2025 Tax Act: Key Changes for Businesses and Individuals

Overview

On July 4, 2025, President Donald Trump signed into law legislation (H.R. 1), known as the “One Big Beautiful Bill Act” (the Act). The signing concluded the bill’s legislative journey through Congress, where it underwent extensive debate and negotiation, along with numerous revisions, both in the House of Representatives and subsequently in the Senate. Ultimately, the version the Senate adopted on July 1 was approved by the House without further changes, landing on Trump’s desk by the July 4 deadline. The Act passed both chambers by slim margins, with Vice President J.D. Vance casting the deciding vote in the Senate, and without Democratic support.

The Act broadly reflects the Trump administration’s tax and other priorities. It extends and makes permanent, with modifications in some cases, an assortment of tax law provisions enacted during Trump’s first term, as part of the Tax Cuts and Jobs Act of 2017 (the TCJA), that would otherwise have sunset after 2025. In general, in addition to other law changes, the Act extends expiring tax cuts enacted temporarily in the TCJA and may increase federal budget deficits compared to projections without the Act.

Perhaps most notably, the Act locks in the current tax rates and brackets for individual/non-corporate taxpayers, including a maximum rate of 37% on ordinary income that would otherwise have reset to 39.6% in 2026. Another feature relates to the deductibility of state and local taxes (SALT) by individuals. The pre-existing annual deduction limitation of $10,000 for married taxpayers filing joint returns, which was enacted in the TCJA, would have expired after 2025. The Act extends the limitation permanently, but with a reprieve in the form of a higher cap ($40,000 on joint returns, with certain adjustments and an income-based phase-out) for a five-year period through 2029.

The Act also extends and modifies an array of business tax provisions highlighted below. Further, it makes noteworthy tax changes in the areas of international tax, not-for-profit organizations, estate and gift taxes, and tax credits and incentives, including an extension and expansion of opportunity zones, as well as a roll-back of numerous clean energy initiatives enacted during the Biden administration. While the tax title accounts for much of the Act, and this GT Advisory is focused on tax law, the Act includes other consequential items, including provisions relating to national defense, border enforcement, Medicaid funding and eligibility rules, and education policies, among other things, and an increase in the U.S. government’s authorized debt limit by $5 trillion.

Business Tax Provisions

Depreciation

The Act makes permanent the full first-year bonus depreciation for certain qualified property first introduced in the TCJA, so long as that property is placed in service after Jan. 19, 2025. Under the TCJA, the bonus depreciation rules that effectively allowed immediate full or partial expensing of such qualified property began to phase out starting in 2023 and ending in 2027. The Act eliminates this phaseout.

For this purpose, “qualified property” generally means property subject to the Accelerated Cost Recovery System depreciation rules with a useful life of 20 years or less, certain computer software, water utility property, and certain leasehold improvements.

In addition, the Act permits full expensing for certain “qualified production property” where (i) the construction begins on or after Jan. 20, 2025 and before Jan. 1, 2029, (ii) the property is placed in service before Jan. 1, 2031, (iii) the property is an integral part of a “qualified production activity,” and (iv) the property’s initial use originates with the taxpayer (i.e., the property cannot be used as tenant property). For this purpose, “qualified production property” means nonresidential real property used for certain “qualified production activities,” such as manufacturing or refining. Significantly, “qualified production property” does not include space used for other purposes related to the business, such as office space, administrative services, sales, and research and development. 

While these revisions are generally taxpayer-friendly, taxpayers should consider whether full expensing is appropriate in all cases, particularly where expensing the property would be expected to generate a net operating loss carryforward that may not be fully utilized during the taxpayer’s expected holding period of the asset. 

Changes to Research and Experimental Expensing Under the Act

The Act introduces reforms to the treatment of research and experimental (R&E) expenditures for U.S. federal income tax purposes. Aimed at incentivizing domestic innovation and easing the tax burden on U.S.-based research, the Act replaces the previous capitalization regime with new options for immediate expensing and provides transition relief for eligible small businesses.

The changes apply to amounts paid or incurred in taxable years beginning after Dec. 31, 2024, with retroactive relief available for certain small businesses.

