On July 4, 2025, President Trump signed into law the One Big Beautiful Bill Act (“OBBBA”). The OBBBA extended or made permanent many of the tax provisions introduced under the 2017 Tax Cuts and Job Act (“TCJA”) that were otherwise set to expire at the end of this year and provided for many other domestic and international tax law changes.  A side by side comparison of prior and current law and the OBBBA  changes is available here. A discussion of the more significant provisions of the OBBBA is set forth below.  

Permanent Reduction in Individual Tax Rates

The OBBBA made permanent the lowered individual income tax rates temporarily provided for under the TCJA.  Absent legislative action, these lowered rates were set to expire at the end of 2025.  As a result of the OBBBA, the maximum individual tax rate remains permanently set at 37%.  The rates for the seven tax bracket rates are now permanently fixed at 10%, 12%, 22%, 24%, 32%, 35% and 37%.

Adoption Credit

Previously, a nonrefundable credit against income tax equal to the total qualified adoption expenses incurred (up to a limit of $17,280) (the “Adoption Credit”). The OBBBA retains the existing Adoption Credit provisions, but permits up to $5,000 (increased annually for inflation) of qualifying adoption expenses to be a refundable credit to individual taxpayers.

Child Tax Credit

Prior law allowed a $2,000 per qualifying child maximum credit, with $1,700 being refundable in 2024, and a $500 nonrefundable credit for non-child dependents. The OBBBA permanently increases the nonrefundable credit amount to $2,200 per child (beginning in 2025), subject to annual inflation-based increases. Additionally, the OBBBA permanently doubles the $2,000 per child credit and $1,400 refundable credit, as well as increasing the income thresholds for the credit’s phaseout.

ABLE Accounts & Saver’s Credit

The credit allowed under Section 25B (for Achieving a Better Life Experience (“ABLE”) accounts) previously allowed a designated beneficiary to claim a saver’s credit for contributions made to the account. However, the credit was set to expire at the end of 2025. The OBBBA permanently allows such a designated beneficiary to claim the credit. 

Additionally, the OBBBA changes the rules with respect to ABLE account rollovers under Section 529(c)(3). Amounts from qualified tuition programs were allowed to be rolled over to an ABLE account without penalty until the end of 2025. The OBBBA makes this penalty-free rollover permanent. 

Finally, the contribution limitation for beneficiaries of ABLE accounts was increased to the federal poverty line for one-person households until the end of 2025. The OBBBA makes this increase permanent. 

Energy-Efficient Home, Residential Clean Energy, Clean Vehicle & Clean Refueling Credits
 

Repeal of the Energy-Efficient Home & Residential Clean Energy Credits

Taxpayers could previously claim the credit under Section 25B for qualifying costs of  improvements that improved the energy efficiency of homes. This credit has been repealed for improvements that are placed in service after December 31, 2025.

Additionally, the OBBBA repeals the credit for qualifying costs of installing clean energy upgrades to residential property provided for under Section 25D for upgrades paced in service after December 31, 2025. 

Repeal of Clean Vehicle Credits

Taxpayers purchasing new and used personal and commercial clean vehicles were previously allowed a credit under Sections 25E, 30D, and 45W, respectively. The OBBBA repeals all three credits for vehicles acquired after September 30, 2025. 

Alternative Fuel Vehicle Refueling Property Credit

Section 30C allowed a credit for qualified alternative fuel vehicle refueling property. The OBBBA repeals the Section 30C credit for alternative fuel vehicle refueling property placed in service after June 30, 2026.

Premium & Earned Income Tax Credits

Premium Tax Credit

The final OBBBA modifies the eligibility rules for individuals to be eligible to receive premium tax credits under the ACA.  Effective for tax years beginning after December 31, 2025, individuals with household income less than 100% of the federal poverty line who are ineligible for Medicaid due to their alien status are also not eligible for premium tax credits.  Effective for tax years beginning after December 31, 2027, individuals who are aliens are not eligible for premium tax credits unless they qualify for certain specified ‘resident’ status or as specified refugees from Cuba or Haiti, and an individual’s eligibility for premium tax credits must be verified by the exchange annually (automatic reenrollment is not permitted).  Additionally, for tax years beginning after December 31, 2025, no premium tax credit is available for mid-year special enrollments due to changes in expected household income and individuals who receive advance payments of premium tax credits are liable for the full amount of any excess advance payments that they receive (the prior limitations are removed).

Earned Income Tax Credit

Prior to the enactment of the OBBBA, low- and moderate-income working individuals and families could receive a refundable credit to offset their tax liability. The OBBBA retains the credit, but adds a new certification program beginning on January 1, 2028. 
Employer Child Care Tax Credit.

The final OBBBA increases the amount of tax credits that employers may claim for employer-provided child care.  Effective for amounts paid or incurred after December 31, 2025, employers may claim up to 40% of their qualified child care expenses, up to a maximum credit of $500,000 (and eligible small businesses can clam up to 50%, up to $600,000).  This amount is indexed in future years.

Renewable Energy Provisions

The OBBBA allowed renewable energy credits to survive the cutting block.  Renewable energy project developers will still be able to finance projects through monetization of the credits or tax equity structures.  For trade balance and policy concerns, the OBBBA imposed new limitations on the supply chain of components that are incorporated into renewable energy projects as well as certain financing and foreign ownership structures of such projects.  The OBBBA shortened the time frame to take advantage of certain income tax credits as set forth in the Inflation Reduction Act of 2022 (“IRA”) enacted under the last administration.  Overall, the OBBBA will encourage developers to accelerate construction of energy projects, which, in many cases, will depend on the speed of permitting from regulatory authorities and the availability of financing. 

