- Deduction for Domestic Research Expenditures
- Interest Deduction Limitation
- Bonus Depreciation and Other Cost Recovery Incentives
- Corporate Charitable Contributions
- Minor Changes to GILTI, FDII and BEAT
- Retaliatory Measures Against ‘Unfair Foreign Taxes’ (Section 899)
On May 22, 2025, the House of Representatives passed the One Big Beautiful Bill Act (OBBBA). Tax-related proposals contained in the OBBBA would extend or make permanent select corporate, international and individual tax provisions originally enacted as part of the Tax Cuts and Jobs Act of 2017 (TCJA) that either have expired or are scheduled to sunset on December 31, 2025.
The OBBBA also contains several other provisions, including:
- Retaliatory measures against foreign countries that have enacted certain “unfair foreign taxes.”
- An increase of the cap on state and local tax (SALT) deductions of individual taxpayers to $40,000 and new restrictions on SALT deductions for certain partnerships.
- Significant modifications to green energy tax credits enacted under the Inflation Reduction Act (IRA).
The Senate is expected to take up the OBBBA in June 2025, with a target date of July 4, 2025, set for the bill’s enactment. Below, we summarize key aspects of the OBBBA and provide our preliminary analysis.
Corporations
Deduction for Domestic Research Expenditures
The OBBBA suspends required capitalization of domestic research and experimental expenditures for amounts paid or incurred in taxable years beginning after December 31, 2024, and before January 1, 2030. Under the OBBBA, at the taxpayer’s election, such expenditures can be:
- deducted as paid or incurred under new Section 174A(a),
- capitalized and recovered over no less than 60 months under new Section 174A(c) (not applicable if chargeable to depreciable or depletable property), or
- capitalized and recovered over 10 years under amended Section 59(e).
By contrast, taxpayers must continue to capitalize and amortize foreign research or experimental expenditures over 15 years.
Taxpayers may not recover foreign capitalized research or experimental expenditures, either as a deduction or a reduction to the amount realized, for any property disposed of, retired or abandoned after May 12, 2025. This provision addresses, at least prospectively, an arguable lack of clarity concerning the application of current Section 174(d).
Transitions to or from current deduction of domestic research expenditures are treated as automatic changes in accounting method on a cutoff basis, i.e., no Section 481(a) adjustments are required or allowed to potentially spread the impact over several years.
Presumably, the Internal Revenue Service (IRS) and Department of the Treasury (Treasury) will issue procedural guidance implementing the statute. While the other conforming amendments, which are permanent for taxable years beginning after December 31, 2024, address some issues that had not yet been adequately resolved in administrative guidance (e.g., the existence of basis, the proper approach to dispositions of research cost objectives, etc.), some issues remain for further regulatory guidance, including the definition of software expenditures and the treatment of contract research arrangements.
Interest Deduction Limitation
Under Section 163(j), the deduction for business interest expense is generally limited to the sum of (1) business interest income, (2) 30% of adjusted taxable income (but not less than zero) and (3) floor plan financing interest. For taxable years beginning after December 31, 2024, and before January 1, 2030, the OBBBA provides that adjusted taxable income be computed by reference to earnings before income taxes without regard to deductions for depreciation, amortization or depletion (EBITDA). This change provides potentially significant increases in the ability to benefit from business interest deductions for many taxpayers.
Bonus Depreciation and Other Cost Recovery Incentives
Several accelerated cost recovery incentives are included in the OBBBA.
First, so-called “bonus depreciation” is extended at 100% of basis for eligible property acquired and placed in service after January 19, 2025, and before January 1, 2030 (January 1, 2031, for longer production period property and certain aircraft). As with prior iterations of bonus depreciation, determining and documenting the placed-in-service date for a particular asset is critical.
Second, in an attempt to incentivize manufacturing in the U.S., the OBBBA provides for an elective 100% depreciation allowance for “qualified production property.” Qualified production property is the portion of any U.S. nonresidential real property that is originally used by the taxpayer as an integral part of a “qualified production activity” and placed in service after the date of enactment and before January 1, 2033 (if construction begins after January 19, 2025, and before January 1, 2029).
Qualified production activity is the manufacturing, production or refining of tangible personal property, if there has been a substantial transformation of the property comprising the product. This provision suggests a number of qualification issues similar to what arose under former Section 199 (relating to the domestic production activities deduction).