Key Changes

1. Immediate Expensing of Domestic R&E Expenditures

New Section 174A permits taxpayers to fully deduct (i.e., expense) domestic research or experimental expenditures in the year they are paid or incurred, provided they are connected with the taxpayer’s trade or business. This provision reverses the requirement under TCJA to capitalize and amortize R&E expenditures over five years (15 years for foreign research). “Domestic R&E expenditures” are redefined as research or experimental costs that are not incurred in connection with activities conducted outside the United States, its territories, or possessions, as described in Section 41(d)(4)(F).

2. Optional Amortization Election

Taxpayers may elect to capitalize and amortize domestic R&E expenditures over a period of not less than 60 months, starting with the month in which the taxpayer first realizes benefits from the expenditures. The election must be made by the return due date (including extensions) for the year the costs are paid or incurred. Once made, the election must be applied consistently in future years unless changed with IRS consent.

3. Treatment of Foreign R&E Expenditures

Foreign R&E expenditures remain subject to the existing 15-year amortization requirement under Section 174.

4. Software Development Cost

Expenditures related to software development are now explicitly treated as R&E expenditures and eligible for immediate expensing under Section 174A if performed domestically.

5. Coordination with Other Provisions

The Act includes numerous conforming amendments to coordinate the new rules with:

• The research credit under Section 41,
• The alternative minimum tax (AMT),
• Start-up expenditure rules, and
• Other relevant code sections.

6. Transition Relief and Retroactive Election for Small Businesses

Eligible small businesses (with average annual average gross receipts for 2025 of $31 million or less (as adjusted for inflation under Section 448(c)) are allowed to:

• Retroactively apply the new expensing rules to expenditures incurred in taxable years beginning after Dec. 31, 2021, and
• Elect to deduct any remaining unamortized R&E expenditures from prior years either entirely in 2025 or ratably over two years.

7. Effective Dates

Generally, these provisions apply to amounts paid or incurred in taxable years beginning after Dec. 31, 2024. However, small businesses, as defined above, have the retroactive option to apply these provisions for years beginning after Dec. 31, 2021.

Taxpayer Implications: The new expensing provisions offer several important implications for taxpayers. Full expensing of domestic R&E expenditures may provide an immediate cash flow benefit by reducing current tax liability and improving liquidity for businesses investing in U.S.-based innovation. Eligible small businesses may take advantage of retroactive deductions, potentially resulting in refunds or reduced tax obligations for prior years. Finally, because foreign R&E expenditures remain subject to 15-year amortization, it is critical to accurately segregate and document domestic versus foreign activities to ensure proper treatment and avoid compliance issues.

Deductibility of Business Interest Expense

The TCJA substantially rewrote Section 163(j) to impose new limitations on business interest expense deductibility. In short, it provides that the amount of a taxpayer’s business interest expense in a taxable year is not currently deductible to the extent that it exceeds the sum of the taxpayer’s business interest income, plus 30% of its “adjusted taxable income.” Adjusted taxable income is based on taxable income, excluding business interest income and expense, and is increased by the deduction under Section 199A for pass-through business income. In addition, as originally constructed in the TCJA, adjusted taxable income was to be increased by adding back the taxpayer’s depreciation, amortization, and depletion deductions, thereby increasing the potential to deduct business interest expense, but only for a limited period of time (originally scheduled to sunset after 2021).

The Act permanently allows for the add-back of depreciation, amortization, and depletion deductions in computing adjusted taxable income, and thereby provides a more generous measure of deductible interest expense. Moreover, the change has retroactive effect to the beginning of 2025. In addition, the Act includes new ordering rules that apply the interest deduction limitation under Section 163(j) without regard to whether the interest in question must otherwise be capitalized, and that excludes certain foreign-source income (under subpart F and GILTI) from the measure of adjusted taxable income.

Extension of Qualified Business Income Deduction (Section 199A)

The Act makes permanent the “qualified business income” deduction available for certain non-corporate taxpayers under Section 199A, which was introduced in the TCJA and scheduled to expire for taxable years beginning after Dec. 31, 2025. Under Section 199A, certain non-corporate taxpayers are generally entitled to deduct 20% of their “qualified business income” to the extent attributable to investments in flow-through entities (including S corporations) and their total qualified REIT dividends and income from certain MLPs. Further, the Act increases the phase-in limitations applicable to taxpayers from $50,000 to $75,000 ($100,000 to $150,000 for joint filers). 

