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The Act: Key Tax Provisions and Analysis

Skadden Publication

Amy E. Heller Victor Hollender Shalom D. Huber Loren C. Ponds Paul Schockett Moshe Spinowitz Scott W. Vance David Berke Nathaniel J. Dorfman Matt Dinger Andrew D. O'Gwynn Sonali Parikh Kyoolee Park Spencer Stolle Joseph E. Thomas

On July 4, 2025, President Donald Trump signed into law the Act (formerly referred to as the One Big Beautiful Bill Act, or OBBBA). The Act includes a suite of tax-related provisions that (1) make permanent many of the individual and corporate tax measures enacted under the Tax Cuts and Jobs Act (TCJA); (2) limit the availability of certain clean energy and related tax credits established by the Inflation Reduction Act (IRA); and (3) provide additional relief to families and workers as well as an increased limitation of the state and local tax (SALT) deduction.

Below, we set forth a summary of the key tax provisions in the Act, together with our analysis of their potential impact. (For more on the tax provisions included in the Senate version of the Act (Senate Proposal), see our June 25, 2025, client alert, and for more on the tax provisions included in the House version of the Act (House Proposal), see our May 29, 2025, client alert.)

Corporations

Deduction for Domestic Research Expenditures

The Act permanently removes the requirement to capitalize domestic research or experimental expenditures for amounts paid or incurred in taxable years beginning after December 31, 2024. 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).
  • 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); that said, the Act provides that no inference is to be drawn concerning the application of Section 174(d) for taxable years beginning prior to May 13, 2025.

There are two elective transitional rules provided under the Act. The first allows small taxpayers (i.e., those under the gross receipts threshold in Section 448(c)) to reverse the impact of the required capitalization of domestic research or experimental expenditures via amended returns for 2022-2024. The second allows taxpayers more generally to deduct the unamortized balance of domestic research or experimental expenditures required to be capitalized during 2022-2024 over one or two years, beginning with the first taxable year beginning after December 31, 2024.

Presumably, the Internal Revenue Service and the Department of the Treasury (Treasury) will need to issue procedural guidance implementing the statute, pursuant to Act provisions mandating accounting method change treatment. 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. Interestingly, the Act provides that no inference is to be drawn from the amendment to Section 280C for taxable years beginning January 1, 2025, concerning the interaction of formerly mandated amortization and the research credit, thus leaving open this interplay that had given rise to questions during the Section 174 guidance process.

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, the Act 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.

Additionally, the Act also excludes Subpart F and global intangible low-taxed income (GILTI) (now NCTI, as described below), and any associated Section 78 gross-up, as well as the portion of the associated deductions allowed under sections 245A(a) (certain foreign-sourced dividends) and 250(a)(1)(B) (40% of NCTI inclusion and Section 78 gross-up), from the determination of adjusted taxable income for taxable years beginning after December 31, 2025.

Finally, the Act provides an ordering rule under which interest capitalization (other than as required with respect to certain produced property and certain straddles) occurs after application of the limitation for taxable years beginning after December 31, 2025. This provision appears aimed at certain planning using elective capitalization of interest to mitigate the impact of the business interest deduction limitation.

Bonus Depreciation and Other Cost Recovery Incentives

Several accelerated cost recovery incentives are included in the Act.

First, so-called “bonus depreciation” is allowed at 100% of basis for eligible property acquired and placed in service after January 19, 2025. As with prior iterations of bonus depreciation, determining and documenting the placed-in-service date for a particular asset is critical. Significantly, for purposes of determining whether property has been acquired before the effective date, property is not treated as acquired after the date on which a written binding contract is entered into for such acquisition. Given the repeal of the special rule for self-constructed property in former Section 168(k)(2)(E)(i), careful review of the facts concerning construction of such property is important to establish the proper treatment for depreciation purposes. Finally, under a transitional rule, taxpayers may elect for the first taxable year ending after January 19, 2025, to use the otherwise applicable bonus depreciation percentages for such year (40% or 60%).

