser of (i) the amount of such itemized deductions and (ii) taxable income in excess of the dollar amount at which the 37% tax bracket applies ($626,350 for 2025, or $751,600 for taxpayers filing a joint return).

State and local taxes

The Act increases the annual deduction for state and local taxes from $10,000 to $40,000 ($5,000 to $20,000 for married taxpayers filing separately) for 2025. That annual limit increases to $40,400 ($20,200 for married taxpayers filing separately) for 2026, with a compounding 1% annual increase for each of 2027, 2028 and 2029. For 2025, the increase phases out for taxpayers with modified adjusted gross incomes above the threshold amount of $500,000 ($250,000 for married taxpayers filing separately), such that the deduction is reduced by 30% of the excess of the taxpayer's modified adjusted gross income over the threshold amount. Thus, the 2025 increase is fully phased out for taxpayers with modified adjusted gross income of $600,000 ($300,000 for married taxpayers filing separately). The threshold amount increases to $505,000 for 2026, with a compounding 1% annual increase for each of 2027, 2028 and 2029. The deduction for all taxpayers drops back to $10,000 ($5,000 for married taxpayers filing separately) beginning in 2030.

Home mortgage interest

The 2017 Act limited the individual deduction for home mortgage interest to interest on $750,000 of acquisition indebtedness. The Act makes this limit permanent, as it was set to revert to its pre-2018 amount of $1 million at the end of 2025. The Act also treats some mortgage insurance premiums on acquisition indebtedness as qualified interest and makes permanent the 2017 Act disallowance of deductions for home equity indebtedness.

Charitable contributions

The Act permanently provides a deduction of up to $1,000 ($2,000 for married taxpayers filing joint returns) for charitable contributions by taxpayers who do not elect to itemize deductions. (A more limited version of this deduction was permitted in 2020 and 2021.)

The Act also disallows deductions for charitable contributions that in the aggregate do not constitute at least 0.5% of adjusted gross income for individuals and 1% of taxable income for corporations.

These changes apply to contributions made in taxable years beginning after December 31, 2025.

Estate tax exclusion

The estate tax does not apply to estates below a proscribed exclusion amount. Beginning in 2026, the Act permanently increases the exclusion amount to $15 million, which will be indexed for inflation. Since 2018, the exclusion amount has been $10 million, indexed for inflation ($13.99 million in 2025) and was set to revert to the pre-2018 amount of $5 million at the end of 2025.

Other

The Act provides temporary exclusions for tips and overtime and deductions for car loan interest, all of which are subject to limitations and phaseouts. The Act also creates Trump accounts, which provide for a deposit by the US Treasury of $1,000 for each child born through 2028 (without regard to income) for investment in certain stock indexes until the child reaches age 18, after which the account acts like an IRA. In addition, the Act makes changes to several other provisions affecting individuals, including changes relating to the standard deduction, alternative minimum tax, casualty losses, qualified transportation fringe benefits, moving expenses, wagering losses and ABLE accounts.

2. Investments

Section 1202 qualified small business stock exclusion

Section 1202 provides an exclusion for noncorporate taxpayers of 100% of the gain from the sale of qualified small business stock (QSBS) held for at least five years, subject to certain caps. The Act provides a 50% exclusion for QSBS held between three and four years and a 75% exclusion for QSBS held between four and five years, in each case if the QSBS was acquired after the date of enactment (taking into account carryover holding periods).

In addition, the Act increases one prong of the cap on the exclusion for QSBS acquired after the date of enactment from $10 million to $15 million (the cap is 50% of such amounts for a married taxpayer filing a separate return). The cap on such post-enacted acquired stock is adjusted annually for inflation (provided that the inflation adjustments cease once the applicable cap is met).

One of the requirements for QSBS is that the adjusted gross assets of the corporation at the time the stock is acquired cannot exceed a certain amount. The Act increases that adjusted gross asset limit from $50 million to $75 million, adjusted annually for inflation, with respect to stock issued after the date of enactment.

