Background
Congress passed House Resolution 1 (the Act) after the House placed its final stamp of approval on the reconciliation package in a 218-214 vote. In the final stages of the legislative process, the Act nearly faltered. Hold outs in the Senate and the House threatened to derail the Act’s passage, but intense negotiations and arduous midnight conferences ultimately led to the Act surviving floor votes in both chambers of Congress and advancing to President Donald Trump’s desk. In this FORsightsTM article, Forvis Mazars explores the key provisions in the Act and how they may impact taxpayers.
The “Big Three” Tax Provisions
The Tax Cuts and Jobs Act of 2017 (TCJA) enacted several business tax provisions that helped fuel economic growth. Among those provisions were three tax issues commonly dubbed as the “big three”: bonus depreciation, research and experimental expense deductions, and business interest expense deductions. The Act amends these provisions with an aim toward stimulating domestic economic growth as described in the SFC’s description of the bill.
Bonus Depreciation
Under Internal Revenue Code (IRC) Section 168(k), “bonus depreciation” had allowed for an immediate and full deduction of depreciation expenses related to qualified property placed in service after September 27, 2017, and before January 1, 2023. After this cutoff, the bonus depreciation allowance gradually phased out by 20% each year until it reached zero beginning in years after 2026. The Act changes this and permanently extends the depreciation deduction and allows for 100% expensing in the year placed in service for qualified property. Additionally, the Act allows taxpayers to elect to utilize a reduced rate of 40% or 60% depending on the kind of property for the first taxable year ending after January 19, 2025. The change to bonus depreciation will apply to qualified property placed in service after January 19, 2025.
The Act also temporarily allows nonresidential real property used in manufacturing, production, or refining of tangible personal property to qualify for bonus depreciation through 2030 if it meets certain requirements. This nonresidential real property must be used in manufacturing activities that “substantially transform” tangible personal property to qualify for this application of bonus depreciation..
Research & Experimental Expensing
In another move aimed at stimulating domestic investment, the Act permanently reinstates the deduction of domestic research and experimental expenditures (REEs). The current legislation requires taxpayers to capitalize and amortize domestic-sourced REEs over a five-year period while foreign-sourced REEs are capitalized and amortized over a 15-year period.
The Act allows for the deduction of domestic REEs in the year incurred while still capitalizing and amortizing foreign-sourced REEs. As an alternative, taxpayers may choose to consider certain domestic REEs as deferred expenses similar to the rules described by IRC §174 before its amendment by the TCJA. As an offramp for taxpayers capitalizing domestic REEs over the past several years, the Act permits taxpayers to accelerate remaining amortization deductions over a one-year or two-year period. Lastly, small businesses with average annual gross receipts of $31 million or less can retroactively deduct their domestic REEs applicable to years beginning after December 31, 2021. The Act requires taxpayers to reduce their domestic REEs by the allowable Credit for Increasing Research Expenditures (R&D credit) or elect the reduced R&D credit under IRC §280C, which effectively restores the mechanics of IRC §280C to its pre-TCJA state.
Interest Deduction
The business interest deduction under IRC §163(j) makes up the last member of the “big three.” Under current legislation, the business interest deduction is limited to the combination of the total of the taxpayer’s business interest income during the year, 30% of the taxpayer’s earnings before interest and taxes (EBIT), and the taxpayer’s “floor plan financing interest.” Floor plan financing interest consists of interest on debt used to finance motor vehicles.
The Act provides a more favorable calculation of the interest deduction by adjusting the calculation to use earnings before interest, taxes, depreciation, depletion, and amortization (EBITDA) rather than EBIT. It also modifies the definition of motor vehicle to include certain campers and trailers. Proponents of the Act hope that broadening the interest deduction will make it easier to purchase equipment and facilities that will stimulate economic growth.1
Insight from Forvis Mazars: Taxpayers that qualify to amend their return to retroactively deduct domestic REEs under the small business allowance in the Act should proceed with caution. Filing an “amended return” in this scenario may trigger unexpected issues in particular while submitting an Administrative Adjustment Request (AAR).
SALT Cap
One of the most contentious items in the reconciliation package was the cap on state and local tax (SALT) deductions paid by a taxpayer. The law had allowed taxpayers to deduct up to $10,000 in state and local taxes with the cap on the deduction sunsetting after 2025. Members of Congress negotiated for a deal that raises the SALT cap to $40,000 in 2025. For 2026 through 2029, the cap increases by 1% each year. The cap reverts back to the original $10,000 limit for all tax years after 2029. Lawmakers included a phaseout for all taxpayers with modified adjusted gross income (MAGI) over $500,000. Taxpayers must decrease their SALT deduction by 30% of every dollar exceeding the phaseout threshold.
