One Big Beautiful House Bill: Insights into Potential Tax Reform

One hundred and twenty-two days after President Trump was sworn into office, the House Republicans advanced the One Big Beautiful Bill Act reconciliation bill  [1] (the House Bill). As articulated in our prior alert, we were anticipating a business-friendly tax reform package that extends and modifies the expiring Tax Cuts and Jobs Act (TCJA) provisions, which the House Bill generally achieved. Now, the House Bill heads to the Senate, where all eyes turn to both the Senate Republicans, who have already said that they intend to make changes to the bill, and the Senate Parliamentarian, who will rule on whether provisions can be included in a reconciliation bill. The proposed changes, which are limited to just the provisions addressed in the House Bill, could have far-reaching implications. Although some provisions in the House Bill may change and others could be added by the Senate, we thought it would be helpful to discuss some of the House Bill’s key provisions and their potential impacts.

TCJA Provisions (2025 Through 2029)

• Research and Experimental (R&E) Costs: Permits the immediate expensing of certain domestic research and experimental costs, but allows an election to amortize the domestic research and development expenditures (§§174 and 174A)
• Bonus Depreciation: Reinstatement of 100% bonus depreciation for certain property (§168(k))
• Business Interest Expense Deduction: Return to a limit based on 30% of an EBITDA-like calculation instead of an EBIT-like calculation (§163(j))

A&M Insight: The ability to choose between immediate deduction or capitalization and amortization of certain domestic R&E costs offers significant planning opportunities, especially as the House Bill does not modify the TCJA limitation on a taxpayer’s ability to utilize net operating losses (NOLs) (§172). Additionally, the closure of a TCJA loophole affecting the R&E credit (§280C(c)) will require taxpayers to reassess their strategies for managing and reporting these expenses as it could reduce the R&E credit for a vast majority of taxpayers by up to 21 percent. Lastly, with the changes to the business interest expense deduction, it would be beneficial for taxpayers to review their capitalization accounting methods and elections to maximize the recovery of interest expense.

Corporate Tax Provisions

The House Bill does not include corporate tax provisions, which many view as a disappointment. Notably, provisions to lower the corporate income tax rate or repeal or adjust the excise tax on stock repurchases and the corporate alternative minimum tax (CAMT) are absent. Additionally, the House Bill does not include a much-discussed new limitation on the deductibility of state income taxes (like the limitation for individuals). However, the House Bill does expand the limitation on the deductibility of compensation for for-profit corporations (§162(m)). Starting in 2026, compensation paid by all members of a controlled group will be aggregated for purposes of applying the $1 million deduction limitation. Additionally, the determination of the five highest compensated employees during the taxable year (excluding current and historic CEOs, CFOs, and the three highest compensated officers who were not CEOs or CFOs for any given year), which first applies in 2027, will be based on aggregate compensation paid to each individual by all members of the controlled group, potentially changing which employees’ compensation is subject to the deduction limitation; any resulting limitation on deductibility would be allocated pro-rata across all controlled group members paying compensation to the relevant individuals.

International Tax Provisions

• Increase of Tax on Foreign Persons:
  • Increase the statutory tax rates for certain taxes by five percentage points annually (up to 20 percent) for most foreign individuals, corporations, and other entities that are residents (or controlled by residents) of discriminatory foreign countries
  • Eliminate the sovereign exemption from tax for discriminatory foreign countries
  • Eliminate the BEAT threshold ($500 million of annual gross receipts and 3% base erosion percentage) for corporations controlled by residents of discriminatory foreign countries, causing such corporations, regardless of size, to be subject to BEAT and increase the BEAT tax rate to 12.5% for corporations controlled by residents of discriminatory foreign countries
  • For this purpose, a “discriminatory foreign country” is a country that has one or more of the following taxes in effect (§899):
    – An undertaxed profits rule (UTPR) tax
    – A digital services tax (DST),
    – A diverted profits tax (DPT), or
    – To the extent provided by Treasury, an extraterritorial tax, discriminatory tax, or any other tax enacted with a public or stated purpose
    indicating the tax will be economically borne, directly or indirectly, disproportionately by United States persons.
• Change in Tax Rates:
  • Base Erosion and Anti-Abuse Tax (BEAT): The minimum tax rate on base erosion payments, which are payments made to foreign affiliates that can reduce a company’s tax liability, is generally fixed permanently at 10.1 percent (from 10 percent through 2025 and thereafter 12.5 percent) (§59A)
  • International Tax Deductions: The deduction associated with Global Intangible Low-Taxed Income (GILTI) and Foreign-Derived Intangible Income (FDII) is fixed permanently at 49.2 percent (from 50 percent through 2025 and thereafter 37.5 percent) and 36.5 percent (from 37.5 percent through 2025 and thereafter 21.875 percent), respectively.