Opportunity Zones

The Act permanently extends the Opportunity Zone tax incentives, including the full exclusion of gain on qualified investments held for at least 10 years. The Act, however, makes several changes to the incentives, including the following:

• New zones will be designated every 10 years.
• Deferred gain invested in an Opportunity Zone will be taxable on the earlier of (i) five years after the investment is made and (ii) sale or exchange of the investment. Under current rules, all deferred gain is required to be recognized by December 31, 2026, regardless of when the investment was made (the rolling five years under the Act eliminates the declining benefit under current law — e.g., an eight-year deferral for investments made in 2018 but only a one-year deferral for investments made in 2025).
• For investments held at least five years, there is a permanent exclusion of 10% of the deferred gain. The permanent exclusion was not available under current law for deferred gain invested after 2021.
• Additional benefits are afforded for certain "rural" areas (a higher permanent exclusion and lower threshold for achieving substantial rehabilitation requirements).

These changes are effective for investments made in taxable years beginning after January 1, 2027. The existing rules continue to apply for investments made before that date. Substantial additional reporting requirements are added beginning after the date of enactment.

529 plans

The Act expands the scope of the term "qualified higher education expense" for purposes of Section 529 accounts to include (i) tuition and various other related expenses for students enrolled at an elementary or secondary public, private or religious school and (ii) "qualified postsecondary credentialing expenses" (including tuition and various other related expenses) with respect to "recognized postsecondary credential programs" (including applicable state-listed programs and such reputable programs identified by the Treasury Secretary in consultation with the Secretary of Labor).

These changes apply to distributions made after the date of the enactment of the Act.

3. Business provisions

Business interest expense

Section 163(j) limits the deductibility of net business interest to 30% of adjusted taxable income. The Act permanently adds back depreciation and amortization in computing adjusted taxable income for taxable years beginning after December 31, 2024, thus prospectively reversing a change that went into effect beginning in 2022. The Act also gives Treasury authority to make special rules for short years that began after December 31, 2024, and ended before the date of enactment.

Additionally, the Act subjects capitalized interest to the limitations in Section 163(j) and provides that, in allocating the permitted amount of interest that can be deducted or capitalized, the capitalized interest is allocated the first dollars of permitted interest. However, any capitalized interest that is limited under Section 163(j) and carried forward is no longer subject to capitalization when carried forward.

The Act also provides that adjusted taxable income does not include subpart F income and GILTI (or related deductions) (such items are described below), deductions for dividends from foreign subsidiaries or the gross-up inclusions under Section 78 for foreign taxes paid or deemed paid.

Section 199A deduction

Section 199A, which was enacted as part of the 2017 Act, provides a 20% deduction for pass-through income from qualifying trades or businesses. The Act makes the Section 199A deduction permanent. It was set to expire at the end of 2025.

The deduction is subject to a cap equal to the greater of (i) 50% of the W-2 wages with respect to such trade or business and (ii) 25% of such wages plus 2.5% of the unadjusted basis of qualified property. The cap does not apply to taxpayers with taxable income below a threshold amount, and the cap is phased in for taxpayers whose taxable income lies between the threshold amount and a fixed amount above that. The Act increases that fixed amount from $50,000 ($100,000 for taxpayers filing a joint return) to $75,000 ($150,000 for taxpayers filing a joint return) and provides a minimum deduction of $400.

Expensing

Bonus depreciation

The Act permanently allows a deduction of 100% of the costs of Section 168(k) "qualified property" acquired (or under a binding contract to acquire) in the first taxable year ending after January 19, 2025, or later. The 2017 Act had temporarily provided such a deduction, but the percentage of such costs permitted to be deducted in the year of acquisition has gradually been reduced since 2023 and is 40% for property placed in service in 2025. The Act also permits taxpayers to elect to apply the reduced 40% for property placed in service in the first taxable year ending after January 19, 2025.

