On Thursday, May 22, 2025, the House of Representatives passed legislation titled the One Big Beautiful Bill Act by a 215-214 vote. The legislation includes increased spending for homeland security (e.g., border wall construction and drones and other border-security equipment) and increased military spending (e.g., air and missile defense, nuclear defense, and border security), as well as modifications of food assistance programs (e.g., increased work requirements for participants in the Supplemental Nutrition Assistance Program), education programs (e.g., changes to student loan repayment plans and stricter requirements for Pell Grants), immigration programs (e.g., imposes fees up to $5,000 for immigrants’ work permits, court hearings, and asylum applications and increased funding for immigration enforcement), and Medicaid. The legislation also includes a provision to raise the federal debt ceiling by $4 trillion. However, the tax component of the legislation has garnered much of the attention. The following provides an overview of key tax components therein.
The legislation makes permanent many of the expiring Tax Cuts and Jobs Act (TCJA) measures set to sunset at the end of 2025. The impact of the permanency of such provisions will vary based on taxpayer.
-
- Makes permanent the individual tax rates and does not add a new top marginal tax rate bracket despite prior discussion of 39 percent top marginal tax rate (previous discussion had suggested the potential for such a tax rate to apply at taxable income levels of $1 million or $2.5 million).
-
- Permanently repeals personal exemptions, miscellaneous itemized deductions, and the deduction for moving expenses.
-
- The legislation preserves a higher standard deduction, but it also introduces new limitations on itemized deductions for tax years beginning after December 31, 2025. First, a computation would reduce such deductions by 5/37 of the lesser of the taxpayer’s state and local tax (SALT) deduction or so much of taxable income as exceeds the dollar amount at which the 37 percent tax bracket begins. Thereafter, a computation would further reduce such deductions by 2/37 of the lesser of the amount of such otherwise allowed deductions that exceed the SALT deduction or so much of taxable income as exceeds the dollar amount at which the 37 percent tax bracket begins.
-
- Permanently raises the child tax credit to $2,000 per child with a temporary increase to $2,500 per child for 2025 through 2028. The legislation also preserves refundability (maximum of $1,400 per child) but adds a requirement for parents and children to provide Social Security numbers if seeking to claim the credit.
-
- Permanently extends increased alternative minimum tax (AMT) thresholds and exemptions.
-
- Makes permanent the $750,000 threshold limitation with respect to the deduction of qualified residence interest.
-
- Permanently disallows a personal casualty loss deduction under Section 165(h)(5) except to the extent of personal casualty gain. However, such deduction would still be allowed to the extent attributable to a Federally declared disaster. Notably, the legislation also has a provision that would extend the date for which Federally declared disasters could constitute qualified disasters for purposes of avoiding the 10 percent adjusted gross income limitation and claiming an above the line deduction. As an example, victims of the California wildfires in late 2024 would qualify.
-
- Increases the qualified business income (QBI) deduction rate under Section 199A to 23% and modifies the phaseout of the deduction for specified service trades or businesses (SSTBs) (modifications discussed below).
-
- Elevates the estate and gift tax exemption to $15 million per taxpayer, as indexed for inflation, effective for 2026 (currently set to reset to $5 million as indexed for inflation in 2026).
As regards Section 199A, the legislation modifies the limitation computation for taxpayers with taxable income over the identified threshold amount ($394,600 for taxpayers married and filing jointly in 2025, $197,300 for all others) and for income from SSTBs. Rather than a computation based on a ratio of taxable income over a threshold amount in comparison to a fixed amount, a limitation amount is computed as 75 percent of the amount of taxable income in excess of the threshold amount. The increased 23 percent rate combined with the modified limitation computation should provide for an increased 199A deduction for many owners of passthrough entities. However, many high-income taxpayers who have ownership in SSTBs (e.g., accountants, attorneys, doctors, etc.) will continue to phase-out of the ability to claim a 199A deduction. The legislation also amends Section 199A to provide a 23 percent deduction for qualified business development interest dividends received from an electing business development company which has an election in place to be treated as a regulated investment company.
The legislation introduces additional tax relief aimed at middle- and lower-income Americans.
-
- Provides deductions to eliminate federal income tax on tips and overtime pay for the 2025 through 2028 tax years for taxpayers, whether or not itemizing, with earned income not exceeding an earned income limit which is $160,000 for 2025. As is required for the child tax credit and other provisions in the tax legislation, taxpayers would need to provide Social Security numbers to claim these deductions.