Third, the maximum amount a taxpayer may expense under Section 179 is increased to $2.5 million (and the phaseout threshold amount is increased to $4 million) for taxable years beginning after December 31, 2024 (with inflation indexing for taxable years beginning after December 31, 2025).
Corporate Charitable Contributions
The OBBBA reduces the deduction for charitable contributions of a corporation by allowing a deduction only to the extent that these contributions exceed 1% of a corporation’s taxable income. This 1% “floor” on corporate charitable deductions operates in addition to the 10% “ceiling” under current law.
Contributions in excess of the 10% ceiling may continue to be carried forward for five years, but contributions disallowed under the 1% floor may be carried forward only in years in which the taxpayer’s charitable contributions exceed the 10% ceiling.
International
Minor Changes to GILTI, FDII and BEAT
The OBBBA slightly reduces the Section 250 deduction currently allowed to domestic corporations for global intangible low-taxed income (GILTI) (from 50% to 49.2%) and foreign-derived intangible income (FDII) (from 37.5% to 36.5%). These minor reductions replace the significantly more drastic changes otherwise scheduled to take effect in 2026, which would have reduced the Section 250 deduction for GILTI and FDII to 37.5% and 21.875%, respectively.
The OBBBA also slightly increases the base erosion anti-abuse tax (BEAT) rate from 10% to 10.1%, while repealing all changes to BEAT currently scheduled to take effect in 2026. These scheduled changes include an increase in the BEAT rate from 10% to 12.5%, as well as the effective denial of the use of credits to offset BEAT liability.
Beyond these minor rate changes, the OBBBA does not make any broader changes to the currently applicable GILTI, FDII and BEAT regimes, and, apart from Section 899, to the U.S. international tax regime more generally.
Notably, the OBBBA does not include several of the taxpayer-favorable international tax provisions included in Sen. Thom Tillis’ “International Competition for American Jobs Act” (S. 1605), such as the permanent extension of Section 954(c)(6), the restoration of Section 958(b)(4)’s limitation on downward attribution, the elimination of the qualified business asset investment (QBAI) in calculating the FDII deduction, further modifications to the BEAT regime and significant changes to the foreign tax credit regime.
Retaliatory Measures Against ‘Unfair Foreign Taxes’ (Section 899)
The OBBBA includes new Section 899, which incorporates certain parts of the “Defending American Jobs and Investment Act” (H.R. 591) and the “Unfair Tax Prevention Act” (H.R. 2423) proposed earlier this year, with several modifications. Broadly, Section 899 imposes increasingly harsh retaliatory taxes against countries (and individuals and entities resident in, or owned by residents of, such countries (applicable persons)) that have enacted any “unfair foreign tax” (such countries referred to as “discriminatory foreign countries” or “DFCs”).
Section 899 generally increases the current U.S. tax rates imposed on applicable persons by 5% in the first year following enactment, increased by an additional 5% for each subsequent year, with the increases capped at 20% above the statutory rate. Withholding rates are increased roughly in tandem with these increased income tax rates.
Section 899 also imposes severe BEAT consequences against any corporation (domestic or foreign) if more than 50% of such corporation is owned by applicable persons. Finally, Section 899 turns off the application of Section 892(a) to foreign governments of DFCs, thus subjecting income received by such foreign governments from certain U.S. investments to U.S. tax, including withholding tax.
Note: While the fate of Section 899 in the Senate remains unclear, these provisions have the potential to result in significant disruptions and economic costs in a variety of common business transactions and investment structures. The provisions and our initial key takeaways are summarized below in greater detail.
Unfair foreign taxes. Section 899(c) defines “unfair foreign tax” to include any undertaxed profits rule (UTPR), digital services tax (DST) or diverted profits tax, as well as any other tax that Treasury designates as an “extraterritorial tax” or “discriminatory tax” (with such terms further defined in the statute). Thus, UTPRs, DSTs and diverted profits taxes are treated as per se unfair foreign taxes, while Treasury is given some discretion with respect to taxes that are not so labeled. There is also a general exception for any tax that does not apply to any U.S. person (including a trade or business of a U.S. person) or to any controlled foreign corporation (CFC) more than 50% owned by U.S. persons. This exception is generally consistent with recent statements by the administration that Pillar Two can exist “side by side” with the U.S. tax regime, but only if the UTPR does not apply to U.S. persons and their foreign operations.