Qualifying property costs

The Act increases the costs of qualifying Section 179 property (generally tangible depreciable property acquired by purchase for use in a trade or business) that can be deducted in the year placed in service (rather than capitalized) from $1 million (adjusted for inflation for taxable years beginning after 2018) to $2.5 million (adjusted for inflation). The accelerated deduction is reduced by the costs of qualifying property placed in service during the taxable year in excess of a threshold amount. The Act increases such threshold amount from $2.5 million to $4 million (both amounts adjusted for inflation).

Domestic research and experimental expenditures

The Act adds a new Section 174A, which allows a deduction for domestic research and experimental expenditures (to the extent not taken as a credit, if available). These amounts previously had to be capitalized and amortized over a five-year period. For certain small businesses that elect to do so, the Act makes Section 174A retroactive to amounts paid or incurred after December 31, 2021, and the Act allows other taxpayers to elect a catch-up deduction for amounts previously capitalized and unamortized.

Qualified production property

The Act adds a new provision (Section 168(n)) that temporarily allows a 100% deduction for the costs of qualified production property (nonresidential real property that is used by the taxpayer in qualified production activity, not including office, administrative and nonmanufacturing areas of the property). Qualified production activity generally includes manufacturing, production or refining of tangible personal property (excluding restaurants). Original use of the property must commence with the taxpayer, and the deduction does not apply to property leased to others. To qualify, the construction of the property must begin after January 19, 2025, and before January 1, 2029, and be placed in service before January 1, 2031. Special recapture provisions apply if the property ceases to be used as qualified production property during the 10-year period following its placed-in-service date.

Excess business losses

The 2017 Act limited the ability of noncorporate taxpayers to deduct excess business losses. The Act made such limitations permanent.

Exception to percentage of completion method

The Act expands the exception from "percentage of completion" accounting for all residential construction contracts. Under current law, the exception only applies to buildings having four or fewer units. This change will generally allow residential condominium developers to report income from the pre-sales of units on a completed contract method (when the contract closes and proceeds are received) rather than the percentage of completion method (which requires income recognition over the life of the contract regardless of the amount of cash received under the contract). This is a long-awaited change that will allow developers to better match income recognition to cash flow. See our alert Tax reform update: Senate Act includes key win for condominium developers. The change is effective for contracts entered into in taxable years beginning after July 4, 2025.

Employee retention credits

The Act disallows COVID-related employee retention tax credits (ERTC) unless a claim was filed on or before January 31, 2024. The Act also extends the statute of limitations for the assessment of any amounts related to claiming an ERTC to six years (based on the date the applicable return or claim was filed). In addition, the Act adds certain penalties and enforcement measures with respect to applicable promoters who provide aid, assistance or advice with respect to the ERTC and who fail to comply with due diligence requirements imposed by the Treasury Secretary with respect to determining eligibility for the ERTC.

4. Foreign

GILTI

A controlled foreign corporation (a CFC) is a foreign corporation that is more than 50% owned by US persons that own, directly, indirectly or constructively through attribution, at least 10% of the corporation's stock (10% US shareholders). The 2017 Act introduced a new requirement on the 10% US shareholders of CFCs to include in income their pro rata share of the CFC's global intangible low-taxed income (GILTI). The GILTI regime is intended to impose a minimum tax on income from intangibles held in low-tax jurisdictions. The Act modifies the GILTI regime in several respects, most notably by expanding it beyond intangibles and adjusting the tax rate for corporations.

Elimination of depreciable property baseline

In general terms, under current law GILTI is equal to the excess of the CFC's modified income (referred to as CFC tested income) over 10% of the corporation's unadjusted basis in certain depreciable property. The Act eliminates the depreciable property baseline and thus the tax is now imposed on net CFC tested income without reduction for a deemed return on depreciable property. As a corollary, the Act replaces the term "GILTI" with the phrase "net CFC tested income" throughout the Code.¹ (CFC tested income is "net" because the GILTI rules are applied with respect to all CFCs in which the taxpayer is a 10% US shareholder and determined net of losses in any such CFCs.) This provision applies to taxable years of foreign corporations beginning after December 31, 2025.

