On July 4, 2025, President Trump signed into law the FY 2025 budget bill (the "Act"), which includes substantial business tax proposals. At a high level, the Act permanently extends many of the 2017 Tax Cuts and Jobs Act's (TCJA's) expiring tax provisions, introduces new tax provisions, including ones that President Trump campaigned on, and eliminates or phases out various clean energy credits established by the 2022 Inflation Reduction Act (IRA). Notably for businesses, the Act does not incorporate the following aspects of the Trump Administration's tax agenda: closing the carried interest loophole, lowering the corporate income tax rates, and eliminating the 15% Corporate Alternative Minimum Tax.
Business owners should consider the implications of the Act's various business tax proposals, which are summarized below.
- Modifying the Section 163(j) limitation. The Act increases the Section 163(j) business interest expense limitation by (i) modifying "adjusted taxable income" from 30% EBIT to 30% EBITDA and (ii) expanding floor plan financing to include certain recreational trailers and campers. However, the Act also decreases the Section 163(j) limitation by excluding various international tax items, such as Subpart F income, Net CFC Tested Income (previously referred to as GILTI), the gross-up for deemed paid foreign tax credits under Section 78 and related deductions from the adjusted taxable income calculation.
Additionally, under a new ordering rule, the Section 163(j) limitation applies to capitalized interest before interest expense in any given year. Historically, taxpayers could capitalize interest into the basis of assets and depreciate it over the life of the assets without limitation under Section 163(j). Subjecting capitalized interest to the Section 163(j) limitation curtails taxpayers' ability to use the interest capitalization rules to circumvent Section 163(j) limitations.
Accordingly, businesses, especially those with foreign corporate subsidiaries, should carefully consider the impact of the revised Section 163(j) limitation on their ability to deduct interest.
- Preserving the PTET deduction. The Act permanently retains the TCJA's cap on the total state and local taxes (SALT) that an individual taxpayer may deduct. However, it increases the cap from $10,000 to up to $40,000 for individuals with taxable income of $500,000 or less. That said, the Act does not restrict the pass-through entity tax (PTET) workaround to the SALT cap, which earlier drafts had proposed. Specifically, in response to the TCJA's SALT cap, various states enacted legislation allowing pass-through entities to elect to pay state income taxes on behalf of their owners at the entity level. The IRS subsequently issued Notice 2020-75, which allows PTET paid by entities to be netted against the owner's federal taxable income, effectively circumventing the SALT cap. In the Notice, the IRS noted that it planned to issue further guidance in the form of proposed regulations; however, it has yet to do so. Thus, the IRS may revisit or revoke its earlier PTET guidance in light of the Act's more favorable SALT cap, and pass-through business owners should closely review any subsequent guidance.
- Extending the Section 199A pass-through deduction. The Act permanently extends Section 199A, thereby allowing individuals to deduct up to 20% of qualified business income from certain pass-through entities.
- Eliminating and phasing out certain energy tax credits. The Act eliminates consumer facing credits for electric vehicles and home efficiency upgrades and curtails certain other energy tax credits introduced by the IRA. The Act also truncates the eligibility timeline for the tech-neutral investment tax credit (ITC) and production tax credit (PTC) by requiring that wind and solar projects either begin construction before July 5, 2026, or be placed into service before 2028. Moreover, as discussed further here, the Trump Administration recently suggested that it may seek to further scale back the IRA's energy tax credits.
- Extending the Clean Fuel Production Credit. The Act extends the Clean Fuel Production Credit through 2029.
- Immediate expensing for domestic R&D. New Section 174A allows either immediate expensing or an elective five-year amortization of domestic R&D costs incurred from 2025 onward. Additionally, Section 174A applies retroactively to domestic R&D expenses incurred from 2022 through 2024, allowing certain small business taxpayers to claim a full deduction in the expense year and other taxpayers to immediately expense any remaining amortization. Before the Act, taxpayers amortized domestic R&D expenses over a five-year period. Foreign R&D expenses remain unchanged and are capitalized and amortized over a 15-year period.
