Tax Revolution: Come Together for The One, Big, Beautiful Bill

The Ways and Means portion is part of a larger budget reconciliation bill that Congressional Republican leadership intends to finalize and send to the President’s desk by July 4. The legislation awaits further consideration in the US House of Representatives, with a Budget Committee markup now scheduled for Friday, and then eventually in the US Senate.

Accordingly, the legislative text of the Bill is likely to change, and the ultimate timing of a final reconciliation bill remains uncertain. For example, if the Senate modifies federal spending cuts elsewhere in the comprehensive budget reconciliation bill, it could impact the net revenue impacts of the legislation. With extremely narrow majorities in the House and Senate, just a few members can bring the process to a halt by withholding their support for provisions outside of the tax title or for the tax package itself. Thus, the tax provisions remain a moving target and may well merit advocacy by stakeholders who so far have not engaged with Congress. This client alert summarizes some of the key tax policy initiatives affecting for-profit, business enterprises that are addressed in the Bill and that could impact many industries, ranging from sports franchises to renewable energy. 

Qualified Business Income (QBI) Deduction (Code Section 199A)

An individual may generally deduct 20% of qualified business income (QBI) earned through a disregarded entity, S corporation, or partnership. This QBI deduction is set to expire for taxable years beginning after December 31, 2025. The Bill proposes to make the QBI deduction permanent and increase the rate from 20% to 23% for taxable years beginning after December 31, 2025, among other changes, such as modifying the phase-in of certain limitations.  

Permanent Elimination of Miscellaneous Itemized Deductions (Code Section 67(g))

The Bill proposes to completely repeal miscellaneous itemized deductions (making permanent the temporary suspension of these deductions under the 2017 Tax Cuts and Jobs Act).

SALT Cap

The Bill proposes to increase the current $10,000 cap on the deductibility of state and local taxes (set to expire on December 31, 2025) to $30,000 subject to phase-out for married filing jointly taxpayers with modified adjusted gross income (AGI) above $400,000 (with a lower $200,000 threshold for married individuals filing separately). For certain Republican House members, the SALT cap is a pivotal policy issue that will dictate their vote on the Bill. Thus, it is expected that this provision will be heavily negotiated among Republicans. 

Bonus Depreciation (Code Section 168(h))

The Bill proposes to allow taxpayers to permanently deduct 100% of the cost of “qualified property” acquired on or after January 20, 2025. Under current law, taxpayers generally may deduct the costs incurred to acquire “qualified property” (i.e., equipment and machinery) used in a trade or business on an accelerated schedule. The accelerated schedule for such deductions is set to fully phase out in 2027.

Increase Expensing Limitations (Code Section 179)

The Bill proposes to expand expensing limitations on qualifying property by increasing (1) the $1,250,000 cap to $2,500,000 and (2) the phase-down threshold to $4,000,000. Under current law, taxpayers may elect to immediately expense 100% of the cost of certain qualifying property (i.e., machinery and equipment), instead of recovering those costs through depreciation. Current law imposes a $1,250,000 cap on such expensing, with a phase-down beginning once the qualifying property costs exceeds $3,130,000.

Research and Experimental Expensing (Code Section 174)

The Bill proposes to allow taxpayers to deduct 100% of expenditures incurred with respect to research and experimental activities conducted in the United States beginning after December 31, 2024, and before January 1, 2030. Under current law, taxpayers are required to amortize expenditures incurred with respect to research and experimental activities conducted in the United States over a five-year period, with expenditures attributed to research conducted outside the United States subject to a longer 15-year amortization schedule.

Interest Deductions (Code Section 163(j))

The Bill proposes to expand a taxpayer’s ability to deduct business interest expense. Under current law, a taxpayer’s business interest expense deduction generally is capped at the sum of (1) business interest income for the taxable year or (2) 30% of adjusted taxable income (i.e., the taxpayer’s earnings before interest and taxes (EBIT)), plus (3) “floor plan financing interest” for the taxable year (generally, interest with respect to debt incurred to finance motor vehicles held in inventory for sale or lease to customers). The Bill proposes to expand the limit on deductible interest expense by revising the definition of adjusted taxable income to equal the taxpayer’s EBITDA (earnings before interest, taxes, depreciation, and amortization), thereby allowing for larger interest deductions. The Bill also would include in the calculation of the cap any floor plan financing interest for certain trailers and campers designed to be towed by or affixed to a motor vehicle.

Special Depreciation for Qualified Production Property

The Bill proposes to allow taxpayers to deduct 100% of the cost of “qualified production property” in the year such property is placed in service. Qualified production property generally would include depreciable property that is used by the taxpayer as an integral part of a “qualified production activity” (the manufacturing, production, or refining of tangible personal property). In effect, the Bill would allow taxpayers to immediately deduct 100% of the cost of certain new factories and improvements to existing factories and certain other structures, a significant change from the current law, under which taxpayers generally are required to deduct the cost of nonresidential real property over a 39-year period.