Permanent rate change

GILTI is currently taxed for corporations at a maximum rate of 10.5% by means of a 50% deduction on a shareholder's GILTI inclusion (i.e., 50% of the 21% top corporate rate). That 50% deduction was set to step down to 37.5% for taxable years beginning after December 31, 2025 (resulting in a 13.125% effective rate). However, the Act permanently adjusts the deduction to 40% (resulting in an effective rate of 12.6%) for taxable years beginning after December 31, 2025.

Increase in foreign tax credit base

Under current law, a 10% US shareholder of a CFC is eligible for a foreign tax credit with respect to foreign taxes paid (or, as discussed below, deemed paid) attributable to the excess of GILTI inclusions over allocable deductions. The Act limits the deductions that are taken into account (thereby potentially increasing the amount of income eligible for a foreign tax credit) to the following: (a) the 40% deduction of GILTI inclusion amounts (referred to above) and the 33.34% deduction of FDII (referred to below), (b) the deduction for state, local and certain other taxes imposed on GILTI, and (c) any other deduction that is "directly allocable" to GILTI. The Act specifies that no interest or research and development expenses are allocated to GILTI. Any deductions that would have otherwise been allocated to the GILTI category but for this rule are instead allocated to US-source income. This provision applies to taxable years beginning after December 31, 2025.

Increased deemed paid foreign tax credit

Under current law, for foreign tax credit purposes a domestic corporation that is a 10% US shareholder of a CFC is deemed to have paid certain foreign income taxes paid or accrued by the CFC that are properly attributable to net CFC tested income, provided that the amount of such deemed paid taxes is reduced in two respects. First, the 10% US shareholder's inclusion percentage (i.e., the ratio of the 10% US shareholder's GILTI inclusion to its aggregate pro rata share of its CFC tested income, without reduction for CFCs with losses) is applied to the foreign taxes, thus reducing the deemed paid amount if the inclusion percentage is less than 100% (which could occur if the 10% US shareholder owns interests in one or more CFCs that incur a loss). Second, only 80% of the foreign income taxes remaining after application of the inclusion percentage are deemed paid by the 10% US shareholder. The amount of foreign income taxes remaining after the foregoing reductions is available to be claimed as a foreign tax credit within the GILTI category.

The Act reduces the haircut from 20% to 10% and thereby increases the available foreign tax credit. Therefore, assuming a 100% inclusion percentage, no tax would be imposed on GILTI income that is subject to a 14% or higher rate of foreign tax (21% corporate rate x (100% - 40% deduction) / 90%). This provision applies to taxable years of foreign corporations beginning after December 31, 2025, and to taxable years of 10% US shareholders in which or with which such taxable years of foreign corporations end.

FDII

As a complement to GILTI, the 2017 Act also introduced a deduction for foreign-derived intangible income (FDII) to further incentivize multinational corporations to hold intangible assets in the US. While GILTI subjects 10% US shareholders to a minimum tax on income from intangibles held in foreign subsidiaries, FDII provides a reduced tax rate (by means of a deduction) on a C corporation's export income derived from intangibles held in the US. The Act modifies the FDII regime in several ways, most notably by expanding it beyond intangibles and adjusting the tax rate.

Elimination of depreciable property baseline

In general terms, under current law the FDII deduction is available on the excess of the corporation's modified income (referred to as deduction eligible income, or DEI) from property sold to non-US persons or services provided to non-US persons for use outside the US (referred to as foreign-derived deduction eligible income, or FDDEI) over 10% of a proportionate share of the corporation's unadjusted basis in certain depreciable property. The Act eliminates the depreciable property baseline and thus the deduction is applied against FDDEI without reduction for a deemed return on depreciable property. As a corollary, the Act replaces the term "FDII" with "FDDEI."² This provision applies to taxable years beginning after December 31, 2025.

Permanent rate change

FDII is currently taxed at a rate of 13.125% by means of a 37.5% deduction. Under current law, the deduction percentage is set to step down to 21.875% for tax years beginning after December 31, 2025. The Act instead permanently reduces the FDII deduction to 33.34%, resulting in an effective tax rate of 14% for taxable years beginning after December 31, 2025.