-
- For the 2025 through 2028 tax years, the legislation provides an additional $4,000 deduction for individual taxpayers, whether or not itemizing, who have attained the age of 65 before the close of the tax year and have modified adjusted gross income below $75,000 ($150,000 if joint filers). If the taxpayer’s modified adjusted taxable income exceeds the threshold, the deduction is reduced by 4 percent (but not below $0) of so much of the taxpayer’s modified adjusted gross income as exceeds the applicable threshold. Taxpayers would need to provide Social Security numbers to claim the deduction.
-
- Includes a permanent exclusion for employer student loan repayment assistance
-
- For 2025 through 2028, allows a deduction of up to $10,000 for interest paid on a qualified passenger vehicle loan incurred after December 31, 2024, for a personal use passenger vehicle. The $10,000 maximum deduction is reduced by $200 for every $1,000 (or portion thereof) by which modified adjusted gross income exceeds $100,000 ($200,000 for joint filers).
-
- Provides a $300 above-the-line charitable contribution deduction for non-itemizers.
-
- Expands 529 plans to cover more educational expenses.
A suite of reforms targets more affordable and flexible health care, including:
-
-
- Expanded use of Health Savings Accounts (HSAs), including higher contribution limits and spousal catch-ups;
-
- Employer credits for offering CHOICE arrangements (alternative coverage options);
-
- Allowing individuals on Medicare Part A to contribute to HSAs; and
-
- Coverage of fitness and exercise costs as medical care expenses.
The One Big Beautiful Bill Act also contains provisions aimed at businesses and economic growth, including much anticipated modifications to bonus depreciation and the deductions for business interest and domestic research and development. However, the modifications would only be applicable for tax years beginning after December 31, 2024, and before January 1, 2030.
-
- The legislation provides 100 percent bonus depreciation for property acquired by a taxpayer after January 19, 2025, and placed in service before January 1, 2030 (January 1, 2031, for property with longer production periods and for plants bearing fruits and nuts). If property was acquired prior to such date (including where had a preexisting binding written contract), the reduced percentages in the current law would apply (e.g., 40 percent for such property placed in service in 2025).
-
- For tax years beginning after December 31, 2024, and before January 1, 2030, the calculation of adjusted taxable income for purposes of the business interest deduction limitation under Section 163(j) would again be based on an EBITDA (earnings before interest, taxes, depreciation, and amortization) concept, thereby increasing the deduction for many taxpayers.
-
- A new Section 174A would allow taxpayers who pay or incur expenditures for domestic research and development activities to deduct 100 percent of such costs for tax years beginning after December 31, 2024, and before January 1, 2030. However, the requirement to capitalize and amortize such costs under Section 174 would return for tax years beginning on or after January 1, 2030. And the legislation does not change the requirement for foreign research and development costs to be capitalized and amortized over 15 years (16 tax years due to mid-year convention) as provided in current Section 174. Additional modifications to Section 280C would also result in most taxpayers again electing a reduced research and development tax credit in lieu of reducing domestic Section 174A expenditures.
-
- Additionally, a new qualified production property deduction would allow a 100 percent deduction for the adjusted basis of nonresidential real property (typically depreciated over 39 years) used as an integral part of a qualified production activity if construction begins after January 19, 2025, and before January 1, 2029, and the property is placed in service in the United States (or any of its possessions) before January 1, 2033. A qualified production activity would include manufacturing, refining, or production (but only agricultural or chemical production) of tangible personal property.
-
- For tax years beginning after December 31, 2024, the legislation also increases the dollar limitations for Section 179 expensing by increasing the dollar limitation from $1 million to $2.5 million and the reduction limitation from $2.5 million to $4 million, as adjusted for inflation.
As regards tax credits, the legislation enhances certain tax credits but also eliminates some tax credits.
-
- It would enhance the employer-provided childcare credit for tax years beginning after December 31, 2025, by increasing the applicable percentage of qualified expenditures from 25 percent to 40 percent (50 percent for an eligible small business) and would increase the maximum credit from $150,000 to $500,000 ($600,000 for an eligible small business), as adjusted for inflation.
-
- For tax years beginning after December 31, 2025, the legislation also modifies the paid family and medical leave credit, including an expansion of the definition of eligible employees and allowing employers to choose between a credit based on wages paid to qualifying employees during leave or a credit based on a percentage of insurance premiums paid for qualifying paid leave insurance policy (portions of leave premiums would be nondeductible to the extent used to claim the credit).
-
- However, the legislation eliminates the clean vehicle credit under Section 30D for tax years beginning after December 31, 2026, and would only allow the credit in 2026 for vehicles manufactured by a manufacturer that had not reached the 200,000 vehicle threshold during the period beginning on December 31, 2009, and ending December 31, 2025.