Qualified Opportunity Zones (QOZ) (Code Section 1400Z-2)

Under current law, taxpayers may invest capital gains into qualified opportunity zones and (1) defer the recognition of those gains until December 31, 2026, and (2) exclude from taxation the gains generated from the sale of certain qualified opportunity zone (QOZ) property that has been held for at least 10 years. Investments made after December 31, 2026, are not eligible for such QOZ tax benefits. The Bill proposes to reopen the QOZ program by extending tax benefits to investments made after January 1, 2027, and before December 31, 2033. The Bill also proposes several modifications to the QOZ program. It would establish a process for re-designating QOZs and would require certain rural areas to be designated as QOZs. Additionally, it would provide a 20% step-up in basis for investments in rural QOZs that meet certain holding-period requirements, allow taxpayers to invest up to $10,000 of after-tax ordinary income into QOZs and reduce the rehabilitation cost requirements for investments in rural QOZ areas.

Exclusion of Interest on Loans Secured by Rural or Agricultural Real Estate

The Bill proposes to create a new 25% exclusion of interest income for certain loans secured by qualifying rural or agricultural real estate.

Limitation on Amortization of Sports-Related Intangibles (Code Section 197)

The Bill proposes to limit the amortization of intangible property (e.g., goodwill) of sports franchise businesses to 50% of the cost basis of such intangible property. Under current law, when a buyer acquires a sports franchise business, the buyer generally is able to amortize 100%of the acquired goodwill of the sports franchise over 15 years.     

Termination of Certain Energy Tax Credits

The Bill proposes to terminate the following energy tax credits, effective December 31, 2025: the previously owned clean vehicle credit (Code Section 25E), the clean vehicle credit (Code Section 30D), the qualified commercial clean vehicles credit (Code Section 45W), the alternative fuel vehicle refueling property credit (Code Section 30C), and the clean hydrogen production credit (Code Section 45V), (with respect to the clean hydrogen production credit, for facilities the construction of which begins after December 31, 2025).

Phase-Out and Restrictions on the Clean Electricity Production Credit (Code Section 45Y) and the Clean Electricity Investment Credit (Code Section 48E)

The Bill proposes to phase out the clean electricity production credit (i.e., the new Production Tax Credit or PTC) and the clean electricity investment credit (i.e., the new Investment Tax Credit or ITC) as follows: a 20% credit reduction for facilities placed in service in 2029, a 40% reduction for facilities placed in service in 2030, a 60% reduction for facilities placed in service in 2031, and complete phaseout after December 31, 2031.

Repeal of “Transferability” of Certain Clean Energy Tax Credits

The Bill proposes to repeal “transferability” (i.e., a new method of credit monetization created under the Inflation Reduction Act) of various clean energy tax credits generally with effect for facilities placed in service after December 31, 2027, and certain other types of credits generated after 2027. Affected credits include the Clean Electricity Production Credit (Code Section 45Y), the Clean Electricity Investment Credit (Code Section 48E), the Clean Fuel Production Credit (Code Section 45Z), Zero-Emission Nuclear Power Production Credit (Code Section 45U), Carbon Oxide Sequestration Credit (Code Section 45Q), the Advanced Manufacturing Production Credit (Code Section 45X), and the Energy Credit (Code Section 48).

Restrictions on Certain Energy Tax Credits for Taxpayers Connected with Certain Foreign Entities

The Bill also proposes to restrict eligibility for certain energy tax credits for taxpayers connected with certain foreign entities (i.e., “foreign entities of concern” and certain other foreign entities). Affected credits include the Clean Electricity Production Credit (Code Section 45Y), the Clean Electricity Investment Credit (Code Section 48E), the Clean Fuel Production Credit (Code Section 45Z), Zero-Emission Nuclear Power Production Credit (Code Section 45U), Carbon Oxide Sequestration Credit (Code Section 45Q), the Advanced Manufacturing Production Credit (Code Section 45X), and the Energy Credit (Section 48).

Phase-Out of Zero-Emission Nuclear Power Production Credit (Code Section 45U)

The Bill proposes to phase out the zero-emission nuclear power production credit (Code Section 45U) as follows: 20% credit reduction for electricity produced in 2029, a 40% reduction for electricity produced in 2030, a 60% reduction for electricity produced in 2031, and no credit available after December 31, 2031.

Phase-Out of Advanced Manufacturing Production Credit (Code Section 45X)

The Bill proposes to eliminate the advanced manufacturing production credit (Code Section 45X) for wind energy components sold after December 31, 2027, and eliminates the credit for all other components sold after December 31, 2031.

Phase-Out of Credit for Certain Energy Property (Code Section 48)

The Bill proposes to phase out the energy property credit (Code Section 48) with respect to geothermal heat pump property as follows: the base credit for geothermal heat pump property that begins construction after December 31, 2029, and before January 1, 2031 is 5.2%; the base credit for geothermal heat pump property that begins construction after December 31, 2030, and before January 1, 2032 is 4.4%; and complete phaseout for geothermal heat pump property that begins construction on or after January 1, 2032.

The House Ways and Means markup has produced a tax rewrite that better reflects the politics of reconciliation than the ideal of tax policy. Ultimately, the Ways and Means legislation will face a buzz saw of parochial roadblocks, like the SALT dispute, before the Senate offers its perspective. If this reconciliation bill passes, it will likely contain something close to this.

 - Phil English, Former Ways and Means Committee member

If you have any questions about the tax provisions highlighted above, the Bill, or the process for passage of the larger reconciliation package, please do not hesitate to contact our AFS Tax and Government Affairs teams.