While prior proposals (e.g., H.R. 591) and analogous provisions of current law (e.g., Section 891) have typically given Treasury or the president discretion to declare taxes discriminatory, Section 899 departs from this mold by rendering certain categories of taxes as per se unfair foreign taxes. This may be driven in part by revenue-scoring conventions, which ordinarily prevent discretionary provisions from being taken into account as revenue-generating.
Further, the inclusion of DSTs and diverted profits taxes as per se unfair foreign taxes is potentially problematic for a couple of reasons.
- Even if there is a broader Pillar Two agreement that resolves the administration’s stated concerns around UTPRs, this still leaves the many countries that have enacted DSTs (including Canada, France, Austria and the United Kingdom, among many others) as per se DFCs.
- Because the terms “digital services tax” and “diverted profits tax” are not further defined in the OBBBA, it is unclear exactly which taxes are included. As drafted, the OBBBA will put significant pressure on countries that have enacted UTPRs, DSTs and/or diverted profits taxes to eliminate or modify those taxes, and certain foreign countries are already considering such measures. (See our May 20, 2025, client alert “UK Consults on Draft Legislation on Transfer Pricing, Permanent Establishments and Diverted Profits Tax.”)
Applicable persons. Section 899(b) defines “applicable person” broadly to include:
- Foreign governments of a DFC.
- Certain individuals who are tax residents of a DFC.
- Certain foreign corporations that are (i) tax residents of a DFC or (ii) more than 50% owned by other applicable persons.
- Certain foreign private foundations and trusts.
- Certain foreign partnerships, branches and other entities.
Notably, certain foreign corporations with significant ultimate ownership by U.S. persons are not treated as applicable persons under the OBBBA. The OBBBA also creates significant uncertainty with respect to its application to foreign partnerships and other pass-through entities. Finally, by including foreign governments of DFCs as applicable persons, in addition to eliminating the benefits of Section 892(a) for foreign governments of DFCs, Section 892 investors of DFCs may be impacted much more severely than other applicable persons.
“Super” BEAT. As noted above, the OBBBA can significantly increase the BEAT burden on U.S. subsidiaries (as well as foreign subsidiaries with U.S. operations) within foreign-parented groups. Specifically:
- Those corporations will be subject to BEAT without regard to the gross receipts and base erosion percentage tests.
- The BEAT rate will be increased from 10% to 12.5%.
- BEAT liability cannot be offset by any credits.
- Base erosion payments will not be reduced for amounts on which U.S. tax is imposed or withheld, or for payments that would otherwise qualify for the services cost method exception in Section 59A(d)(5).
- Certain capitalized amounts will be treated as if those amounts had been deducted, rather than capitalized, for BEAT purposes.
Importantly, the Super BEAT can apply even where the ultimate parent of a foreign group is not itself an applicable person (e.g., the ultimate parent is not an applicable person, but intermediate entities within the group are). Moreover, because both the gross receipts and base erosion percentage thresholds are removed, many foreign-parented groups will be swept into the BEAT regime for the first time.
Note: Foreign-parented groups with any U.S. operations and foreign institutional investors should carefully monitor Section 899 and examine their structures to assess the potential impacts.
Applicability dates. As drafted, Section 899 will become applicable with respect to any DFC during the calendar year beginning on or after the latest of (i) 90 days after enactment, (ii) 180 days after the enactment of the unfair foreign tax that causes such country to be treated as a DFC, or (iii) the first date that an unfair foreign tax of such country begins to apply (the “applicable date”). This delayed applicability is intended to give foreign countries with unfair foreign taxes an opportunity to either eliminate or otherwise modify such taxes so that they do not apply to U.S. persons or to the foreign operations of U.S. persons.
Assuming that the OBBBA is enacted on or before October 3, 2025, Section 899 will take effect on January 1, 2026, for countries that already apply a UTPR, DST or diverted profits tax, unless those taxes are eliminated or sufficiently modified. As of that date, payments to applicable persons with respect to such DFCs will generally be subject to a 5% increase on withholding rates, and applicable persons with respect to such DFCs who are on a calendar U.S. taxable year will become subject to the increased rates and to the Super BEAT.
Notably, while certain payments to applicable persons may become subject to increased withholding as of January 1, 2026, the increased tax rates and the Super BEAT apply to an applicable person only during such person’s first taxable year that begins on or after such date. Applicable persons with a fiscal year other than the calendar year may thus become subject to these rules on a different date, generally using a blended tax rate. This creates potential mismatches between amounts withheld and a taxpayer’s ultimate U.S. tax liability.
