Provision

Details

Bonus depreciation

Allows 100% bonus depreciation for property acquired and placed in service after January 19, 2025, and before January 1, 2030 (five years less several days). For longer production period property and certain aircraft, the end date is January 1, 2031. 100% bonus depreciation is also allowed for specified plants planted or grafted after January 19, 2025, and before January 1, 2030.

The rules under the percentage-of-completion method are made permanent for the allocation of bonus depreciation under a long-term contract.

163(j) interest deduction

Reinstates the EBITDA (earnings before interest, taxes, depreciation, and amortization) limitation for the calculation of the deduction after December 31, 2024 and before January 1, 2030

174 R&D

Allows expensing for five years rather than a five-year amortization period for domestic R&D amounts paid or incurred in tax years beginning after December 31, 2024, and before January 1, 2030. Taxpayers can choose to (1) deduct domestic R&D expenses, (2) elect to capitalize and recover domestic R&D expenses ratably over the useful life of the research (no less than 60 months) beginning with midpoint of the tax year in which the expenses were paid or incurred, or (3) elect to capitalize and recover domestic R&D expenses over 10 years.

Taxpayers are required to reduce domestic R&D expenses by the amount of their IRC Section 41 research credits for tax years beginning after December 31, 2024, and before January 1, 2030. Alternatively, taxpayers can elect to claim a reduced IRC Section 41 research credit.

Foreign R&D is unchanged and must continue to be capitalized over a 15-year period.

Accelerated depreciation for factories

Allows expensing of new factories, certain improvements to existing factories, and certain other structures. Construction must begin after January 19, 2025, and before January 1, 2029, and be placed in service before January 1, 2033. Includes recapture if property use changes within 10 years.

Executive compensation

The provision adds an aggregation rule to IRC Section 162(m). Where a specified covered employee is paid by different members of a controlled group, the amounts are combined for purposes of the $1m limit.

Charitable contributions made by corporations

Corporate charitable deductions would be limited to the extent the aggregate of corporate charitable contributions exceeds 1% of the taxpayer's taxable income and does not exceed 10% of the taxpayer's taxable income, with certain carryforward rules applying to disallowed contributions, applies after December 31, 2025.

Sports teams

Excludes 50% of the adjusted basis of an amortizable IRC Section 197 asset from amortization for professional sports franchises. IRC Section 197 generally provides good will and many other types of intangible property with 15-year amortization

Opportunity Zones

Ends the initial qualified opportunity zones designation after December 31, 2026 and establishes new round of qualified opportunity zone designations through December 31, 2033, "under rules similar to those for the initial designation"

Tanning tax

Affordable Care Act 10% tax on tanning services repealed after date of enactment of current bill

Sound recording

Expands the special expensing rules for qualified film, television, and live theatrical productions under IRC Section 181 to include aggregate qualified sound recording production costs of up to $150,000 per tax year

Low-income housing tax credit (LIHTC)

Provides an increase in the State housing credit ceiling for calendar years 2026, 2027, 2028, and 2029, modifies the tax-exempt bond financing requirement

Provision

Details

Global intangible low-taxed income (GILTI)

Along with making permanent the current rates on global intangible low-taxed income (GILTI) of a 50% deduction (10.5% rate), including the corresponding IRC Section 78 gross-up amount, the bill would exclude from "tested income" any "qualified Virgin Island services income," applying narrowly to only certain US shareholders — individuals, trusts, or estates, or closely held corporations if the corporation acquired its direct or indirect equity interest in the foreign corporation deriving the Virgin Islands income before December 31, 2023.

Foreign-derived intangible income (FDII)

37.5% deduction (13.125% rate) made permanent

Base erosion and anti-abuse tax (BEAT)

Makes permanent the current rates for the base erosion and anti-abuse tax (BEAT) of 10%, or 11% for banks/dealers and the current rules regarding credits, and repeals the changes scheduled to apply post-2025 (i.e., changes in the BEAT rate and changes that would reduce regular tax liability by the taxpayer's income tax credits for the tax year).