Second, in an attempt to incentivize manufacturing in the U.S., the Act 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 July 4, 2025, and before January 1, 2031 (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 and computational 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 Act 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 prior 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

The Act makes several important changes to the international tax regime, as outlined below. Notably absent from the Act is Section 899, which was in prior iterations of the Act and would have imposed increasingly harsh retaliatory taxes on countries (and certain individuals and entities associated with those countries) that had enacted any “unfair foreign tax.” The removal of Section 899 followed an agreement between Treasury and the other G7 countries regarding the application of the Pillar Two rules to U.S.-parented multinational companies.

Changes to GILTI and FDII

The Act makes several substantive changes to the provisions governing the regimes formerly known as GILTI and foreign-derived intangible income (FDII) for taxable years beginning after December 31, 2025, and repeals other changes to those provisions that had been scheduled to go into effect for such taxable years. In addition, the Act removes the terms “GILTI” and “FDII” from the Internal Revenue Code (Code) and renames GILTI as “Net CFC Tested Income” (NCTI) and FDII as “Foreign-Derived Deduction Eligible Income” (FDDEI).

  • Increased rates. The Act reduces the Section 250 deduction for NCTI (to 40% from 50%) and FDDEI (to 33.34% from 37.5%). It also increases (to 90% from 80%) the portion of foreign income taxes that a domestic corporation is deemed to have paid with respect to NCTI, and disallows 10% of the deemed paid foreign tax credits (FTCs) for distributions of previously taxed NCTI. Taking these changes together, the effective rate for both NCTI and FDDEI will be 14% (an increase from the current 13.125%).
  • Elimination of QBAI. The Act eliminates the deemed 10% return on certain tangible business assets (QBAI) from the calculation of both NCTI and FDDEI. 
  • GILTI expense allocation. Prior to the effective date of the Act’s changes to the GILTI regime, in calculating the FTC limitation for deemed-paid foreign taxes associated with GILTI, taxpayers are often required to allocate a portion of certain group expenses (e.g., interest, stewardship expense) to foreign-source income, thereby reducing the FTC limitation. The Act modifies these rules by limiting expenses that are allocated to foreign-source GILTI (now NCTI) to (1) the deduction under Section 250 and (2) other expenses only if directly allocable to that income, with interest expense and R&E expense expressly excluded. This change will potentially increase the FTC limitation in the NCTI basket for many taxpayers.
  • Calculation of deduction eligible income. The Act also makes other changes to the calculation of deduction eligible income (DEI), which is a necessary component in calculating FDDEI. DEI will no longer include income from certain sales (or deemed sales, deemed dispositions or transactions subject to section 367(d)) of certain intangible property and property of a type that is subject to deprecation, amortization or depletion by the seller. The Act also modifies the expense allocation rules for purposes of calculating DEI by excluding interest expense and R&E expense, potentially increasing the amount of a taxpayer’s income qualifying for the Section 250 deduction.

Changes to BEAT

In contrast to the more drastic changes to the base erosion anti-abuse tax (BEAT) in the initial Senate Proposal, the Act slightly increases the BEAT rate to 10.5% from 10% on a permanent basis, effective for taxable years beginning after December 31, 2025, while repealing all changes to BEAT that had been scheduled to take effect in such taxable years. These scheduled changes would have included an increase in the BEAT rate to 12.5% from 10%, as well as the effective denial of the use of credits to offset BEAT liability.

Restoration of Section 958(b)(4) and Addition of Section 951B

The Act makes two other important changes to the Subpart F anti-deferral regime: restoring Section 958(b)(4) — which TCJA removed from the Code — and adding new proposed Section 951B. These provisions have appeared in draft legislation since shortly after TCJA’s enactment (including in the technical corrections draft released by the House Ways and Means Committee in early 2019, and in the Build Back Better Act of 2021), as a means of rectifying the unintended consequences of TCJA’s repeal of Section 958(b)(4). 