A&M Insight: The proposed increase in tax on foreign persons could affect a wide range of taxpayers, including private equity funds, and raises a range of complex issues, including its interplay with statutory exemptions from tax (e.g., the “portfolio interest” exemption) and treaties (e.g., is income that is currently exempt from withholding tax under a treaty subject to US tax under section 899 and, if so, is it only subject to the ratcheting tax rate or the statutory tax rate plus the ratcheting tax rate). Notably, the provision automatically applies with respect to UTPRs and DSTs, and there is no provision allowing the Treasury to exempt specific countries from such application. This could complicate ongoing tariff negotiations and international relations, as well as discourage foreign investment in the US.

Other Business Tax Provisions

• Bonus Depreciation: 100% bonus depreciation for certain production, manufacturing, and refinery facilities (§168(n)) – effective for property placed in service after the date of enactment)
• Small Manufacturers Benefit: Increase the gross receipts eligibility cutoff for numerous benefits, including eligibility for the cash method and business interest expense limitation waiver, for small manufacturers to approximately $100 million
• Qualified Business Income: Make the deduction for certain business income (§199A) permanent and increase it to 23 percent (from 20 percent)
• Opportunity Zones: Allow for a new round of qualified opportunity zones which, for certain capital gains that are invested, excludes 10 percent of that gain and allows tax payments to be deferred for up to seven years

A&M Insight: The increase in the qualified business income deduction is unexpected and may prompt companies to reconsider their business structures as the effective tax rate of operating in a flowthrough status (e.g., as a partnership or an S corporation) may be reduced, particularly as the current individual tax rates are proposed to also become permanent. The opportunity zones provision requires careful planning as it only applies to amounts invested in a qualified opportunity fund beginning in 2027.

Green Energy Provisions

The House Bill dismantles many green energy incentives:

• Termination of Credits: Credits for clean vehicles (§§ 25C, 25D, 25E, 30C, 30D, and 45W), new home energy efficiency (§ 45L), and clean hydrogen (§ 45V) are generally terminated after December 31, 2025
• Reduction of Other Green Energy Incentives: Materially reduces eligibility for the investment and production tax credits by implementing a requirement for projects to (i) begin construction within 60 days of enactment and (ii) be placed in service by the end of 2028 (in contrast to existing law under which these credits are forecast to be in place through the mid-2040s)
• Transferability Sunset: The ability to transfer credits for cash is phased out with most credits no longer being eligible for transfer past 2027
• Limited Expansion for Clean Fuels and Nuclear: The clean fuel credit (§ 45Z) is extended for four years through 2031; certain nuclear projects retain greater access to the investment and production tax credits

A&M Insight: The rollback of green energy provisions is significant and notable. Even those in the oil and gas industry generally support the credits. The only notable benefit for the oil and gas industry is the bonus depreciation for certain refining facilities.

Individual Taxes

• Avoidance of Tax Rate Increases: The current individual tax rates are made permanent
• Deduction for State and Local Tax (SALT): Increases the cap on SALT deductions to $40,000 for certain taxpayers, while limiting the ability to work around the limit for certain taxpayers
• Limitation on Itemized Deductions: Beginning in 2026, the maximum benefit for itemized deductions (other than SALT) will be 35 percent, and the maximum benefit for SALT will be 32 percent (in contrast to the current maximum benefit of 37 percent)
• High-Net-Worth Benefits: Sets the gift and estate tax exemption for 2026 at $15 million, with subsequent adjustments for inflation
• Exemptions and Credits: Introduces new provisions to reduce certain individual taxes (e.g., no tax on tip income or overtime pay, along with tax credits that advance certain social priorities)

The House Bill does not include much-discussed changes to the rules governing carried interest.

A&M Tax Says

The House Bill presents a significant shift in the tax landscape, with far-reaching implications for businesses and individuals alike. While it extends and modifies key TCJA provisions, it also introduces new complexities in international taxation and a significant impact on green energy incentives. In the Senate, Republican members have expressed a wide range of desired changes to the House Bill. On the one hand, deficit hawks are concerned about the bill’s impact on the deficit, while others believe the bill either cuts too much (e.g., in the green energy space) or does not include their desired modifications. Given the slim Republican majorities in both the House and the Senate, finding a compromise will be essential to finalize a tax reform bill. Taxpayers must consider how the evolving tax policies and highly uncertain geopolitical environment could affect their businesses. Strategic planning and reassessment of tax positions will be crucial in navigating these changes. If you would like to discuss how the evolving legislative and regulatory landscape could affect your business strategies and tax planning, please feel free to reach out to Kevin M. Jacobs of our National Tax Office.

[1] https://rules.house.gov/sites/evo-subsites/rules.house.gov/files/documents/rcp_119-3_final.pdf as amended by https://amendments-rules.house.gov/amendments/RCP_119-3_Managers_xml%20(002)250521201648156.pdf