Changes to DEI

The Act also modifies DEI by excluding from DEI any income or gain from the sale or other disposition (including a deemed sale or other deemed disposition) of intangible property and other property of a type that is subject to depreciation, amortization, or depletion by the seller. This change applies retroactively to sales or other dispositions or amounts received after June 16, 2025. In addition, the Act limits the deductions against DEI to expenses and deductions properly allocable to such income. For these purposes, interest and research and experimental expenses are not allocable to DEI. This change applies to taxable years beginning after December 31, 2025.

Other CFC changes

Repeal of downward attribution

The 2017 Act expanded the scope of foreign corporations that would be CFCs by attributing to an entity stock owned by the entity's equity holders (referred to as downward attribution). Thus, for example, if a shareholder of a foreign corporation owns at least 50% of the stock of a US corporation, the US corporation is treated as owning the stock of the foreign corporation held by such shareholder for purposes of determining whether the foreign corporation is a CFC. The 10% US shareholders of a CFC must include in income their pro rata shares (based on direct and indirect ownership, but not constructive ownership such as through downward attribution) of the CFC's subpart F and GILTI (now referred to as net CFC tested income, as described above).

The Act eliminates downward attribution in determining whether a corporation is a CFC and its 10% US shareholders. However, it retains downward attribution for purposes of the subpart F and GILTI inclusions with respect to a US person that would as a result be treated as owning 50% or more of the foreign corporation's stock (with some modified nomenclature).

This change applies to taxable years beginning after December 31, 2025, with no inference as to the application of downward attribution prior to such date.

Permanent look-through rule for related CFCs

The 10% US shareholders of a CFC must include in income (in addition to their share of the CFC's GILTI, now net CFC tested income) their share of the CFC's subpart F income, which includes foreign personal holding company income (generally certain categories of passive income). Under a rule that was scheduled to expire for taxable years beginning after December 31, 2025, dividends, interest, rents and royalties received from a related CFC are excluded from foreign personal holding company income if paid out of earnings that are neither subpart F income nor income that is effectively connected with a US trade or business. The Act makes this rule permanent.

Pro rata shares

Under current law, a CFC's 10% US shareholders must include their shares of the CFC's subpart F income and GILTI (now net CFC tested income) for a taxable year only if they are shareholders on the last day in such taxable year in which the corporation is a CFC. The Act adopts a more sensible approach by requiring pro rata inclusions by 10% US shareholders based on the number of days in the year in which they held their shares while the corporation was a CFC, even if they no longer held such shares on such last day.

This change applies for taxable years beginning after December 31, 2025, with a transition rule for dividends paid (or deemed paid) during 2025.

BEAT

The base erosion and anti-abuse tax (BEAT), which was introduced in the 2017 Act, is a minimum tax on C corporations (other than RICs and REITs) with average gross receipts of at least $500 million whose "base erosion percentage" exceeds 3% (or 2% for certain taxpayers).

The Act increases the rate of the tax to 10.5% from 10%. The rate had been scheduled to increase to 12.5%.

The tax is imposed on the corporation's modified taxable income. One such modification is an addback for certain tax credits, including research credits. The Act permanently retains this addback, which was otherwise set to expire.

These changes apply for taxable years beginning after December 31, 2025.

Change to the source of inventory sales for foreign tax credit purposes

Under current law, income from the sale of inventory produced in the US is sourced solely on the basis of the production activities with respect to the property. The Act amends this rule for purposes of the foreign tax credit limitation (i.e., foreign taxes can only be credited against US tax on foreign source income). Under the Act, the portion of income from a sale outside the US for use outside the US of inventory produced in the US that is attributable to the seller's foreign office or other fixed place of business is treated as foreign source, provided that the foreign source portion is capped at 50% of the taxable income from the sale. This provision applies to taxable years beginning after December 31, 2025.