  • Section 958(b)(4). This rule limits so-called “downward attribution” of stock of a potential controlled foreign corporation (CFC) to a U.S. shareholder. Specifically, Section 958(b)(4) limits the circumstances in which a U.S. subsidiary is treated as constructively owning CFC stock held by the U.S. subsidiary’s owner. When TCJA removed Section 958(b)(4) and thus introduced “downward attribution” into Subpart F, that change dramatically increased the number of foreign corporations treated as CFCs, particularly within foreign-parented groups. This proliferation of CFCs had major consequences under both Subpart F and other Code provisions that cross-reference Subpart F’s CFC definition. The Act’s restoration of Section 958(b)(4) will again limit downward attribution for purposes of determining CFC status and thus materially reduce the number of foreign corporations treated as CFCs. 
  • Section 951B. In tandem with restoring Section 958(b)(4), the Act adds new Section 951B, a provision that addresses the types of ownership structures that originally motivated TCJA’s repeal of Section 958(b)(4). In sum, Section 951B creates a new parallel Subpart F regime for “foreign-controlled foreign corporations.” These are certain foreign corporations that would be CFCs if Section 958(b)(4) were not in the Code (that is, if downward attribution applied). In essence, Section 951B subjects foreign subsidiaries within certain foreign-parented structures to Subpart F, but in a more targeted manner than the result obtained from a full repeal of Section 958(b)(4).

Remittance Transfers

The Act includes a new 1% excise tax on certain transfers of money abroad. The tax applies to transfers for which the sender provides cash, a money order, a cashier’s check or any other similar instrument. The tax does not apply to transfers from an account held in or by a financial institution, as defined under the Bank Secrecy Act (e.g., banks, trust companies, credit unions, brokers and dealers) and transfers funded with a debit or credit card issued in the U.S.

Proposed versions of the legislation had included higher rates of tax (initially 5%, then reduced to 3.5%, and reduced to 1% in the Act) and had imposed the tax only on non-U.S. citizens, with a credit equal to the amount of tax available to individuals who have Social Security numbers. The Act eliminates the tax credit and imposes the tax on all senders, regardless of citizenship.

Pro Rata Share Rules

The Act revises the pro rata shares rule under Subpart F, which will generally affect those calculations upon certain transfers of CFC stock. Prior to the Act’s effective date, a U.S. shareholder includes its pro rata share of Subpart F and tested income only to the extent it holds stock of the foreign corporation on the last day of the year on which such foreign corporation was a CFC.

Under the Act, a U.S. shareholder’s pro rata share of a CFC’s Subpart F and tested income is the portion of such income which is attributable to: (1) the stock of the corporation owned by the shareholder, and (2) any period of the CFC’s taxable year during which the shareholder owned the stock, the shareholder was a U.S. shareholder, and the corporation was a CFC.

These revised pro rata share rules are effective for taxable years of foreign corporations beginning after December 31, 2025, with a transition rule for certain dividends paid (or deemed paid) by CFCs prior to such date.

Additional International Tax Provisions

Other international tax provisions in the Act include:

  • Permanent extension of Section 954(c)(6), commonly referred to as the “CFC look-through rule,” which was otherwise scheduled to expire at the end of 2025.
  • Repeal of the one-month deferral election in determining the taxable year of certain CFCs under Section 898(c)(2).
  • Changes to the sourcing rules for certain sales of inventory produced in the U.S. for purposes of calculating the FTC limitation.

Individuals

SALT Cap

The Act increases the individual deduction SALT cap to $40,000 in 2025 ($20,000 for married individuals filing separately) from $10,000 ($5,000 for married individuals filing separately). The increased cap is phased out for households with modified adjusted gross income greater than $500,000. Both the cap and the phase-out threshold increase by 1% each year through 2029. In 2030 and beyond, the cap returns to $10,000. The Act does not include any of the pass-through entity tax limitations that had been included in prior versions of the bill.

Section 199A Deduction

The Section 199A deduction for certain qualified business income (QBI) earned by noncorporate taxpayers is made permanent at 20% for taxable years beginning after December 31, 2025. Further, the Act sets the minimum deduction at $400 for taxpayers with at least $1,000 of QBI from any qualified trade or business in which such taxpayer materially participates, increases the existing phase-in threshold and applies inflation adjustments to these new minimum amounts for tax years beginning after 2026.