Although most renewable energy credits remain transferable, the OBBBA prohibited transfer of the credits to certain foreign purchasers.  New limitations were introduced that could trigger a disqualification, ban on transfer, or recapture for certain tax credits if there is material assistance from, or involvement by, certain foreign entities.  A “Prohibited Foreign Entity” is defined as: (1) a “Specified Foreign Entity” (one that is engaged in terrorism, criminal activity, a threat to national security, or owned and controlled by China, Russia, Iran or North Korea); or (2) a “Foreign Influenced Entity” (an entity with respect to which a Specified Foreign Entity has certain levels of ownership, control or affiliation).  Project developers and operators will have to prohibit these types of investors, lenders and suppliers from participating in the development and operation of renewable energy projects to the extent they can be linked to a Prohibited Foreign Entity.  For example, the Section 45Q carbon capture and sequestration credits and Section 45U clean nuclear power credits are now subject to these rules.  Although the transferability of renewable energy tax credits remain largely intact, these credits cannot be transferred to a Specified Foreign Entity.  Substantial understatement penalties under Section 6662 apply where credits are disallowed due to violations of these rules, and penalties may be imposed for substantial misstatements of certifications provided by suppliers under Section 6695B.   

There are changes to certain deadlines to qualify for certain production and investment tax credits with respect to the “beginning of construction” dates and the “placed in service” dates. For electricity produced by clean energy projects, the IRA timetable remains unchanged, except for wind and solar projects which terminate earlier than before under prior law, unless these projects begin construction no later than the end of the 12-months period from the date of enactment of the OBBBA.  If construction begins after July 4, 2026, then wind and solar projects must be placed in service no later than December 31, 2027 to qualify.   

With respect to the Clean Hydrogen Production Credit under Section 45V and the Advanced Manufacturing Production Credits under Section 45X, availability of the credits terminates for hydrogen, and wind components, respectively, produced after December 31, 2027. The Clean Hydrogen Production Credit, during its shortened term, does not appear to be subject to disallowance under the Prohibited Foreign Entity rules discussed above.  Phase-outs dates for the Advanced Manufacturing Production Credits have been accelerated in certain cases for wind and solar components under Section 45X.   Section 45X credits for critical mineral production terminates in 2034 under the OBBBA, and Prohibited Foreign Entities cannot provide material assistance, nor can Specified Foreign Entities and Foreign Influenced Entities claim the credits.  For the Qualifying Advanced Energy Project Credits under Section 48C, Treasury will not allocate any new credits after enactment of the OBBBA, but there is no change to existing credits that have already been allocated to projects under the program.   

For projects with accelerated deadlines for “beginning of construction” or “placed in service” dates, the focus will be on permitting and regulatory approvals.  Otherwise, the financial viability of most projects remains largely unchanged (unless the projects relied on material assistance from, or credit transfers to, Prohibited Foreign Entities).  
 
Importantly, the Section 48E investment tax credit, which is available for clean electricity production facilities, was extended through 2035 with a phasedown in 2034 and 2035.  Energy storage facilities continue to be eligible for the credit, including for electricity generated by wind or solar.  Nevertheless, these credits are subject to the limitations and disqualifications with respect to Prohibited Foreign Entities.      

Finally, the OBBBA changed the clean fuel credit allowed under Section 45Z, which provides a credit for domestic production of clean fuels that are sold from 2025 through 2027. The OBBBA extends the credit through 2029, but disallows the credit for fuels produced from feedstock located outside of North America. 

Overall, the OBBBA largely left intact, and in certain cases expanded, the availability of tax credits for clean energy production and manufacturing enacted under the IRA.  Wind, solar and hydrogen credits were scaled back considerably.  Although these changes dealt a blow to green hydrogen projects, blue hydrogen projects can still benefit from carbon capture and sequestration tax credits.  For the fossil fuel industry, the continued availability of carbon capture and sequestration credits will incentivize investment in blue hydrogen production and LNG export facilities all along the coast of the Gulf of America. 

On July 7, 2025, President Trump signed the Executive Order entitled “Ending Market Distorting Subsidies for Unreliable, Foreign Controlled Energy Sources.”  In the Executive Order, President Trump directed both the Secretary of the Treasury and the Secretary of the Interior to implement the OBBBA provisions quickly in order to terminate credits for wind and solar facilities.  President Trump ordered the Secretaries to revise agency regulations and policies to eliminate preferential treatment for wind and solar facilities compared to reliable dispatchable energy sources.  The Executive Order directs the Secretary of the Treasury, within 45 days, to take action (a) to enforce the termination of Section 45Y and 48E tax credits for wind and solar projects, and (b) to implement the enhanced Foreign Entity of Concern restrictions in the OBBBA.

Alternative Minimum Tax Exemption & Phaseout

The alternative minimum tax (“AMT”) under Section 55 previously provided for an exemption amount of $133,300 for joint filers ($85,700 for individual filers), with a phaseout threshold of $1,218,700 for joint filers ($609,350 for individual filers, each adjusted for inflation). This was set to expire at the end of 2025. The OBBBA reverts the inflation-adjusted phaseouts to $1 million for joint filers ($500,000 for individual filers), with inflation-based increases. 

Standard Deduction

Standard Deduction Increase

Effective for the 2025 tax year, the OBBBA permanently increases the standard deduction by $1,150 to $15,750 for single filers (and by $2,300 to $31,500 for joint filers) and $1,725 for those filing head as head of household to $23,625. These amounts are subject to an annual inflation-based adjustment. Additionally, like prior law, the OBBBA does not allow for personal exemptions.

New Enhanced Deduction for Seniors

The OBBBA also adds a new provision for an above-the-line deduction under Section 63(f). This provision allows for a deduction of $6,000 for individuals over 65 years of age. However, it contains an income based phaseout for joint filers with an income of over $150,000 ($75,000 for all other taxpayers). This enhanced senior deduction is set to expire on December 31, 2028.

Itemized Deductions

Miscellaneous Expenses    

Previously, no deduction was permitted for miscellaneous expenses, except for certain expenses of educators (which were set to expire on December 31, 2025). The OBBBA changes Section 67(g) to disallow any deduction for miscellaneous expenses. 