5. Credits

Termination of Green New Deal subsidies

The Act terminated the following credits as of the corresponding termination dates:

In addition:

• Section 48C (advanced energy project credit program) is amended to disallow the reissuance of credit allocations that lapse.
• Section 45X (advanced manufacturing production credit) is phased out starting in 2030 for critical minerals other than metallurgical coal and is terminated for (i) wind energy components produced and sold after December 31, 2027, and (ii) metallurgical coal produced after December 31, 2029.
• Section 45Z (clean fuel production credit) is extended from 2027 until 2029.
• Section 168(e)(3)(B)(vi) (cost recovery for energy property — i.e., solar or wind energy) is also terminated for property the construction of which begins after December 31, 2024.

Solar and wind credits

Aside from the credit terminations, significant changes were made with respect to solar and wind credits under Sections 45Y (clean electricity production credit) and 48E (clean electricity investment credit). For facilities that do not begin construction within 12 months of July 4, 2025, no credit will be available under those sections for any wind or solar facilities placed in service after December 31, 2027. Furthermore, President Trump issued an executive order on July 7, 2025, for Treasury to "strictly enforce" the termination of tax credits for wind and solar projects, focusing on ensuring the policies concerning "beginning of construction" are not circumvented. The foregoing does not apply with respect to energy storage technology.

The Section 45Y credit is in all events terminated for facilities placed in service after December 31, 2032. This is a change from current law, which permitted the credit for property placed in service prior to the later of (i) the end of the calendar year in which the annual greenhouse gas emissions from the production of electricity in the US are equal to or less than 25% of the annual greenhouse gas emissions from the production of electricity in the US for calendar year 2022 and (ii) December 31, 2032.

The investment tax credit under Section 48E is amended to include qualified fuel cell property as eligible for a 30% credit (rather than the base 6% credit unless additional requirements are satisfied) and exempting such property from the requirement of having an anticipated greenhouse gas emissions rate not greater than zero and the recapture associated with failing that test. This change is effective for property the construction of which begins after December 31, 2025.

Adders

Under current law, an additional credit is allowed for certain projects, including those satisfying a "domestic content" level or located in an "energy community."

The Act amends the domestic content requirements (under Section 48E) by increasing the required domestic content percentage (i.e., the percentage of costs attributable to manufactured products mined, produced or manufactured in the US) from its current 40% to 45% for projects commencing construction after June 16, 2025, and before January 1, 2026; 50% for projects commencing construction in 2026; and 55% for projects commencing construction after 2026. This change is effective as of June 16, 2025.

A taxpayer-favorable change was made to Section 45Y by allowing an increased credit for certain nuclear energy communities.

Additional restrictions for projects involving foreign entities

The Act further limits the availability of credits for projects owned by, or receiving material assistance from, certain foreign entities.

Section 48E credits are disallowed for any taxpayer that is a prohibited foreign entity. Section 48E credits also would not be available for any facility (that begins construction after December 31, 2025) receiving material assistance from a prohibited foreign entity. Material assistance is defined as having a material assistance cost ratio (percentage of costs that relate to components manufactured by a person other than a prohibited foreign entity) that is less than the threshold percentage, which threshold percentage ranges from 40% to 60% for qualified facilities and 55% to 75% for energy storage technology. The material assistance rules apply to any project commencing construction after December 31, 2025. Credits also may not be sold (under Section 6418) to a prohibited foreign entity.

For these purposes, a prohibited foreign entity is a specified foreign entity or a foreign-influenced entity. A specified foreign entity generally includes designated terrorist organizations, blocked persons, Chinese military companies operating in the US and foreign-controlled entities (a government or instrumentality of North Korea, China, Russia or Iran (each, a covered nation), an entity that is controlled by such government or instrumentality, a citizen or a national of a covered nation (other than an individual who is a citizen, national or a lawful permanent resident of the US), an entity organized under the laws of or having its principal place of business in a covered nation or any entity controlled by any of the foregoing). A foreign-influenced entity is an entity (i) with respect to which a specified foreign entity has direct authority to appoint a covered officer (i.e., a board member or executive-level officer); (ii) of which a single specified foreign entity owns 25% or more; (iii) of which one or more specified foreign entities own 40% or more in the aggregate; (iv) at least 15% of the debt of which has been issued to one or more specified foreign entities; or (v) that, during the prior taxable year, made payments to a specified foreign entity pursuant to a contract or agreement that entitled such specified foreign entity to exercise effective control over any qualified facility or energy storage technology.