Insight from Forvis Mazars: Different versions of the legislation contained provisions targeting so-called pass-through entity tax (PTET) work arounds with the SALT deduction. The Act does not include any changes to the handling of PTET in relation to the SALT deduction.
International Tax Items
On the international tax side of things, the Act made modifications to the GILTI, FDII, and BEAT regimes.
GILTI and FDII: The Act adjusts the effective rates of global intangible low-taxed income (GILTI) and foreign-derived intangible income (FDII) by decreasing the applicable deduction percentages. Thus, increasing the rates for FDII and GILTI to 14%. In addition to these changes, the Act contains various alterations to each of these calculations regarding expense apportionment and the elimination of the 10% return on QBAI. Further, GILTI will now be referred to as Net CFC Tested Income (NCTI) and FDII will now be referred as foreign derived deduction eligible income (FDDEI).
BEAT: The Act increases the tax rate from 10% to 10.5% and retains the current law ability to utilize credits in the calculation. It maintains the base erosion threshold of 3%.
Proposed §899: The proposed provision that would enact retaliatory taxes against countries levying “unfair foreign taxes against the United States” was removed from the Act. Read more about the deal surrounding this provision in this alert.
Clean Energy Credits
Credits: The Act repealed many of the clean energy credits enacted by or adjusted by the Inflation Reduction Act of 2022. For solar and wind property, early iterations of the Act proposed aggressive rollbacks that required energy projects to begin construction within 60 days of the bill’s enactment to take advantage of the investment and production tax credits. For these credits, the final version of the Act softened this proposal by positing that qualifying projects placed in service before December 31, 2027 (and which begin construction before 12 months after the Act’s enactment), would receive 100% of the available credits. The Act also repealed most credits related to electric vehicles and residential property.
Energy-Efficient Buildings: Under current law, taxpayers can deduct expenditures related to the construction of energy-efficient buildings on square footage basis under §179D. The Act terminates this deduction for properties that begin construction after June 30, 2026.
Insight from Forvis Mazars: Considerations for foreign entities of concern were included in the Act for many clean energy tax credits. Taxpayers may find themselves with property that no longer qualifies for a tax credit based on their vendors, deal structure, or other factors. Further, if purchasing a tax credit, transferees should proceed with additional assurances that the property meets the requirements of the Act.
Compensation & Benefits
One of the major promises put forth by President Trump during his campaign for president centered around no taxes on tips and overtime. Current law includes tips and overtime in W-2 wages, which are taxed accordingly via income and employment taxes. The Act eliminates the taxes on tips and overtime to a certain amount.
No Tax on Tips: The Act allows a deduction limited to $25,000 of qualified tips. The Act limits eligibility for the deduction to taxpayers that work in historically tipped occupations as of December 31, 2024. This deduction for tip income is available to itemizers and taxpayers claiming the standard deduction. Lawmakers define qualified tips to be cash tips given voluntarily at an amount up to the payer’s discretion that is not subject to negotiation in each proposal.
The Act excludes highly compensated individuals from taking the deduction. It carves out highly compensated taxpayers by using a graduated phaseout for taxpayers with MAGI exceeding $150,000 (or $300,000 for joint returns). This deduction for tip income will sunset December 31, 2028.
No Tax on Overtime: The “no tax on overtime” provisions nestled in the Act follows a similar methodology as the tips provisions by providing a deduction for overtime compensation. The Act limits this deduction for qualified overtime compensation up to $12,500 (or $25,000 for joint returns). In this case, qualified overtime compensation consists of compensation above the regular rate in exchange for working more hours than the standard set forth in the Fair Labor Standards Act of 1938 (FLSA).
The Act precludes highly compensated individuals from claiming the overtime deduction. According to the Act, taxpayers with MAGI above $150,000 wishing to deduct overtime compensation are subject to a graduated phaseout of the deduction. The no tax on overtime provision is scheduled to sunset after 2028.
Insight from Forvis Mazars: Even though the Act removed taxation on tips and overtime, it still requires these income streams to be reported separately on the W-2. The IRS will update withholding tables if the deductions were enacted. An open question is whether cash tips includes tips paid by an app.
How Forvis Mazars Can Help
Forvis Mazars can help you navigate the changing legislative landscape through its various resources dedicated to tracking and distilling these changes. The 2025 Tax Bill Guide from Forvis Mazars outlines each provision in the Act and provides commentary on the impact of the provision on you and your business. We also publish resources that explore various issues in more depth through our FORsights. To contact a member of our team for guidance on any of these issues, please contact us here.
- 1“Republicans’ Pro-Business Tax Relief Will Unleash a New Era of Economic Growth,” thehill.com, May 23, 2025.