Overall Limit on Itemized Deductions

Prior law placed no limit on itemized deductions through December 31, 2025. The OBBBA now limits itemized deductions to $0.35 per $1.00 for individuals in the top marginal tax bracket beginning January 1, 2026.

Student Loan Discharges

Under current law, any income resulting from the discharge of student debt on account of death or total disability of the student is excludable from taxable income, but this treatment was set to expire after December 31, 2025.  The final BBA makes permanent the exclusion from taxable income of any amount which is discharged after December 31, 2025 on account of death or total and permanent disability of the student, provided that the taxpayer includes his or her Social Security Number on the tax return for such taxable year.

Bicycle Commuting Reimbursement

Before the enactment of the TCJA, employers were permitted to deduct expenses related to “Qualified Transportation Fringe Benefits” provided to employees. These benefits included free parking, transit passes, parking reimbursements, and bicycle commuting reimbursements.  The TCJA eliminated the employer’s ability to deduct most of these benefits, with the exception of qualified bicycle commuting reimbursements, which remained deductible. In the original draft of the OBBBA, the House proposed eliminating the deduction for bicycle commuting reimbursements, effectively removing all employer deductions for Qualified Transportation Fringe Benefits. However, the final OBBBA retains the deduction for bicycle commuting reimbursements.

Automobile & Home Mortgage Interest Deductions

Automobile Interest Deduction

Under current law, no deduction for automobile interest is allowed. The OBBBA creates a deduction for interest paid on qualified car loans, subject to a $10,000 per year limitation. The vehicle must be for personal use and have been assembled in the U.S., and campers/motorhomes are excluded. Additionally, the deduction is subject to an income-based phaseout ($200,000 for joint filers; $100,000 for individual filers). The OBBBA sets this deduction to expire on December 31, 2028. 

Home Mortgage Interest Deduction

The current home mortgage interest deduction allowed for mortgages with a principal amount of up to $750,000 was set to expire on December 31, 2025. The OBBBA retains the $750,000 principal limitation and makes the home mortage interest deduction permanent. Additionally, the OBBBA permits some mortgage insurance premiums and acquisition indebtedness to be treated as qualified residence interest. As under current law, the OBBBA does not permit the deduction for interest on home equity loans on a primary residence.

Business Interest Expense Changes

Section 163(j) limits the amount of net business interest expense that a business can deduct in any tax year to 30% of adjusted taxable income, with any excess interest expense carried forward. When first introduced by the TCJA, the Section 163(j) definition of adjusted taxable income was earnings before interest, taxes, depreciation and amortization (“EBITDA”).  However, beginning with the 2022 tax year, adjusted taxable income was computed after taking into account depreciation, amortization and depletion. This decreased adjusted taxable income and reduced the amount of net business interest expense that could be deducted in any given year.  The OBBBA goes back to the expanded EBITDA calculation of adjusted taxable income. The OBBBA also expands the definition of motor vehicles for purposes of the floor plan financing exception to Section 163(j). Motor vehicles now include any trailer or camper that is designed to provide temporary living quarters for recreational, camping or season use that is designed to be towed by or affixed to a motor vehicle. These changes are applicable to tax years beginning after December 31, 2024.

Another OBBBA changes it that the definition of adjusted taxable income now excludes certain foreign income (i.e., Subpart F income and global intangible low-taxed income).  This change, which could negatively impact the amount of net business interest expense a taxpayer can deduct, has a delayed effective date.  It goes into effect for taxable years beginning after December 31, 2025.

State & Local Tax Deduction

The deductibility of state and local income, sales, and property taxes (“SALT Taxes”) was limited through December 31, 2025 under prior law. The OBBBA raises the cap on the deductibility of SALT Taxes to $40,000 through 2029. Additionally, the OBBBA introduces a phaseout for individuals with an income over $500,000 (or $250,000 per individual for joint filers). However, the current workaround for the payment of state and local taxes by passthrough entities (the PTE tax regime) remains in place. 

Wagering Loss Rules

Prior law permitted losses from wagering transaction to be deducted only to the extent of gains from such transactions until the end of 2025. The OBBBA makes this limitation permanent, and limits deductible “losses from wagering transactions” to 90% of actual wagering losses. For example, if an individual had $100 of wagering gains and $100 of wagering losses, only $90 of the $100 in wagering losses could be deducted.

Personal Casualty Losses

No deduction for personal casualty and theft losses was previously allowed until 2026. The OBBBA provides for a permanent deduction for personal casualty losses arising in federal- and state-declared disaster areas. 

Expensing & Depreciation Changes

The OBBBA provided several benefits to taxpayers in the area of expensing and depreciation.  The OBBBA increased the Section 179 limitation on amounts that taxpayers can expense from $1 million to $2.5 million, while also increasing the phaseout threshold from $2.5 million to $4 million.  These higher amounts apply to property placed in service in taxable years beginning after December 31, 2024. 

The OBBBA also brought back 100% bonus depreciation and made it permanent for qualified property acquired and placed in service on or after January 19, 2025.  Qualified property includes most tangible personal property with a recovery period of 20 years or less as well as computer software, water utility property, qualified film or television production, and qualified live production.  

The OBBBA also introduced 100% bonus depreciation for qualified production property (“QPP”).  Nonresidential real property generally does not qualify for bonus depreciation as it has a recovery period of 39 years, which exceeds the 20-year requirement to qualify as qualified property.  However, it may now get the benefit of bonus depreciation if it is QPP.  

QPP is nonresidential real property used as an integral part of the manufacturing, production, or refining of tangible personal property (excluding food and beverage products prepared in the same building as a retail establishment in which the property is sold) if:

(i)    The original use of the property begins with the taxpayer;
(ii)    Construction of the property begins after January 19, 2025 and before January 1, 2029;
(iii)    The property is placed in service before January 1, 2031; and
(iv)    The taxpayer elects to designate the property as QPP.  