Excess Business Losses

The Act makes permanent the excess business loss limitation applicable to noncorporate taxpayers. In short, this provision caps the amount of available trade or business losses at $250,000 ($500,000 for joint filers), adjusted for inflation. However, note that, starting in 2026, the inflation adjustment resets from a baseline of 2017 to a baseline of 2024, which will affect the limitation amount. Prior versions of the legislation had included a provision that would have changed the treatment of disallowed losses from recharacterization as net operating losses to a cumulative total of trade or business losses, which would have significantly reduced the ability of many individual taxpayers to benefit from those losses; this change was not included in the Act as enacted.

Individual Charitable Contributions

The Act reduces the deduction for charitable contributions of individuals who itemize deductions. Specifically, an individual’s deduction will be allowable only to the extent that the individual’s contributions exceed 0.5% of adjusted gross income. As with the new 1% floor on corporate charitable deductions, amounts disallowed by the floor may be carried over only in years when the taxpayer’s contributions exceed the applicable percentage limitation for that type of contribution.

The Act also makes permanent the 60% percentage limitation for cash contributions to public charities, meaning that an individual can deduct an amount of up to 60% of adjusted gross income in a given year, provided that the taxpayer contributes only cash, and no other property, to public charities.

Gift and Estate Tax Exemption

Under the Act, 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

For the renewable energy credits that were previously introduced, extended or expanded under the IRA, the Act introduces substantial cuts through an acceleration of the phase-out schedules and the imposition of restrictions on claiming credits for certain foreign-connected projects.

The Act enacts the deepest cuts to wind and solar projects seeking production tax credits under Section 45Y or investment tax credits under Section 48E, requiring those projects to either begin construction by July 4, 2026, or be placed in service by December 31, 2027. Importantly, a mere three days following the Act’s enactment, President Donald Trump issued an executive order directing Treasury to strictly enforce the beginning-of-construction rules for these wind and solar projects. The industry awaits Treasury’s response.

Apart from wind and solar projects, other power generation and storage projects remain eligible for Section 45Y or Section 48E credits through 2033. But the Act includes accelerated phase-out schedules for Section 45V clean hydrogen production credits and Section 45X advanced manufacturing production credits, and an extension of Section 45Z clean fuel credits.

Much of the text of the energy credit portion of the Act was spent on several novel provisions focused on prohibiting credits for projects owned by certain foreign-controlled entities and for projects built with certain foreign-sourced materials. As a result, along with the IRA’s incentives for utilizing sufficient U.S.-produced content in a project, or for manufacturing components in the U.S., developers, manufacturers and investors will need to obtain certifications from counterparties to ensure there is not an impermissible foreign connection.

Tax-Exempt Organizations

Endowment Tax

Prior to the Act’s effective date, certain private college and university endowments are subject to a 1.4% excise tax on their net investment income. The Act introduces a tiered rate structure, applicable taxable years beginning after December 31, 2025, with rate brackets from 1.4% to 8%, based on the size of an endowment on a per student basis. The House Proposal proposed a higher top tax rate of 21% and excluded international students when determining the number of students counted for the purposes of the excise tax, but the tax rate was lowered and the provision excluding international students was removed in the Act.

Net Investment Income Tax on Certain Private Foundations

The House Proposal had proposed an increase to the excise tax on the net investment income tax of certain private foundations, but that increase was excluded from the Act.

Expanded Application of Excise Tax on Highly Compensated Employees of Charitable Organizations

Section 4960 imposes a 21% excise tax on compensation paid in excess of $1 million and certain severance amounts payable upon an involuntary termination to any “covered employee” by certain tax-exempt organizations. Prior to changes made by the Act, applicable to tax years beginning after December 31, 2025, a covered employee includes any employee of a charity that is one of the charity’s “five highest-compensated employees” or anyone who in a prior taxable year beginning after December 31, 2016, had qualified as a covered employee. Income paid to the employee from a related organization (including certain related for-profit entities) is included in the calculation of an employee's income. Due to the potentially broad application of the excise tax, Treasury Regulations were issued in 2021 to provide exceptions to the definition of “five highest-compensated employees.”