Tax increases aimed at "unfair foreign taxes"

The proposal, in creating a new IRC Section 899, combines and makes modifications to legislation introduced earlier this year (H.R. 591) by Chairman Smith and HR 2423 introduced by Rep. Ron Estes (R-KS) aimed at increasing tax rates on "applicable persons," including individuals, foreign governments, foreign corporations, private foundations, certain trusts, and certain foreign partnerships of a discriminatory country. A discriminatory foreign county is one that has an "unfair foreign tax" as defined by the bill, or an "exterritorial tax" or "discriminatory tax" as defined by the bill. According to the bill, an unfair foreign tax includes an undertaxed profits rule (UTPR), digital services tax and diverted profit tax. The proposal would increase a variety of taxes, including withholding taxes, on applicable persons. Rather than override tax rates negotiated in treaties, as under the Smith bill, the revised proposed adds an additional tax to the treaty rate. In addition, the proposal modifies the BEAT with respect to corporations that are more than 50% owned by certain applicable persons. The changes to the BEAT in this case would apply regardless of the average annual gross receipts and base erosion percentage of the corporation, regardless of the exception for certain services under IRC Section 59A(d)(5), and by treating certain amounts that are capitalized as if they had been deducted, among other things. The proposal would be effective on the date of enactment but the increased taxes would apply to tax years beginning after the later of (1) 90 days after the date of enactment, (2) 180 days after the date of enactment of the unfair foreign tax that causes a country to be treated as a discriminatory foreign country, and (3) the first date that the unfair foreign tax of such country begins to apply; and before the last date on which the discriminatory foreign country imposes an unfair foreign tax.

Provision

Details

Clean vehicle credit (30D)

Repeals the new clean vehicle credit for vehicles placed in service after December 31, 2025. Allows credit to continue through December 31, 2026 for manufacturers that have sold 200,000 or less plug-in electric vehicles or clean vehicles after 2009 and before 2026

Credit for previously owned clean vehicles (25E)

Repeals previously owned clean vehicle credit for vehicles acquired after December 31, 2025

Credit for qualified commercial clean vehicles (45W)

Repeals commercial clean vehicle credit for vehicles acquired after December 31, 2025, except for vehicles placed-in-service before 2033 if acquired pursuant to a written binding contract entered into before May 12, 2025

Alternative fuel refueling property credit (30C)

Repeals the alternative fuel vehicle refueling vehicle property credit for property placed in service after December 31, 2025

Energy efficient home credit (25C)

Repeals energy efficient home improvement credit for property placed in service after December 31, 2025

Residential clean energy credit (25D)

Repeals the residential clean energy credit for property placed in service after December 31, 2025

New energy efficient home credit (45L)

Repeals new energy efficient home credit for homes acquired after December 31, 2025, unless home began construction before May 12, 2025 and is acquired before the end of 2026

Clean electricity production credit (45Y)

Phases out the clean electricity production tax credit and clean electricity investment tax credit for facilities placed in service in 2029 (20% haircut), 2030 (40% haircut), 2031 (60% haircut) and 2032 (zero credit). Transferability is not allowed for facilities (and energy storage) where construction begins two years after the date of enactment. Foreign Entity of Concern (FEOC) limitations apply (see below). Bonus credits are generally preserved for low-income/energy communities and domestic content.

FEOC limitations

No credit for tax years beginning after DOE if taxpayer is a "specified foreign entity" (defined in new IRC Section 7701(a)(51)(B)).

No credit if construction begins 1 year after DOE and there is "material assistance from a prohibited foreign entity" (defined in new IRC Section 7701(a)(52))

No credit in tax years starting two years after DOE for a "foreign-influenced" entity (defined in new IRC Section 7701(a)(51)(D)).

Clean electricity investment credit (48E)

Carbon sequestration (45Q)

Includes two of the FEOC limitations that apply to electricity; credit is denied starting tax years after the DOE if the taxpayer is a "specified foreign entity" and denied starting two years after DOE if the taxpayer is a "foreign-influenced entity." And repeals transferability for carbon capture equipment that begins construction after the date that is two years after DOE.

Zero-emission nuclear power production credit (45U)

Similar phase-out structure as 45Y and 48E for electricity produced and sold by the taxpayer: in 2029 (20% haircut); in 2030 (40% haircut); in 2031 (60% haircut); no credit in 2032. Same FEOC limitation as 45Q. Transferability denied for electricity produced or sold after December 31, 2027.

Credit for production of clean hydrogen (45V)

Terminated for facilities that begin construction after December 31, 2025.