Bonus depreciation for QPP is not available for the portion of property used for office space, lodging, parking, research and development activities or other functions unrelated to the manufacturing, production or refining of the tangible personal property. 

Additional changes were made to the depreciation schedule for some projects. Those projects that qualify for the technology-neutral credits, e.g., section 48E, will still qualify for the 5-year MACRS depreciation schedule. However, the OBBBA provides that projects qualifying under the “legacy” credit provisions, e.g., projects eligible for the credit allowed under section 48, that begun construction after the 2024 tax year. The “legacy” projects most likely to be affected are geothermal heat pumps because these have until December 31, 2034 to begin construction and claim the “legacy” credits, while other “legacy” projects must have begun construction by December 31, 2024.

Tax-Exempt Organizations & Charitable Contributions

Excise Tax on Excess Compensation

Code Section 4960 was added as part of the TCJA to impose an excise tax on executive compensation amounts over $1 million (and any excess parachute payments) paid to the five (5) highest paid executives (the "covered employees") and any former covered employees of “applicable tax-exempt organizations” (“ATEOs”).  ATEOs include organizations exempt under section 501(a) of the Code, including 501(c)(3), 501(c)(4) and 501(c)(6) organizations, farmers’ cooperatives under 521(b)(1), and some governmental and political entities.  The OBBBA broadens these rules, effective for tax years beginning after December 31, 2025, to require ATEOs to pay an excise tax on any compensation amounts over $1 million (and any excess parachute payments) paid to any employee or former employee who was employed during any tax year beginning after December 31, 2016 (regardless of whether he or she would have been a “covered employee” under the old rule).

UBTI For Qualified Transportation

The TCJA required tax-exempt organizations, excluding churches and their affiliates, to increase their unrelated business taxable income (“UBTI”) by the amount of qualified transportation fringe benefits provided to employees. UBTI refers to income generated by a tax-exempt entity from activities unrelated to its exempt purpose. The House’s version of the OBBBA proposed continuing to disallow deductions for expenses related to qualified transportation fringe benefits or parking facilities not directly connected to an unrelated trade or business, but this provision was not included in the final OBBBA. As a result, tax-exempt organizations are no longer required to increase their UBTI to reflect the amount of qualified transportation fringe benefits provided to employees.

Charitable Contribution Deduction 

The OBBBA introduces several changes to Section 170’s charitable deduction rules, all of which take effect in 2026. Non-itemizers will be able to deduct up to $1,000 for charitable contributions ($2,000 on a joint return); prior law allowed a $300 deduction ($600 on a joint return). For itemizers in the 37% top income tax bracket, the tax benefits of itemized charitable deductions will now be limited to 35%. The OBBBA also provides a floor for itemized charitable deductions: contributions can only be deducted to the extent they exceed 0.5% of the taxpayer’s adjusted gross income (“AGI”). For example, a taxpayer with an AGI of $400,000 who itemizes deductions cannot deduct the first $2,000 of charitable donations 

Section 4968’s excise tax on the investment income of private colleges and universities has also been amended. Since 2017, private colleges and universities with more than 500 students and more than $500,000 per student in investment assets have paid a 1.4% excise tax on investment income. The new law imposes this tax on fewer institutions—only those with at least 3,000 students—but at a graduated rate ranging from 1.4% to 8%, based on the ratio of enrolled students to total value of investment assets. In addition, the Secretary is specifically authorized to issue regulations and guidance to prevent avoidance schemes. 

Research & Development Expenditures

Prior law required taxpayers to capitalize and amortize most specified research and development (“R&D”) expenditures over a five-year period. The OBBBA permanently allows the immediate deduction of domestic R&D expenditures paid or incurred after December 31, 2024. Further, the OBBBA permits small businesses with annual gross revenues less than or equal to $31 million to apply this change retroactively to their 2022 taxable year. However, foreign R&D expenditures still must be capitalized over a 15-year period. 

Energy-Efficient Commercial Building Credit

Taxpayers could previously deduct certain expenditures for qualified energy efficient commercial building property expenditures, e.g., those installed as part of lighting, HVAC, and hot water systems. The OBBBA removes this deduction for any energy efficient commercial building property that begins construction on or after July 1, 2026. 

Permanent Qualified Business Income Deduction

The TCJA introduced Section 199A, which provided owners of sole proprietorships, partnerships, S corporations, and some trusts and estates with a deduction of up to 20% of their qualified business income, as well as a deduction of up to 20% of qualified real estate investment trust dividends and qualified publicly traded partnership income.  This qualified business income deduction was set to expire at the end of 2025, but the OBBBA made the deduction permanent.  

New Section 224 – Qualified Tips

The OBBBA adds the highly anticipated Section 224 to the Code, which provides a deduction equal to qualified tips received during the taxable year, up to $25,000. Notably, Section 224 is retroactive and applies to taxable years beginning after December 31, 2024.

Section 224 allows a deduction for those with social security numbers of up to $25,000, which is decreased by $100 for each $1,000 by which the taxpayer’s modified adjusted gross income exceeds $150,000 (or $300,000 for those filing jointly). These amounts are only taken into account to the extent the gross income for the taxpayer from that trade or business in which the qualified tips are received by the individual for the taxable year exceeds the sum of deductions allocable to such trade or business in which the qualified tips are received by the individual. While Section 224 is technically an itemized deduction, Section 70201(b) of the OBBBA amends Section 63(b) to extend the deduction under Section 224 to non-itemizers. Additionally, amounts with respect to which a deduction is allowable to the taxpayer under Section 224(a) for the taxable year are excluded from Qualified Business Income under Section 199A(c)(4).  