Credits are also disallowed (i) under Section 45U (zero-emission nuclear power production credit) and Section 45Z (clean fuel production credit) for any taxpayer that is a specified foreign entity or, starting in 2028, if the taxpayer is a foreign-influenced entity, and (ii) under Section 45Q (carbon oxide sequestration credit) if the taxpayer is a specified foreign entity or foreign-influenced entity.

The Act added a provision requiring 100% recapture of any credit under Section 48E claimed in a taxable year beginning after July 4, 2027, to the extent any "applicable payment" is made within 10 years following the date the facility is placed in service. Applicable payments include any payments to a specified foreign entity pursuant to a contract, agreement or other arrangement if such specified foreign entity exercises effective control over any qualified facility or energy storage technology.

Other credits

Section 45D (new markets tax credit) is now made permanent.

The low-income housing credit has been expanded in two ways: (i) the state allocation ceiling is increased by 12%, thereby increasing the pool of credits available to be granted, and (ii) the percentage requirement for private activity bond financing (which permits credits without using the state allocation) is lowered from 50% to 25%. This change is effective beginning in 2026.

6. Other

Disguised sales in partnerships

The Act eliminated language suggesting that implementing regulations may be required in order for certain transactions involving a partnership and two or more partners to be treated as disguised sales under Section 707, such as a contribution to the partnership of cash by one partner and a distribution of such cash to another partner. The Act, however, does not provide guidance as to when such transactions should be so treated, as the statute still requires as a precondition to recharacterization that such transfers be "properly characterized" as a sale of property, and no regulations have been issued by Treasury.

This change applies to services performed and property transferred after the date of enactment, with no inference as to the proper treatment under Section 707 with respect to payments from a partnership to a partner for services performed or property transferred, on or before such date.

Increased threshold for 1099-MISC reporting

The Act increases the threshold for a payer to be required to provide a Form 1099-MISC to a payee from $600 to $2,000, adjusted annually for inflation. (The $10 thresholds for reporting interest and dividends on Forms 1099-INT and 1099-DIV have not changed.)

This change applies for taxable years beginning after December 31, 2025.

Increased excise tax on investment income of certain private colleges and universities

The Act replaces the existing excise tax on the investment income of private colleges and universities with a new rate structure beginning in 2026. Currently, the 1.4% excise tax only applies to private colleges and universities (i) that have at least 500 tuition-paying students, (ii) of which more than 50% are located in the US, (iii) with a student adjusted endowment (roughly the school's investment assets divided by the number of students) of at least $500,000 and (iv) that meet certain other tests. The Act introduces a multi-tiered rate system of 1.4%, 4% and 8%, where an institution's applicable rate depends on its student adjusted endowment (the 8% rate will apply if the student adjusted endowment exceeds $2 million). The Act retains the same requirements as set forth above, except for the first, which beginning in 2026 will require 3,000 tuition-paying students. The Act also adds certain related reporting requirements.

Excise tax on remittance transfers

The Act adds a 1% excise tax under new Section 4475 on remittance transfers, as defined in the Electronic Fund Transfer Act, payable by the sender of cash, a money order, a cashier's check or any other physical instrument (as determined by the Treasury Secretary) to recipients outside the US.

There are exceptions for transfers from accounts held with certain financial institutions or funded with a debt or credit card issued in the US. The remittance transfer provider must collect and remit such tax quarterly and has secondary liability if the tax is not collected.

This change applies to transfers made after December 31, 2025.

Footnotes

1 Notwithstanding this name change, this Alert at times continues to refer to GILTI.

2 Notwithstanding this name change, this Alert continues to refer to FDII.

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.