Prior versions of the Act would have extended the Section 199A deduction to dividends from certain business development companies. However, those extensions were not included in the Act’s final version.

Business Loss Limitation

Under Internal Revenue Code Section 461(l), U.S. individuals and other non-corporate taxpayers (such as trusts and estates) are restricted from using net business losses that exceed certain threshold amounts (Excess Business Losses) to offset non-business income, such as investment income (dividends, interest) or compensation (W-2 wages).

For tax year 2025, the threshold amounts are:

• $313,000 for single taxpayers (or any non-joint return), and
• $626,000 for married taxpayers filing jointly.

These amounts are indexed for inflation and adjust annually.

Any Excess Business Loss disallowed under Section 461(l):

• Cannot offset non-business income in the current year, and
• Carries forward as a net operating loss (NOL) to the following year, which may be used to offset any type of income (subject to the general NOL limitations in Section 172).

– The Act makes the Section 461(l) Excess Business Loss limitation permanent, removing its previously scheduled sunset in 2028.

The Act does not adopt an earlier proposal (included in both the House and Senate versions) that would have eliminated the NOL carryforward treatment, which would have permanently disallowed Excess Business Losses. As a result, taxpayers may continue to carry forward disallowed Excess Business Losses to future years as NOLs.

Expansion of the Qualified Small Business Stock (QSBS) Regime

Section 1202 of the Internal Revenue Code allows U.S. individual taxpayers (and certain non-corporate entities, such as trusts and estates) to exclude up to 100% of eligible capital gains from U.S. federal income tax upon the sale of stock in a U.S. C corporation that qualifies as a qualified small business. The Act introduces several significant, taxpayer-favorable enhancements to the qualified small business stock (QSBS) regime, generally effective for QSBS acquired after July 4, 2025. Existing rules continue to apply to QSBS acquired on or before July 4, 2025.

Key Changes Under the Act

1. Shorter Holding Periods for Partial Exclusions

• Prior Law: For QSBS acquired on or before July 4, 2025, taxpayers must hold the stock for more than five years to be eligible for up to a 100% capital gains exclusion. No partial exclusion is available for shorter holding periods.
• New Law: For QSBS acquired after July 4, 2025, taxpayers may benefit from tiered exclusions:

– 50% exclusion if held for at least three years;

– 75% exclusion if held for at least four years;

– 100% exclusion if held for at least five years.

• Note: Excluded QSBS gain continues to be exempt from AMT calculations, both before and after the Act.

2. Increased Per-Issuer Gain Exclusion Cap

• Prior Law: The capital gain exclusion is capped at the greater of $10 million ($5 million for married, filing separately) or 10 times the aggregate adjusted basis in QSBS sold during the year.
• New Law: For QSBS acquired after July 4, 2025, the cap increases to the greater of $15 million (indexed for inflation after 2026; $7.5 million for married filing separately) or 10 times the aggregate adjusted basis. Inflation adjustments do not retroactively increase the cap for gains realized in prior years.
• As before, prior gain exclusions reduce the available cap, and the per-issuer limitation is divided equally between married spouses filing jointly.

3. Higher Asset Threshold for Qualified Small Business Status

• Prior Law: The issuing corporation (and any predecessor) must not have had aggregate gross assets exceeding $50 million before and immediately after stock issuance.
• New Law: For QSBS acquired after July 4, 2025, this threshold increases to $75 million, indexed for inflation after 2026.
• The requirement for the corporation to provide necessary reports to the IRS upon request remains unchanged.

Taxpayer Implications: These legislative changes offer enhanced flexibility and greater potential tax savings for investors in qualified small businesses. For taxpayers considering investments in QSBS or planning to sell existing holdings, these updates may present new planning opportunities.

Provisions Affecting Individuals and Non-Corporate Taxpayers

The Act extends the tax rates enacted under the TCJA, temporarily increasing the $10,000 cap on state and local tax deductions, and also includes the specific tax cut pledges Trump made during his campaign: (i) no tax on tips; (ii) no tax on overtime; (iii) no tax on car loan interest; and (iv) no tax on Social Security.

Increase in Cap on State and Local Tax Deductions

Prior Law: SALT deductions are capped at $10,000 per year with no phaseout of the deductions for higher income taxpayers.