Section 224 applies to “qualified tips” received in an occupation in which tips are customary and regular. These occupations explicitly include those that were reasonably anticipated—bartending, serving food, and delivery—in addition to those that otherwise regularly receive tips as a courtesy, as specified by the Secretary. The Secretary is required to publish a list of eligible occupations within 90 days of enactment. “Qualified tips” includes those paid in cash, charged, or received under a tip-sharing arrangement. 
The deduction provided under Section 224 only applies against income taxes, not FICA and SECA. However, Section 70201(e) also extends the FICA tip tax credit under 45B to include beauty service establishments and those providing, delivering, or serving food or beverages for consumption. 

The OBBBA also modifies Sections 6041, 6041A, and 6050W to require the payor of compensation reportable on Forms 1099-K, 1099-MISC, or 1099-NEC to report as a separate item (i) the portion of the payments that constitute cash tips and (ii) the occupation of the recipient.

Section 224 will sunset on December 31, 2028. For any cash tips required to be reported before January 1, 2026, those persons required to file returns or statements under Sections 6041, 6041A, or 6050W may approximate a separate accounting by any reasonable method specified by the Secretary.

International Tax Law Changes 

The OBBBA represents the most significant overhaul of U.S. international tax rules since the Tax Cuts and Jobs Act (“TCJA”) of 2017. The OBBBA extends and modifies many TCJA provisions while introducing international tax changes. 

Modification of the Section 250 Deduction for FDII and GILTI (Now NCTI)

The OBBBA reduces the Section 250 deduction for foreign-derived deduction eligible income (“FDII”) from 37.5% to 33.34%, and for net controlled foreign corporation (“CFC”) tested income (“NCTI,” formerly GILTI) from 50% to 40%, effective for tax years beginning after December 31, 2025. This change creates an effective 14% tax rate for both FDII and NCTI versus the prior 12.5% FDII effective tax rate and 10.5% GILTI effective tax rate. 

As an example, a U.S. multinational with $90 million of net CFC tested income in 2026 will now be eligible for a $36 million deduction (40%), rather than the $45 million deduction (50%) under prior law. This increases the effective U.S. tax rate on such income, narrowing the gap with the 15% GMT rate under pillar 2 and reducing the incentive to shift profits to low-tax jurisdictions.

Redefinition of GILTI and Repeal of the Deemed Tangible Income Return

As noted above, the OBBBA renames GILTI as "net CFC tested income" or “NCTI” and repeals the exclusion for a deemed return on tangible property (“QBAI”). This means all tested income of CFCs is now subject to current U.S. taxation, regardless of the CFC’s investment in tangible assets. 

Previously, a U.S. shareholder of a CFC with $10 million of tested income and $50 million of QBAI (tangible assets) would exclude $5 million (10% of QBAI) from GILTI, only including $5 million. Under the OBBBA, the full $10 million is included, increasing the U.S. tax base and aligning more closely with pillar 2’s approach, which generally does not provide a similar QBAI exemption.

Increase in the Deemed Paid Foreign Tax Credit Percentage

The OBBBA increases the percentage of foreign taxes deemed paid that can be claimed as a credit under Section 960(d) from 80% to 90% for net CFC tested income. A U.S. corporation with $10 million of net CFC tested income and $2 million of foreign taxes paid can now claim a $1.8 million credit (90%), up from $1.6 million (80%). This reduces the risk of double taxation and brings the U.S. regime closer to the pillar 2 GMT, which allows a 100% credit for foreign taxes.

Modification of Foreign Tax Credit Limitation and Sourcing Rules

The OBBBA provides that certain deductions (notably interest and R&D) are not allocated to foreign source net CFC tested income for foreign tax credit (“FTC”) purposes and allows up to 50% of income from inventory produced in the U.S. and sold through a foreign branch to be treated as foreign-sourced. For purposes of this Section, the term "foreign branch" means an integral business operation carried on by a U.S. person outside the United States. Whether the activities of a U.S. person outside the United States constitute a foreign branch operation must be determined under all the facts and circumstances. Evidence of the existence of a branch includes, but is not limited to, the existence of a separate set of books and records, and the existence of an office or other fixed place of business used by employees or officers of the U.S. person in carrying out business activities outside the United States.

Consequently, a U.S. manufacturer with a foreign branch selling U.S.-produced goods abroad can now treat up to half of the income from those sales as foreign-sourced, potentially increasing the FTC limitation and reducing residual U.S. tax on such income.

Permanent Extension of the Look-Through Rule for CFCs

The OBBBA makes permanent the look-through rule of Section 954(c)(6), which allows certain payments between related CFCs to be excluded from subpart F income. As an example, a U.S. parent with multiple CFCs can continue to structure intercompany loans and royalties without triggering subpart F inclusions, facilitating global cash management and intellectual property outbound planning.

Restored Limitation on Downward Attribution and New Foreign Controlled U.S. Shareholder Rules

The OBBBA restores the pre-TCJA limitation on downward attribution of stock ownership (section 958(b)), preventing U.S. persons from being treated as owning stock held by foreign persons. It also introduces new rules for "foreign controlled U.S. shareholders" and "foreign CFCs," requiring certain inclusions similar to subpart F and GILTI for U.S. shareholders controlled by foreign persons.

A U.S. subsidiary of a foreign parent that previously became a U.S. shareholder of a CFC solely due to downward attribution will no longer be subject to subpart F or GILTI inclusions on that basis. However, if the U.S. subsidiary is itself controlled by a foreign person, it may now be subject to new inclusion rules under Section 951B. However, the elimination of downward attribution is particularly important in the context of portfolio loan interest planning as a foreign person deemed a CFC cannot receive the portfolio interest exclusion under Section 881(c). 

Modification of Pro Rata Share Rules for Subpart F Income

The OBBBA aligns the determination of a U.S. shareholder’s pro rata share of subpart F income with the period of actual ownership during the year, rather than year-end ownership. Therefore, a U.S. shareholder who acquires CFC stock mid-year will now include only the portion of subpart F income attributable to the period of ownership, reducing the risk of being taxed on income earned before acquisition.