The Act expands the definition of covered employee to include any employee or former employee of the charity who was an employee during any prior taxable year beginning after December 31, 2016. By amending prior law in this manner, the Act also creates uncertainty about the continued efficacy of existing regulatory exceptions, due to the fact that the term “five highest-compensated employees” no longer exists in Section 4960.

Compensation and Benefits

Section 162(m) Deduction Limitation 

The Act adds an entity aggregation rule to the $1 million deduction limitation applicable to covered employees under Section 162(m), pursuant to which all members of a “controlled group” are considered to be publicly held if any member of the controlled group is publicly held. The controlled group for this purpose means a group of entities that would be treated as a single employer for employee benefit plan purposes under Sections 414 (b), (c), (m) and (o). Compensation paid to a covered employee by any member of the controlled group is aggregated to determine whether the total amount exceeds the $1 million limitation, and any amount disallowed as a deduction by Section 162(m) is prorated among the paying members of the controlled group in proportion to the amount of compensation paid by each paying member of the controlled group in the taxable year. These changes will apply for tax years beginning after December 31, 2025.

Prior to the Act, the Code itself did not expressly contain an entity aggregation rule for purposes of Section 162(m). However, since 1995, the final regulations under Section 162(m) have provided for an entity aggregation rule, including rules for apportioning any amount disallowed as a deduction among the paying members of the aggregated group. These final regulations applied the affiliated group rules under Section 1504 (determined without regard to Section 1504(b)). Section 1504, which defines an affiliated group of corporations for purposes of allowing such corporations to file a consolidated income tax return, is narrower than the controlled group rules under Section 414. For example, under Section 1504, a partnership cannot be a member of an affiliated group of corporations, and any subsidiaries below a partnership will not be part of such affiliated group; conversely, under the controlled group rules under Section 414(c), a partnership can be part of the controlled group if the parent entity owns at least 80% of the capital interests or profits interests of the partnership.

As a result of the Act, in certain corporate structures, additional affiliates and subsidiaries of the publicly held company may become part of the controlled group for purposes of the deduction limitation under Section 162(m), including in connection with the expansion beginning in 2027 of the list of covered employees to include the next five highest-compensated employees for the applicable tax year.

Section 1202 Qualified Small Business Stock Gain Exclusion

The Act shortens the five-year holding period for qualified small business stock (QSBS) issued after July 4, 2025, to a tiered model where QSBS held for at least three years will be eligible for a 50% gain exclusion, QSBS held for at least four years will be eligible for a 75% gain exclusion, and QSBS held for at least five years will be eligible for the full 100% gain exclusion (subject to the applicable limits described below). In addition, the overall gain exclusion limit has been increased to the greater of $15 million (up from $10 million and now indexed for inflation) and 10 times the shareholder’s original investment in the QSBS, and the limit on the tax basis in the assets of the qualified small business issuing the QSBS has been increased to $75 million (up from $50 million and now indexed for inflation). These changes to the gain exclusion limit and tax basis limit will apply for tax years beginning after July 4, 2025.

Employee Benefits 

The Act makes permanent and/or moderately expands a number of employee-benefits related tax credits, deductions and exclusions, including the paid family and medical leave tax credit, health savings accounts, employer-provided educational assistance programs, dependent care flexible spending accounts (dependent-care FSAs), the employer-provided childcare tax credit, and the child and dependent care tax credit. These changes will generally apply for tax years beginning after December 31, 2025.

In addition, certain contributions (up to $2,500 per year) by employers to Trump accounts can be excluded from the taxable income of employees. Trump accounts are expected to become available in July 2026.

Other Proposals

Other Business Provisions

  • The Act makes a number of changes to the Opportunity Zone regime, including new Opportunity Zone designations, enhanced benefits, and information reporting requirements.
  • The Act makes a number of changes to the Qualified Small Business Stock regime, including a sliding scale of exclusion percentages for qualified stock held for three, four or five years, and increases in the per-issuer limitation and the aggregate gross asset limit.
  • The Act adds the treatment of intangible drilling costs to the list of adjustments to arrive at adjusted financial statement income for purposes of the corporate alternative minimum tax.

See the Executive Briefing publication

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