House Passes Tax Reform Package: What It Could Mean for Taxpayers

In a razor-thin vote, the House of Representatives passed the One Big Beautiful Bill Act (OBBB) in the early hours of May 22. This comprehensive tax and spending package introduces significant changes that could impact individuals, businesses, and nonprofits alike. While the Senate is expected to revise the bill when it reconvenes in June, the House version lays the groundwork for what may become the most consequential tax legislation since the Tax Cuts and Jobs Act of 2017 (TCJA).

From proposed SALT cap adjustments and TCJA extensions to retroactive deductions and new limitations targeting high-income taxpayers, the OBBB is poised to have far-reaching implications – if it becomes law. Key changes are as follows.

Revised SALT Deduction Cap and New PTET Limits Could Hit High-Income Taxpayers

TCJA, the massive tax bill passed during President Trump’s first term, ushered in a $10,000 cap on the itemized deduction for state and local taxes claimed by individual taxpayers. This has proven to be one of the most contentious tax provisions being negotiated within the Republican caucus. The OBBB raises the deduction cap to $40,000 but introduces new limitations and additional complexities. For example, the additional cap phases back down to $10,000 if modified adjusted gross income exceeds $500,000 ($250,000 for married filing separate taxpayers).

Modifications to the state and local tax deduction also include potential limitations on the deductibility of pass-through entity taxes (PTET) – unless 75% of the pass-through entity’s gross receipts, on a controlled group basis, are derived from qualified trade or businesses as defined for purposes of the qualified business income (QBI) deduction. This means that PTET paid by specified service trade or businesses or other non-qualified trade or businesses may be subject to the SALT deduction cap. Specified service trade or businesses include businesses in the fields of health, law, accounting, performing arts, certain consulting activities, financial services, brokerage services, etc.

Extensions of Key TCJA Tax Cuts: What’s Staying Beyond 2025

The House version of the OBBB extends expiring provisions from TCJA that were scheduled to sunset at the end of 2025. The following are among the most notable provisions being extended and made permanent:

• Section 199A deduction percentage on QBI increased from 20% to 23%, among other modifications
• Estate and gift tax exemption set at $15 million per taxpayer for 2026 and will be adjusted for inflation going forward
• Highest marginal rate for individuals will remain 37%
• Increased standard deduction amounts with temporary enhancements through 2028
• Increased alternative minimum tax exemption and increased phase-out thresholds
• Deductible mortgage interest limited to the first $750,000 in home mortgage acquisition debt
• Extension of the increased child tax credit, with temporary enhancements through 2028
• Increases the foreign-derived intangible income (FDII) deduction to 36.5% for tax years after 2025
• Increases the global intangible low-taxed income (GILTI) deduction to 49.2% for tax years after 2025
• Reduces the base erosion and anti-abuse tax (BEAT) rate to 10.1% after 2025

The bill also ushers in various limitations on the calculation of itemized deductions to limit the benefit of itemized deductions for taxpayers in the highest marginal tax brackets. Instead of the benefit being 37% for such high-income taxpayers, these limitations effectively cap the benefit of itemized deductions at 35% with a further limitation to a 32% benefit for the state and local tax deduction.

Retroactive Business Tax Deductions Offer Immediate Relief for 2025

The OBBB provides several important deductions with retroactive effective dates, including:

• 100% Bonus Depreciation: Reinstated for qualified property acquired after Jan. 20, 2025
• Domestic Research and Experimental Expenditures: Full deduction available for domestic research expenses paid or incurred in taxable years beginning in 2025 through 2029
• 163(j) Interest Expense Limitation: Provides that “adjusted taxable income” is computed without taking into account depreciation, amortization, or depletion for taxable years beginning in 2025 through 2029
• Section 179 Deductions: Increases the maximum amounts for taxable years beginning after Dec. 31, 2024
• Excess Business Loss Limitation (Section 461(l)): Makes the limitation permanent and changes the treatment of carryforward losses so they continue being subject to the limitation in the carryforward years
• A new 100% deduction for certain real property used in certain qualified production activities

Trump-Era Campaign Tax Proposals Make Their Way Into OBBB

The OBBB includes several provisions that originated during President Trump’s campaign, such as:

• No tax on certain cash tips, subject to income phase-out and restrictions on the type of trade or business activities the tip income relates to
• Deduction for qualified overtime compensation, subject to income phase-out
• Enhanced deduction for seniors, subject to income phase-out
• Interest deduction on loans used to purchase personal use vehicles assembled within the United States, subject to a maximum deduction of $10,000 and subject to income phase-out

Green Energy Tax Credits Face Accelerated Phaseout

The OBBB looks to phase out many existing green energy tax credits. This also proved to be part of the last-minute negotiations with changes made to accelerate the termination of a variety of green energy tax credits just before passing the bill through the House. Taxpayers planning projects that include the benefits of green energy tax credits must pay careful attention to potential new phaseouts and limitations. In particular, the bill focuses on limiting benefits from the Inflation Reduction Act.

Opportunity Zones, Excise Taxes, and Trump Accounts: What Else Is in the OBBB?

The OBBB creates a second round of Opportunity Zones beginning on Jan. 1, 2027, through 2033. The second round will be subject to several modifications, including a narrowed definition of “low-income community.” Opportunity zones are used as an economic development tool to encourage real estate development within distressed communities.

The OBBB also expands certain taxes imposed on tax-exempt organizations and private foundations, including:

• Expanding the definition of “covered employee” for purposes of the excise tax on excess compensation to include any employee that receives compensation in excess of $1 million
• Increasing the excise tax imposed on the net investment income of certain private colleges and universities, and private foundations reporting $50 million or more in total assets
• Increasing unrelated business income by the amount paid for any qualified transportation fringe benefit and the income from any sale or licensing of the organization’s name or logo

Among the many additional provisions within the OBBB, there is a provision to create new tax-favored accounts named Trump Accounts. These accounts will be tax-favored accounts that parents of children under the age of 8 can open for their child, and the government will provide a $1,000 credit for children born in 2025 through 2028. The accounts will be tax-free with respect to income earned within the accounts. The maximum contribution allowed is $5,000 until the child is 18. Distributions cannot be taken until the age of 18, and the income portion of distributions will be taxed as long-term capital gain income if used for certain qualified purposes.

What’s Next?

As the OBBB advances to the Senate, taxpayers and businesses should closely monitor potential changes and prepare for adjustments that could significantly impact their tax planning strategies. While the bill remains subject to revision, the House version provides valuable insight into the direction of federal tax policy.

KSM’s tax professionals are actively tracking developments and are available to help you understand how this evolving legislation may affect your specific situation. For guidance, contact your KSM advisor or fill out the form below.