Repeal of 1-Month Deferral for Specified Foreign Corporations

The OBBBA repeals the ability of specified foreign corporations to elect a taxable year ending one month later than the U.S. parent, eliminating the so-called "1-month deferral.” A U.S. multinational with a CFC that previously used a November 30 year-end to defer income recognition will now be required to conform the CFC’s year-end to the U.S. parent, accelerating the inclusion of CFC income.

Coordination of Business Interest Limitation with Capitalization

The OBBBA clarifies that the Section 163(j) business interest limitation applies before capitalization, and that disallowed interest is not subject to future capitalization. A U.S. corporation with significant capitalized interest under Section 263A will now apply the Section 163(j) limitation first, potentially reducing the amount of interest that must be capitalized and simplifying compliance.

Base Erosion Minimum Tax (“BEAT”)

The BEAT is a corporate minimum tax imposed under Section 59A on corporations with average annual gross receipts of at least $500 million for the three-taxable-year period ending with the preceding tax year.  The minimum tax is designed to target large corporations that reduce their U.S. tax liability by making deductible payments to foreign related parties. The BEAT operates as an additional tax, separate from the regular corporate income tax, and is intended to ensure that corporations engaging in significant base erosion activities (related party sales, services, etc.) pay a minimum level of U.S. tax.

Under the OBBBA, the BEAT additional tax calculation rate is increased from 10% to 10.5% exposing more corporate income to an additional BEAT tax. 

Other Notable International Provisions

• Proposed Section 899: The proposed Section 899, which would have imposed retaliatory US tax measures on residents of countries enacting Pillar 2 undertaxed profits rules, digital service taxes, or other discriminatory taxes against US corporations, has been removed from the OBBBA. 
• Permanent Full Expensing for Business Property: 100% bonus depreciation is made permanent, encouraging domestic investment both from U.S. and foreign corporations and businesses
• Full Expensing of Domestic R&D: Domestic R&D expenses can be immediately deducted, while foreign R&D remains subject to 15-year amortization. Note that in the case of U.S. subsidiaries of foreign corporations if the R&D is carried out by the U.S. subsidiary, there are opportunities for indirect benefit from this part of the OBBBA. 

The OBBA’s international tax provisions are designed to simplify compliance, align U.S. rules more closely with global minimum tax standards, and reduce incentives for profit shifting. For clients, these changes mean:

• Higher U.S. tax on foreign earnings: Reduced Section 250 deductions and elimination of the QBAI exemption increase the U.S. tax base.
• Greater FTC relief: The increase in the deemed paid FTC percentage and more favorable sourcing rules reduce double taxation.
• More predictable compliance: Permanent look-through rules, repeal of downward attribution, and alignment of pro rata share rules reduce complexity and the risk of unexpected inclusions
• Accelerated income recognition: Repeal of the 1-month deferral and changes to interest capitalization may accelerate U.S. tax liabilities.

In sum, the OBBA’s international tax reforms require multinational clients to revisit their global tax planning, model the impact of higher U.S. inclusions, and take advantage of new FTC and sourcing rules to minimize double taxation. The changes also bring the U.S. system closer to the evolving global consensus on minimum taxation, reducing the risk of foreign top-up taxes and international disputes.

REIT Asset Test Change

A real estate investment trust (“REIT”) is required to satisfy several asset tests.  One such test is a cap on the percentage of the REIT’s assets that can be held in securities of taxable REIT subsidiaries, which the REIT forms to engage in activities that the REIT cannot.  The OBBBA increased this cap from 20% to 25%, a beneficial change for REITs that will apply to tax years beginning after December 31, 2025. 

Qualified Small Business Stock Exclusion

Prior to the enactment of the OBBBA, taxpayers were required to hold qualified small business stock (“QSBS”) for a period of at least five years before the exclusion of gain on the disposition of QSBS was available (for QSBS acquired after September 27, 2010). The OBBBA shortens the holding period required before the QSBS exclusion applies for stock acquired after July 4, 2025. 

Rather than the “all or nothing” approach taken under current law, where a holder of QSBs must hold it for at least five years or no exclusion applies, the OBBBA changes the QSBS rules to permit some exclusion to be taken if the stock is held for only three or four years before being sold. The new holding period and exclusion ratios for QSBS are as follows:

(i)    QSBS held at least three years: 50% of taxable gain. 
(ii)    QSBS held at least four years: 75% of taxable gain. 
(iii)    QSBS held for at least 5 years: 100% of taxable gain. 

Additionally, the OBBBA increases the exclusion amount for stock acquired after July 4, 2025. Previously, the exclusion amount was limited to the greater of (i) $10 million or (ii) 10 times the shareholder’s basis in the stock. The OBBBA increases this to $15 million, and also adds a yearly inflation-based adjustment (rounded to the nearest $10,000) to the $15 million exclusion amount. 

Finally, the previous limit on the $50 million “aggregate gross assets” (determined by the adjusted basis of the company’s assets) restriction has been increased. Previously, if a company had over $50 million of aggregate gross assets, stock issued by it after the date on which its aggregate gross assets exceeded this amount was not eligible for the QSBS exclusion. 

The OBBBA has increased the $50 million limitation to $75 million, and also added a yearly inflation-based adjustment to the amount of the limitation. While this is helpful to corporations hoping to incentivize investment, it is especially helpful for those who operate their business as an entity treated other than as a C corporation for tax purposes. Now, rather than needing to convert earlier in order to be eligible of the QSBS exclusion, such owners of expanding businesses can take advantage of single-level, pass-through taxation longer before converting to a C corporation and being subject to two levels of tax on the company’s profits.  