-
- It would also terminate the previously-owned clean vehicle credit under Section 25E, the alternative fuel vehicle refueling property credit under Section 30C, and the commercial clean vehicle credit under Section 45W for tax years beginning after December 31, 2025 (an exception for the latter exists where a written binding contract was entered into before May 12, 2025, and such vehicles are placed in service before January 1, 2033).
-
- The legislation also terminates the energy efficient home credit under Section 25C and the residential clean energy credit under Section 25D for property placed in service after December 31, 2025, as well as the new energy efficient home credit under Section 45L where a qualified new energy efficient home is acquired after December 31, 2025 (December 31, 2026, if construction began prior to May 12, 2025).
-
- The legislation also terminates several energy incentives created under the Inflation Reduction Act of 2022 much earlier than as planned under the existing law. For example, the Section 45Y clean electricity production credit and Section 48E clean electricity investment credit would only be available if a project’s construction begins within 60 days of the legislation’s enactment and was placed in service by December 31, 2028 (a carve out for advanced nuclear facilities allows a credit if construction begins by December 31, 2028 and is placed in service by December 31, 2031). Phase outs would also occur earlier for the Section 45V clean hydrogen credit (projects must begin construction by end of 2025), Section 45X advanced manufacturing credit, and Section 45U nuclear power production credit.
-
- The legislation would also narrow the pool of credits eligible for transferability.
Other notable impacts of the legislation would involve the following items
-
- Makes the excess business loss provision under Section 461(l) permanent and modifies its characterization from a net operating loss under Section 172 in subsequent tax years to remaining an excess business loss in such years, thereby further limiting the use of such losses.
-
- Lowers the global intangible low-tax income (GILTI) inclusion deduction from 50 percent to 49.2 percent and the foreign-derived intangible income (FDII) deduction from 37.5 percent to 36.5 percent. However, under current tax law these rates would decrease to 37.5 percent and 21.875 percent, respectively, for tax years beginning after December 31, 2025. Thus, the legislation’s rate reduction would prove more beneficial for future tax years.
-
- Creates a new round of qualified opportunity zones for taxable years 2027 through 2023.
-
- Increases the threshold for gross receipts threshold under Section 448(c) for manufacturing taxpayers to $80 million from $25 million for tax years beginning after December 31, 2025, which would allow for use of the cash method of accounting, as well as avoiding the Section 163(j) business interest limitation and obtaining exemptions from UNICAP under Section 263A and the accounting for inventories under Section 471.
-
- Increases 1099 threshold reporting to certain payees from $600 to $2,000.
-
- Creates a new savings account for children (must establish account before beneficiary turns 8) which are known as Trump Accounts (identified as MAGA accounts in the initial House legislation).
Finally, a critical component of the legislation involves the state and local tax (SALT) deduction limitation. The cap on individual state and local tax itemized deductions would be increased from its current amount of $10,000 (set to expire after this year) to $40,000, starting with tax year 2025, with certain limitations.
-
- The cap would max out at $20,000 for married taxpayers filing separately; and
-
- The cap would decrease 30 percent for every dollar a taxpayer’s modified adjusted gross income is over $500,000 ($250,000 for married taxpayers filing separately), but would never go below the current $10,000 amount (e.g. the SALT cap would be reduced to $17,500 for a taxpayer with a modified AGI of $575,000 ($40,000-($75,000*30%)).
Importantly, the cap and income threshold will increase 1 percent each year for 10 years. After that, the SALT cap would remain at the 2033 level for all subsequent tax years.
Notably, the current version of the legislation also includes language that effects the deductibility of state and local taxes at the business level for certain pass-through entities. Specifically, as written, the legislation denies those pass-through entities deemed SSTBs, as defined under Section 199A, such a deduction, by restricting these entities and their partners or shareholders from using the state workarounds to the SALT cap, which have been in place for years following the original implementation of the SALT cap through the TCJA. SSTBs typically include businesses providing services, such as in the fields of accounting, law, medicine, and financial services. Therefore, these key provisions could have a significant effect on these industries if they remain in the final legislation.
The legislation now moves to the Senate which is on recess until next week. Several Republicans in the Senate have indicated changes will be made to the House legislation, and any changes would require the House to vote again on an updated legislative package. FGMK will continue to monitor the legislation as it moves through Congress.
About FGMK
FGMK is a leading professional services firm providing assurance, tax and advisory services to privately held businesses, global public companies, entrepreneurs, high-net-worth individuals and not-for-profit organizations. FGMK is among the largest accounting firms in Chicago and one of the top ranked accounting firms in the United States. For over 50 years, FGMK has recommended strategies that give our clients a competitive edge. Our value proposition is to offer clients a hands-on operating model, with our most senior professionals actively involved in client service delivery.