Note: Fiscal year taxpayers should carefully monitor any changes in the statutory language regarding applicability dates as well as the ultimate date of enactment, and should assess the impact of any changes in light of their specific circumstances.
Interaction with treaties and other reduced rates. One significant departure from the prior version of Section 899 contained in H.R. 591 is the interaction of the increased tax rates with treaties. While H.R. 591 would have expressly overridden U.S. treaties (e.g., increasing a 5% treaty rate to 35% in the first year of application), Section 899 instead applies the 5% increase to the reduced treaty rate itself. The 20% cap on rate increases, however, is based on the statutory rate, rather than the reduced treaty rate.
For example, assuming that the U.S. withholding rate on U.S.-source interest payments to residents of Country X — a DFC — is reduced to 5% under a treaty, this rate will be increased to 10% in Year 1, 15% in Year 2, and ultimately to 50% (30% statutory rate plus 20%) in Year 9.
Section 899 accomplishes this by applying the rate increase to each “specified rate of tax (or any rate of tax applicable in lieu of such statutory rate).” The House Budget Committee report seeks to clarify this language by stating that it is intended to include both reduced and zero treaty rates, but is not intended to apply to income that is specifically excluded from the application of a specified tax, such as portfolio interest excluded from tax pursuant to Section 871(h).
While this is a helpful clarification with respect to portfolio interest and certain treaty rates, uncertainty remains as to the treatment of other amounts exempt from tax under treaties and other Code sections.
Partnerships
Section 707(a)(2) Revision
In a last-minute (and unexpected) amendment added shortly before the House passed the OBBBA, Section 707(a)(2) was revised so that its substantive terms apply “Except as provided by the Secretary,” as compared to the “Under regulations prescribed by the Secretary” currently included in the statutory language.
Section 707(a)(2) provides rules for “disguised sales” of property or “disguised payments” for services between a partner and a partnership, and rules for disguised sales of property between partners in a partnership. This amendment appears to be intended to ensure Section 707(a)(2) is self-executing and thus eliminates the argument that Section 707(a)(2) is operative only to the extent that Treasury has promulgated final regulations amplifying the provision.
In particular, final regulations currently address partner-to-partnership disguised sales, but no final regulations have been issued on disguised payments or so-called “disguised sales” of partnership interests. Proposed regulations addressing disguised sales were issued in 2004 and withdrawn in 2009. Thus, under this argument, Section 707(a)(2) as currently drafted would have no application to those latter categories of transactions. We understand the IRS’s position is that Section 707(a)(2) is self-executing even as currently drafted.
In terms of practical implications, taxpayer positions related to fee waivers and carried interest should be impacted only to the extent they are premised on the statute not being self-executing. The statutory substance of the disguised sale and payment rules remains unchanged.
Individuals
SALT Cap
The bill increases the individual deduction cap for specified taxes including state and local sales, income and property taxes from $10,000 ($5,000 for married individuals filing separately) to $40,000 in 2025 (50% of that amount for married individuals filing separately) and $40,400 in 2026 (50% of that amount for married individuals filing separately), with additional 1% annual increases through 2033, after which the deduction cap becomes permanent at the 2033 amounts.
The deduction is subject to income limitations: the deduction is reduced, but not below $10,000 ($5,000 for married individuals filing separately), by 30% of the excess of modified adjusted gross income (AGI) over $500,000 in 2025 (50% of that amount for married individuals filing separately) and $505,000 in 2026 (50% of that amount for married individuals filing separately), with additional 1% increases in the income limitations through 2033, after which the income limitations from 2033 become permanent. The cap also applies to “substitute payments,” which are payments made to a tax authority that provide the payor with a tax benefit.
The bill disallows a deduction for specified taxes including state and local sales, income and property taxes made by a partnership in certain industries (generally, businesses that are ineligible for the Section 199A deduction). The bill requires that these tax payments be separately stated items, and in so doing, abrogates Notice 2020-75, which effectively authorized the pass-through entity tax (PTET) provisions enacted by various states.
Section 199A Deduction
The Section 199A deduction for certain “qualified business income” earned by noncorporate taxpayers is made permanent with an increase in the deduction to 23% (for taxable years beginning after December 31, 2025), from 20% currently. The application of the Section 199A deduction is also expanded to certain interest dividends from qualified business development companies (a change apparently intended to cover regulated investment companies that engage in loan origination), in addition to its current application to:
- Qualified business income.