Changes Executive Compensation and Employee Benefits

Deduction Limit for Executive Compensation

The final OBBBA modified Code Section 162(m) to aggregate controlled group members when determining the disallowance of compensation expense of "covered employees." Under current law, Code Section 162(m) generally prohibits any publicly-held corporation from deducting compensation (including performance and equity based compensation) that exceeds $1 million paid to certain officers and highly compensated employees of the public company during the tax year.  This rule applies to the deductibility of the annual compensation paid to the public company's "covered employees," which are defined as its: (i) CEO and CFO, (ii) employees whose compensation must be reported to shareholders as the top three (3) paid employees other than the CEO and CFO, (iii) the top 5 paid employees of the Company not counting the employees in (i) or (ii), and (iv) any employee who was a covered employee in the prior year.

Under the final OBBBA, beginning with tax years after December 31, 2025, if a public company is a member of a controlled group of companies, then it will need to include all members of the controlled group when determining the top 5 paid employees of the company to include as covered employees (the broader group, defined in the OBBBA as the "specified covered employees"). The new rule also requires public companies to use the compensation paid to the specified covered employee by other controlled group members to determine the amount of compensation that will be disallowed as a compensation expense. The "allocable limitation amount” for a specified covered employee with respect to any member of the controlled group means the amount which bears the same ratio to $1,000,000 as (i) the amount the compensation paid by such controlled group member to the specified covered employee bears to (ii) the aggregate amount of compensation provided by all controlled group members to the specified covered employee. Under the new rule, the controlled group will essentially allocate the $1,000,000 deduction limit among the controlled group members in proportion to how much each company paid the employee. If the employee is only receiving compensation from one controlled group member, then that member is allocated the full allocable limitation amount of $1,000,000.

Example: Assume a three-member controlled group, with each paying the specified covered employee the following amounts of remuneration:
    Company 1: $200,000
    Company 2: $50,000
    Company 3: $50,000
    Total remuneration = $200,000 + $50,000 + $50,000 = $300,000

Company 1 is allocated $200,000/$300,000, or 2/3rds, of the deduction limit set by Code Section 162(m) ($666,666), and Companies 2 and 3 are each allocated $50,000/$300,000, or 1/6th, of the total allowable deduction ($166,666 each).   

Employee Credit for Paid Family and Medical Leave

The OBBBA makes temporary employer tax credits for paid family and medical leave under Code Section 45S permanent with a few changes. The TCJA provided an employer tax credit designed to encourage employers to offer paid family and medical leave to their employees. The tax credit began in January of 2018 and was set to expire at the end of 2025. Under the TCJA, employers can claim a credit equal to a percentage of wages they pay to qualifying employees while on family and medical leave. Qualifying employees are employees who have worked for the employer for at least one year and whose compensation does not exceed a certain threshold ($96,000 for 2026). Once the paid leave meets certain requirements (including a written policy), employers are entitled to a 12.5% tax credit on the amount of eligible wages, which increases by 0.25% for each percentage point by which the amount an employer paid a qualifying employee exceeds 50% of the employee’s wages. The maximum credit that can be claimed is 25% (based on leave paid at 100% of normal wages).

The employer tax credit is now permanent, with the below modifications for taxable years beginning after December 31, 2025:

(1)    Under the TCJA, employers who were required by state or local law to provide paid family and medical leave could be disqualified from receiving the tax credit. The final OBBBA instead allows employers to receive the credit for leave provided in a state that does not mandate paid leave (even if the employers are required to provide paid leave in other states), as well as receive a credit for any paid leave provided in excess of that mandated by state or local law.
(2)    Eligible employers can claim the credit for a percentage of premiums paid for insurance policies that cover paid family and medical leave (not just wages paid during leave). This is an ‘either/or’ election – employers cannot claim both the credit for premiums and the credit for wages paid.
(3)    The employer can choose to shorten employee qualification for the paid family and medical leave to 6 months of employment (instead of requiring a full 12 months).

Health Savings Accounts

The final OBBBA does not include many of the health savings account (“HSA”) and health reimbursement account (HRA) provisions that were included in the original House bill (such as increasing the contribution limit, allowing both spouses to make catch-up contributions, and allowing Medicare-eligible taxpayers to contribute), but it does include a few important provisions related to HSAs:

(1)    Reimbursement for Direct Primary Care. Effective for months beginning after December 31, 2025, HSA owners will be allowed to spend up to $150 per month for individuals, and $300 per month for a family, to pay for direct primary care practice memberships. The type of care covered by a direct primary care practice membership is defined as consisting solely of primary care services provided by primary care practitioners for a fixed periodic fee. Certain services are specifically excluded from the definition of “primary care” services: (i) procedures that require general anesthesia, (ii) prescription drugs other than vaccines, and (iii) laboratory services not typically administered in an ambulatory primary care setting. The final OBBBA directs the Secretary of Health and Human Services to issue regulations or guidance regarding these direct primary care services reimbursements.
(2)    Bronze and Silver HAS-Compatible Plans. One of the main HSA requirements is that an HSA can only be coupled with a high-deductible health plan (HDHP) that meets certain out-of-pocket spending limits. Under the final OBBBA, eligibility is expanded to include bronze and catastrophic plans. Effective for months beginning after December 31, 2025, HSAs will be deemed compatible with bronze-level coverage and catastrophic coverage available under the Affordable Care Act (ACA), even if the annual out-of-pocket spending limits exceed the limits permitted for HSA-compatible HDHPs.
(3)    Telehealth Coverage. During the COVID-19 pandemic, in an effort to promote remote access to health care, the Coronavirus Aid, Relief, and Economic Security (CARES) Act permitted coverage of telehealth services by HSA-compatible HDHPs before the participant meets his or her deductible. This relief, which was extended multiple times, expired on December 31, 2024. The final OBBBA codifies this safe harbor effective for plan years beginning after December 31, 2024, which ensures that HDHPs can cover telehealth services before the deductible is met without affecting a participant’s HSA eligibility.