- Permanently reinstating the TCJA's 100% bonus depreciation. Specifically, Section 168(k) now allows taxpayers to immediately expense certain trade or business property placed into service after January 19, 2025. While the TCJA had temporarily allowed bonus depreciation, permanently extending it is a significant deviation from the historic requirement that these costs be capitalized and depreciated over the asset's relevant recovery period. Business owners should review their receipts and records for assets acquired after January 19, 2025, to ensure optimal expensing of those assets.
- Increasing the Section 179 limitation. The Act increases the Section 179 limitation for immediately expensing certain trade or business assets from $2.5 million to an inflation-adjusted $4 million for property placed into service after 2024. Businesses may immediately expense certain assets, namely HVAC systems, roofing, security systems, and fire protection systems, which are not otherwise eligible for immediate expensing under Section 168(k), as discussed above.
- Providing 100% bonus depreciation for certain nonresidential real property. New Section 168(n) provides 100% bonus depreciation for nonresidential real property connected to certain agricultural or chemical manufacturing and production activities, provided that (i) construction begins between January 20, 2025 and December 31, 2029, and (ii) the property is placed into service before 2031.
- Increasing the Net CFC Tested Income, FDII, and BEAT tax rates. The Act increases the effective rates on Net CFC Tested Income (formerly known as GILTI) from 10.5% to 14%, on Foreign Derived Intangible Income (FDII) from 13.125% to 14%, and on the Base Erosion and Anti-Abuse Tax (BEAT) from 10% to 10.5%.
- Modifying the CFC rules. The Act modifies the controlled foreign corporation (CFC) rules by (i) permanently extending the CFC look-through rule, (ii) restoring the limitation for applying downward attribution from a foreign person to a U.S. person when determining CFC status, (iii) requiring any CFC shareholder to include its pro rata share of Subpart F income regardless of whether it held CFC stock on the last day of the year, and (iv) eliminating a CFC's ability to elect a tax year that ends earlier than that of its majority shareholder.
- Modifying the Foreign Tax Credit regime. The Act includes various business favorable changes to the foreign tax credit (FTC) regime. First, the Act increases the deemed paid credit that U.S. corporations may claim on foreign taxes paid on Net CFC Tested Income (formerly known as GILTI) from 80% to 90%. Second, under the Act, R&D and interest expenses, as well as other expenses not related to Net CFC Tested Income, are not be allocated to Net CFC Tested Income for purposes of calculating foreign source taxable income, thereby potentially allowing more foreign taxes to be credited. Finally, the Act allows up to 50% of the income from the sale of inventory produced in the U.S. and sold through certain overseas offices to be treated as foreign source income for FTC limitation purposes, rather than U.S. source income as it was previously treated, thereby potentially allowing more foreign taxes to be credited.
- Modifying the REIT rules. The Act increases the total amount of Taxable REIT Subsidiary (TRS) stock that a REIT can hold from 20% to 25%, thereby reinstating the pre-TCJA limit and providing greater flexibility for REIT structuring.
- Increasing the Low-Income Housing Credit. The Act expands the Low-Income Housing Credit by allowing states to issue more tax credits and increasing the credits for properties financed by tax-exempt bonds.
- Partially excluding certain agricultural loan interest income. Under new Section 139L, banks can exclude from their gross income 25% of the interest on certain loans secured by rural or agricultural property that are incurred after the enactment date.
- Excluding tips and overtime compensation. The Act creates a temporary deduction for employees earning certain qualified tip and overtime compensation from 2025 through 2028. Notwithstanding the above, employers must (i) separately track qualified tip and overtime compensation, and (ii) withhold FICA taxes thereon. Employers should consider necessary updates to their payroll systems to address tip and overtime compensation.
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.