- Qualified publicly traded partnership income.
- Qualified real estate investment trust (REIT) dividends.
- Income of, or received from, certain agricultural and horticultural cooperatives.
The OBBBA further replaces the existing phase-in of W-2 wages, capital investment and specified services trades or businesses for taxpayers whose taxable income exceeds the threshold amounts and indexes such threshold amounts for inflation for taxable years after 2025.
Note: The OBBBA does not include any change to the tax treatment of carried interests.
Gift and Estate Tax Exemption
Based on the OBBBA, the estate, gift and generation-skipping transfer tax exemption amounts will be $15 million per person beginning in the 2026 tax year (an increase from the $13.99 million exemption amount in effect for 2025). The exemption amounts will continue to be indexed for inflation. The increased exemption amounts will be permanent.
Energy
In respect of the renewable energy credits that were previously introduced, extended or expanded under the IRA, the OBBBA introduces substantial cuts through:
- Acceleration of the phase-out schedules.
- Restrictions on foreign-parented entities claiming credits.
- Elimination of transferability for certain credits.
The deepest cuts were made to the technology-neutral credits in Section 45Y and Section 48E through a manager’s amendment to the OBBBA released on May 21, 2025, which provides that the credits will not be available for facilities that begin construction 60 days after the enactment of the bill. While nuclear facilities were spared from that tight phase-out, it will severely impact the development of new wind and solar projects.
The OBBBA also sets forth several novel rules, including that certain prohibited foreign entities are not able to claim Section 45X advanced manufacturing credits, Section 45Y production tax credits, Section 48E investment tax credits, Section 45Q carbon capture credits or Section 45U nuclear credits, and that, starting in 2026, Section 45Y production tax credits and Section 48E investment tax credits will not be able to be claimed in respect of residential rooftop solar systems that are leased to homeowners.
Note: Senators have indicated the possibility that changes may be in store for one or more of these cuts to the credits but, given the uncertain outcome, developers would be prudent to plan beginning construction, within the meaning of IRS guidance, as soon as possible on new projects.
Other Proposals
Endowment Tax
Under current law, certain private college and university endowments are subject to a 1.4% excise tax on their net investment income. The OBBBA introduces a tiered rate structure, with rate brackets from 1.4% to 21%, based on the size of an endowment on a per student basis. In determining the number of students, only U.S. citizens and permanent residents are counted. Under current law, international students also are counted in determining the size of an endowment on a per student basis.
Additional changes to the current endowment tax include:
- An exemption for religious institutions.
- An expansion of the definition of net investment income to include student loan interest income and certain royalty income.
- The imposition of certain reporting requirements with respect to the number of the institution’s students.
The OBBBA also grants Treasury broad authority to prescribe regulations or other guidance to prevent avoidance of the tax.
These modifications to the endowment tax will apply to taxable years beginning after December 31, 2025.
Net Investment Income Tax on Certain Private Foundations
Under current law, private foundations are subject to a 1.39% excise tax on their net investment income. The OBBBA introduces a tiered rate structure, with rate brackets from 1.39% to 10%, depending on the value of a foundation’s assets. For purposes of determining the value of a private foundation’s assets, related foundations are aggregated. The new net investment income tax rates are effective for taxable years beginning after the OBBBA is enacted.
Qualified Opportunity Zones
The OBBBA renews and expands the Opportunity Zone provisions under Sections 1400Z-1 and 1400Z-2. In addition to modifications to the definition of low-income communities and to Opportunity Zone investment incentives, the OBBBA provides a new round of Qualified Opportunity Zone designations effective for 2027-33.
In general, the certification will follow a process similar to the prior iteration, with nominations from states and certification by the secretary of the Treasury. There will be more emphasis on rural areas.
The OBBBA provides a new category of Qualified Rural Opportunity Funds, which will have a 30% basis increase for investments held for at least five years (compared to 10% for a regular Qualified Opportunity Fund).
Note: While there is some time until the new Opportunity Zone regime goes into effect, potential investors should consider how the enhancements may fit into their overall tax strategy.
Finally, the OBBBA imposes enhanced reporting obligations on qualified funds and qualified businesses within those funds for taxable years beginning after the enactment date. Experience suggests challenges with existing compliance requirements like Forms 8996 and 8997 as well as with processes like decertification. The increased reporting appears aimed at bolstering IRS compliance and enforcement efforts.
See the Executive Briefing publication
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