Dependent Care Assistance Programs

Effective for tax years beginning after December 31, 2025, the final OBBBA increases the limit on pre-tax contributions that an employee may make to an employer-provided dependent care assistance program (DCAP) for individuals who are married filing jointly from $5,000 to $7,500, and for single or individuals who are married filing separately from $2,500 to $3,750.

Employer-Provided Education Assistance

Under current law, the first $5,250 of employer-provided educational assistance is excluded from an employee’s gross income. Employer-provided educational assistance includes the payment, by an employer, of an employee’s educational expenses (including, but not limited to, tuition, fees, and similar payments, books, supplies, and equipment). This also includes an employee’s qualified student loan payments in the case of payments made before January 1, 2026.  The final BBA makes this exclusion permanent. In addition, for employer-provided educational assistance payments made after December 31, 2025, the $5,250 maximum exclusion will be indexed for inflation (this limit had been fixed since 1979), so it may adjust from year to year.

Employer-Provided Meals

Under current law, food and beverage expenses of an employer for meals that are provided to employees through an eating facility or that meet the requirements for de minimis fringe benefits at the workplace (such as coffee and donuts, working meals, and overtime meals) are limited to a 50% deduction of the expense, and no deduction is allowed after 2025.  The final BBA continues to disallow this deduction after 2025, but provides two exceptions aimed to benefit the fishing industry, particularly in extreme/remote areas like Alaska.  These exceptions are available for meals provided on certain fishing vessels, fish processing vessels, or fish tender vessels; or at certain facilities for the processing of fish for commercial use or consumption which are located in the U.S. north of 50 degrees north latitude and not located in a metropolitan statistical area.

Moving Expenses

Before the enactment of the TCJA, employers were allowed to deduct the cost of qualified moving expenses, and employees could exclude such reimbursements from their taxable income. The TCJA repealed these provisions, except for members of the U.S. Armed Forces or the intelligence community, effectively eliminating the employer deduction and requiring employees to treat moving expense reimbursements as taxable income. The final OBBBA maintains these TCJA changes, continuing the disallowance of employer deductions and employee income exclusions for most moving expense reimbursements.

Extension of the Opportunity Zones Period and Enhancement of Investment Opportunities

The TCJA provided taxpayers the opportunity to defer tax on capital gains when those gains were invested on or before December 31, 2026, in a qualified opportunity fund ("QOF"). Under the TCJA, taxpayers could defer the tax on their invested capital gain until the bill's sunset provision—December 31, 2026. The TCJA did not provide any method for renewal or revision.

The OBBBA makes other significant changes to the existing law. For example, under the OBBBA, the term "low-income community" is redefined by lowering the threshold median family income ("MFI") of a population tract not to exceed 70 percent of the statewide MFI for a tract not located within a metropolitan area, and to not exceed 70 percent of the metropolitan area MFI for a tract located within a metropolitan area. The OBBBA further redefines the term concerning a population census tract that has a poverty rate of at least 20 percent also, has an MFI that does not exceed 125 percent of the statewide MFI for a tract that is not located within a metropolitan area, and does not exceed 125 percent of the metropolitan area MFI for a tract located within a metropolitan area.

Other Relevant Changes Made by the OBBBA

•    Contiguous tracts to low-income communities can no longer be designated as opportunity zones.
•    The special rule for Puerto Rico, deeming each population tract in Puerto Rico that is a low-income community to be certified and designated as a qualified opportunity zone, is repealed.
•    The OBBBA provides for a 30 percent stepped-up basis for an investment in a qualified rural opportunity fund of at least 5 years. The 15 percent stepped-up basis is no longer available for property held for at least 7 years.
•    For any investment held for at least ten years, the basis in such property shall be equal to the fair market value of the investment on the date such investment is sold or exchanged if the investment is sold before the date that is 30 years after the date of the investment, or, in any other case, the fair market value of the investment on the date that is 30 years after the date of the investment.

Reporting Requirements and Penalties

Finally, the OBBBA imposes additional reporting requirements for QOFs, qualified opportunity zone businesses, and qualified rural opportunity zone businesses. Additionally, the OBBBA introduces penalties for failure to comply with information reporting requirements and increases penalties for intentional disregard of these requirements.

Permanent Increase in the Estate and Gift Tax Exclusion and GSTT Exemption

The TCJA previously doubled the federal estate and gift tax exclusion and generation-skipping transfer tax exemption from $5 million to $10 million with such amount being subject to annual inflation adjustments. In 2025, the inflation adjusted amount is $13,990,000. However, the higher exclusion/exemption amounts provided by the TCJA were scheduled to expire effective January 1, 2026. The OBBBA eliminates the scheduled sunset of the increased exclusion/exemption amounts under the TCJA. The OBBBA slightly increases and makes the federal estate and gift tax exclusion and generation-skipping transfer tax exemption permanent at $15 million per individual (or $30 million per married couple) beginning in 2026. The exclusion/exemption amounts under the OBBBA are subject to inflation adjustments beginning in 2027 (using 2025 as the base year for future inflation adjustments). The OBBBA does not make any changes to the portability rules. The top estate and gift tax rate (40%) remains the same. The gift tax annual exclusion remains the same, which is currently $19,000 for 2025 and is subject to inflation adjustments for future years. The changes to the exclusion/exemption amounts under the OBBBA are “permanent” meaning that there is no automatic expiration date of the change. Nevertheless, the increased exclusion/exemption amounts are always subject to change by a future Congress and President.

If you have any questions about the application of these changes to your business or personal tax situation, please contact:  Ann Murray, Wells Hall, Maurice Holloway, Amanda Wilson, Tim Wagner, Matthew McRoberts, Matt Zischke, Jim Reardon, Mauricio Rivero, Conrad Deitrick, Frances-Ann Criffield, Deborah Hembree, Lauren Nations, Geoffrey Fay, Seth Proctor, Elaine Yap, Alexis Rallis, Adriana Obeso, or any other member of the Nelson Mullins Tax practice group.