Advanced manufacturing production credit (45X)

Terminates the credit for wind energy components for components sold after 2027 and eliminates sale of all other components, including critical minerals, after 2031. Transferability repealed for components sold after 2027. FEOC restrictions apply as follows: No credit is allowed for taxpayers that are 'specified foreign entities' for tax years beginning after the DOE; the 'material assistance' FEOC rules applies to manufactured components with a new prohibition on licensing agreements valued in excess of $1m with a prohibited foreign entity; no credit is allowed for taxpayers that are 'foreign-influenced entities' for tax years beginning two years after DOE — for this purpose the restriction applies across the entire eligible component category in 45X (e.g., solar energy components).

Energy credit (48)

The geothermal heat pump, as a qualifying technology in the legacy section 48 credit, did not expire for facilities PIS before January 1, 2035. A similar phase-out rule, FEOC restrictions, and repeal of transferability as applies to 45Y and 48E is applied here.

Clean fuel production credit (45Z)

Repeals transferability for fuel produced after December 31, 2027; extends the credit through 2031; requires fuel to be produced from feedstocks produced or grown in the U.S., Mexico or Canada for fuel sold after December 31, 2025; excludes indirect land use changes for purposes of greenhouse gas emissions analysis and requires new distinct emissions rates for specific manure feedstocks; and applies the new 'specified foreign entity' limitation effective tax years beginning after DOE and new 'foreign-influenced entity' rule effective two years after DOE.

Publicly traded partnerships (7704)

Expands the definition of qualifying income for publicly traded partnerships to include (1) income and gains from the transportation or storage of sustainable aviation fuel, liquified hydrogen, or compressed hydrogen; and (2) income and gains from the generation, availability for such generation, or storage of electric power, as well as capture of carbon dioxide by a 45Q facility effective for tax years beginning after December 31, 2025.

Provision

Details

Tax credit for contributions to scholarship granting organizations

Allows for a credit for qualified contributions to scholarship granting organizations. Cannot exceed the greater of 10% of the taxpayer's aggregate gross income or $5,000. Effective for tax years ending after December 31, 2025.

Charitable contributions for nonitemizers

Allows for an above-the line deduction of $150 for individuals and $300 for married couples for charitable contributions for tax years beginning after December 31, 2024, and before January 1, 2029.

Increase excise tax on private college and university endowments

Expands the current excise tax on net investment income of private college and university endowments. First, it introduces a new rate structure from the current 1.4% rate in which institutions with a per student endowment in excess of $500,000 and not in excess of $750,000 are taxed at 1.4%, in excess of $750,000 and not in excess of $1.25 million are taxed at 7%, in excess of $1.25 million and not in excess of $2 million are taxed at 14%; and, in excess of $2 million are taxed at 21%.

Second, the term applicable educational institution must now (1) have at least 500 tuition-paying students during the previous tax year, (2) have more than 50% of the tuition-paying students located in the US, (3) is not a state college or university, (4) is not a qualified religious institution, and (5) the student adjusted endowment is at least $500,000.

Effective for tax years beginning after December 31, 2025.

Increased excise tax on private foundations

Replaces the current 1.39% excise tax on net investment income with a tiered structure in which private foundations with assets less than $50 million are taxed on their net investment income at 1.39%, assets equal to or greater than $50 million but less than $250 million are taxed at 2.78%, assets equal to or greater than $250 million but less than $5 billion are taxed at 5%, and assets at least $5 billion are taxed at 10%.

Changes to UBIT

Makes several additions to what is considered unrelated business income including parking fringe benefits with certain exceptions for churches, name and logo royalties, and income that is from research not publicly available.

Corporate charitable donations

Adds a 1% floor for corporate charitable donations

H.R. 9495

Includes H.R. 9495, Stop Terror-Financing and Tax Penalties on American Hostages Act, with some minor adjustments for terrorist-supporting organizations

No tax on tips

The proposal provides a federal income tax deduction equal to the qualified tips that an individual receives during any tax year. The bill also expands the business tax credit for the portion FICA/payroll taxes an employer pays on certain tips to include payroll taxes paid on tips received in connection with certain beauty services. This provision sunsets after December 31, 2028.

Under the bill, the new tax deduction for tips is limited to cash tips (1) received by an employee during the course of employment in an occupation that customarily receives tips, and (2) reported by the employee to the employer for purposes of withholding payroll taxes. Further, an employee with compensation exceeding a specified threshold ($160,000 in 2025 and adjusted annually for inflation) in the prior tax year may not claim the new tax deduction for tips.

