As part of ongoing budget negotiations, the Senate Finance Committee has released its version of a 2025 tax bill in response to H.R. 1 – The One Big Beautiful Bill Act, which passed the House of Representatives on May 22, 2025.
Like the House version, the Senate budget bill aims to support working families, encourage business investment, and improve U.S. tax competitiveness—but it also introduces key differences. These include a permanent fix for domestic R&D expensing, the elimination of popular energy-related tax incentives, and significant updates to international tax rules. These divergences set the stage for a complex reconciliation process in the weeks ahead.
So what's in the Senate budget bill, and where are the biggest flashpoints heading into negotiations?
Where the Senate Bill Breaks from the House
Despite areas of alignment, the Senate's version introduces some important changes that could shape the direction of reconciliation:
- Child Tax Credit (CTC) provisions: The Senate bill proposes a permanent increase to the Child Tax Credit, raising the maximum benefit per child from $2,000 to $2,200—a smaller increase than the House's temporary bump to $2,500. It also includes stricter eligibility criteria, such as requiring both the child and parents to have Social Security numbers.
- Limitation on interest expense deduction: Both the House and Senate bills would reinstate the EBITDA-based limitation under Section 163(j) for tax years beginning after December 31, 2024. This means that for purposes of the business interest deduction, adjusted taxable income would once again be calculated without subtracting depreciation, amortization, or depletion—a more generous approach than current law, which uses EBIT. The House version of the bill would expire after 2030, while the Senate modification would be permanent.
- R&D expensing: Unlike the House bill's temporary fix, the Senate version proposes a permanent restoration of immediate expensing for domestic research and development costs. Notably, it offers a retroactive benefit: taxpayers with average gross receipts under $31 million may amend 2022–2024 returns to claim full expensing, while others may deduct unamortized costs from those years on their 2025 tax return or over two years. This introduces strategic opportunities for eligible taxpayers.
- Energy tax provisions: In a significant departure from the House bill, the Senate proposal eliminates the Section 179D energy-efficient commercial building deduction, effective for projects beginning 12 months after the bill's enactment. It also repeals the 45L credit and begins a phaseout of certain green energy incentives including investment and production tax credits for solar and wind properties. These changes could significantly impact taxpayers involved in sustainable construction or energy-related planning.
- SALT deduction: The Senate bill retains the current $10,000 cap on the state and local tax (SALT) deduction, diverging from the House bill's proposed increase to $40,000. However, this provision remains the subject of active negotiation. The Senate version also includes anti-avoidance rules—clarifying which taxes are subject to the cap, placing limits on passthrough entity tax (PTET) deductions, and authorizing Treasury to prevent circumvention through allocation schemes or capitalization.
- Enhanced deduction for taxpayers over 65 years of age: The House and Senate bills each contain provisions for enhanced deductions for seniors. However, the Senate version has a $6,000 vs. a $4,000 deduction in the House version. Both versions limit this enhanced deduction based on modified adjusted gross income. This provision will expire after 2028 under both proposals.
- Estate and gift tax exemption: The Senate bill would permanently increase the estate and lifetime gift tax exemption to $15 million for single filers (or $30 million for joint filers) starting in 2026. These amounts would be adjusted for inflation annually thereafter.
- Mortgage interest deduction: The Senate proposal would permanently extend the TCJA's cap on mortgage interest to debt of up to $750,000, and would also permanently exclude home equity loan interest from the definition of qualified residence interest. Additionally, it would treat mortgage insurance premiums as qualified interest for deduction purposes.
International Tax Highlights
The Senate bill includes several international tax changes that aim to simplify calculations, improve foreign tax credit (FTC) utilization, and align with global tax developments:
Changes to Foreign Tax Credit Calculations:
- Raises the deemed paid credit on foreign taxes from 80% to 90% on Net CFC Tested Income (fka GILTI), helping reduce residual U.S. tax on foreign earnings of controlled foreign corporations.
- Reduces the type of deductions allocated to the Net CFC Tested Income bucket
- Allows up to 50% of income from inventory manufactured in the U.S. and sold to foreign customers to be treated as foreign-source when a foreign office is involved.
Adjusted §250 deductions and expanded BEAT:
- Lowers both Foreign-Derived Deduction Income (FDDI, formerly known as FDII) and Net Tested CFC Income deduction percentages to achieve a 14% effective tax rate
- Removes the 10% qualified asset floor for both FDDI and Net Tested CFC Income, potentially impacting more taxpayers
- For large multinational groups, broadens the scope of the Base Erosion and Anti-Abuse Tax (BEAT), potentially impacting more multinational businesses.
- Includes a new provision as a modification to BEAT for withholding taxes imposed payments by all taxpayers, not just large multinationals, to all recipients resident in a country with certain discriminatory and extraterritorial taxes.
Other Important International Tax Changes
- A permanent extension of the look-through rules for payments of passive income from lower tier to upper tier controlled foreign corporations, eliminating the potential for Passive Foreign Holding Company (FPHC) treatment.
- A restoration of the limitation on downward attribution, which caused U.S. corporations to be deemed owners of the foreign parent's other subsidiaries. This is replaced by a more directed approach to prevent abuse.
- Changes the allocation of Subpart F and Net Tested CFC Income by using a pro rata calculation based on the number of days held, instead of testing on the last day of the CFC's year. This will affect sellers of CFC's and cause an income inclusion for the portion of the year they held the CFC stock.
These provisions reflect a push toward greater tax parity and enforcement in cross-border operations.
What's Next?
With both chambers now on record with formal legislative proposals, the reconciliation process will likely focus on aligning:
- Child Tax Credit refundability and phase-in rules
- Business interest deduction limitations
- R&D expensing structure and retroactivity
- Energy-related tax incentives and eliminations
- International tax framework and FTC improvements
- Revenue offsets and enforcement provisions
Observers expect bipartisan negotiations to intensify in the coming weeks, especially around provisions that impact middle-income households, exporters, and globally active businesses.
Planning ahead: What you can do now
While nothing is final yet, this is a good time to start evaluating your current tax strategy in light of the proposed changes. Being proactive can help you stay ahead of any potential impacts—whether you're an individual taxpayer, a business owner, or managing international interests.
Here are a few steps to consider as negotiations move forward:
- Review prior-year R&D treatment to identify potential refund opportunities if retroactive expensing becomes law
- Assess upcoming capital expenditures in light of possible extensions to bonus depreciation and Section 179 limits
- Evaluate international tax exposure, particularly for export income and global intercompany payments
- Consider potential changes to energy-related tax incentives, such as Section 179D and 45L, when evaluating upcoming projects.
- Revisit mortgage and real estate strategies, including use of home equity loans and mortgage insurance premiums.
- Consider estate and gift planning strategies, especially if your estate may approach the proposed $15M/$30M exemption threshold
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.