No tax on overtime

Deduction equal to qualified overtime compensation, which doesn't include tips or payments to highly compensated individuals — 5% owners, compensation over $160,000 — effective December 31, 2024, through December 31, 2028, and Social Security number requirement applies

Enhanced deduction for seniors

$4,000 tax deduction between 2025—2028 reduced by 4% of so much of the taxpayer's modified AGI as exceeds $75,000 ($150,000 for joint return) between December 31, 2024, and before January 1, 2029, and SSN requirement applies

No tax on car loan interest

Personal interest won't include qualified passenger vehicle loan interest, except fleets, leases, etc., between 2025—2028

Enhancement of employer-provided childcare credit

25% credit increased to 40% (50% in the case of an eligible small business)

FML credit

Extends the paid family and medical leave credit permanently, with modifications

Adoption credit

Treats up to $5,000 of the adoption tax credit as refundable

Limitation on tax benefit of itemized deductions

In place of the Pease limitation, itemized deductions reduced by 2/37 of the lesser of the amount of itemized deductions otherwise allowable for the year or so much of the taxable income of the taxpayer for the year as exceeds that dollar amount at which the 37% rate bracket begins, effective after 2025

Third-party settlement

Reverts to the previous de minimis reporting exception for third party settlement organizations

SALT

$10,000 state and local tax (SALT) deduction cap increased to $30,000, reduced above $400,000 in income (this provision is fluid and expected to be deliberated further prior to a House vote)

Provision

Details

MAGA accounts

"Money account for growth and advancement" (MAGA) account for beneficiaries under age 18, with contribution limit for any tax year of $5,000 (except for rollovers and government contributions) with distribution limits until beneficiary reaches age 31, when it is distributed and ceases to be a MAGA account. Distributions from the account that are used for qualified expenses — related to education, business, or home purchase — are taxable as capital gains. Under a pilot program, Treasury will pay a one-time credit of $1,000 to the MAGA account of each qualifying child born 2025—2028.

Section 529 accounts

Additional elementary, secondary, and home school expenses treated as qualified higher education expenses for purposes of 529 accounts

Certain postsecondary credentialing expenses treated as qualified higher education expenses for purposes of 529 accounts

Health reimbursement arrangements

Codifies the final rules permitting employers to offer individual coverage HRAs — renamed as Custom Health Option and Individual Care Expense, or "CHOICE," arrangements — without violating the group health plan requirements

Cafeteria plans

Permits employees enrolled in a CHOICE arrangement in conjunction with a cafeteria plan to use salary reduction to purchase health insurance coverage on an Exchange

Employer Credit for CHOICE Arrangement

Establishes a new credit for employers whose employees are enrolled in CHOICE arrangements maintained by the employer

Provision

Details

Individual rates

10%, 12%, 22%, 24%, 32%, 35%, 37% made permanent (with inflation relief for rates below the 37% rate)

Standard deduction

$15,000/single, $30,000/married inflation (adjusted for 2025) extended past 2025 and increased for years 2025—2028

Personal exemptions

Reduced to $0, effectively suspending the provision, made effective after 2025

Child tax credit

Extension of $2,000 credit and inflation indexing beginning in 2029

Increased to $2,500 for 2025—2028

Subject to an added Social Security number requirement

199A pass-through deduction

20% deduction on certain pass-through income made permanent, increased to 23%, and made applicable to certain interest dividends of qualified business development companies

Estate tax

Exemption of $12.92m for 2025 (inflation adjusted) permanently increased to $15m

AMT

Exemption amounts and phase-out thresholds extended past 2025

Itemized deductions

$750,000 ($375,000 for married filing separately) limitation on home mortgage acquisition indebtedness is made permanent, and the exclusion of interest on home equity indebtedness from the definition of qualified residence interest made permanent

Bicycle commuting

Termination of the exclusion for qualified bicycle commuting reimbursement after 2025

Moving expense deduction

Permanent repeal of the exclusion for employer-provided qualified moving expense reimbursements, except for a member of the Armed Forces

Permanent repeal of deduction for moving expenses, except for a member of the Armed Forces

Wagering losses deduction

Wagering losses deduction clarification to include deductible expenses incurred in gambling activity extended beyond 2025

ABLE accounts

Makes permanent certain provisions related to ABLE accounts

Eligibility for the Saver's Credit

Extension of rollovers from qualified tuition programs to ABLE accounts permitted

Student loans

Restores the exclusion from an individual's gross income for an otherwise includible amount from the discharge of a qualifying loan on account of a student's death or total and permanent disability

For additional information concerning this Alert, please contact:

Washington Council Ernst & Young

• Any member of the group at (202) 293-7474.