Changes Under the Act

Temporary increase in SALT cap: The Act makes permanent the cap on state and local tax deductions beginning with the 2025 tax year. It temporarily increases the cap on deductions from $10,000 to $40,000 for state and local taxes and further increases the cap by 1% per year until the 2030 tax year, when the cap reverts back to $10,000. However, the temporary $40,000 cap is phased out for taxpayers with more than $500,000 in modified adjusted gross income (MAGI), so that the cap is reduced to $10,000 for taxpayers earning $600,000 or more in MAGI. The term “modified gross income” is adjusted gross income (AGI), plus certain income from foreign sources, Puerto Rico, or U.S. territories otherwise excluded from income. This phaseout threshold is also increased by 1% per year beginning with the 2026 tax year (when the threshold will be increased to $505,000 of MAGI).

Marriage Penalty: This SALT deduction cap continues the marriage penalty for SALT deductions the TCJA originally created, in that the temporary $40,000 cap applies to both single taxpayers and married couples filing jointly. The temporary cap for married couples filing separate returns is $20,000, so married couples cannot avoid this marriage penalty by filing separately. This marriage penalty is intensified by the phaseout of the $40,000 cap for couples earning more than $500,000 in MAGI. For example, if each partner in an unmarried couple earns $450,000, each partner would be able to deduct $40,000 in state and local taxes (total $80,000 deduction) because neither of their gross incomes exceeds the $500,000 phaseout threshold. However, if the same couple decided to marry, their joint income would be $900,000 and their total SALT deduction would be limited to $10,000. The marriage penalty in this example would be the taxes due on an additional $70,000 of lost SALT deductions, multiplying the marriage penalty seven-fold compared to the pre-Act law.

State Workarounds on State Tax Businesses Pay: Congress dropped from the final version of the bill limitations on the passthrough entity state law workarounds to the SALT deduction cap, known as a passthrough entity tax election (PTET election), which allows the owners of businesses operated as passthrough entities to deduct without limitation their proportionate share of the state and local taxes paid by an active business, including the state income tax that a PTET election imposes at the entity level. The initial House bill would have disallowed the benefit of the PTET election workaround to most professional businesses (including physicians, dentists, lawyers, accountants, and brokers). The initial draft of the Senate bill would have limited the deduction of state and local taxes under a PTET election for all types of businesses to 50% of the taxes their business pays. However, neither of these attempts to limit SALT deduction under a PTET election made their way into the final language of the Act signed into law, retaining the status quo for these state workarounds to the SALT deduction cap for passthrough entities.

 No Tax on Tips

The Act provides for a temporary federal income tax deduction for tips employees and certain independent contractors receive. This development marks a significant shift from prior law, under which all tips were fully subject to income tax.

 Key Highlights

• Temporary Deduction for Qualified Tips: For tax years 2025-2028, individuals who receive qualified tips may deduct up to $25,000 of those tips annually from their taxable income. This deduction is set to expire after 2028; starting in 2029, tips will again be fully taxable.
• Above-the-Line Deduction: The deduction is an above-the line deduction to determine AGI, so that tipped employees will benefit even if they do not itemize deductions.
• FICA Taxes Remain Owed: FICA taxes (Social Security and Medicare taxes) will still be due from both the employee and the employer.
• Eligible Occupations: The tip recipient must be involved in an occupation which customarily receives tips. The Act requires the IRS to publish a list setting out such occupations by no later than Oct. 2. Both employees and independent contractors may qualify, provided their work is included on this list. Certain professional services are specifically excluded.
• Deduction Details for Independent Contractors: Independent contractors may claim the deduction only if their business income (including tips) exceeds all business deductions. If a net loss is reported, no tip deduction will be allowed.
• Qualified Tips Defined: Only voluntary tips (not subject to negotiation and paid at the discretion of the customer) are eligible. Mandatory gratuities, such as automatic service charges, do not qualify.
• Reporting Requirements: Employers must separately report all tips employees receive on Form W-2. To claim the deduction, taxpayers must accurately report all tips received, potentially increasing IRS scrutiny of tip reporting in future years after the no tax on tips deduction disappears.
• Eligibility Requirements:

– A valid Social Security number is required (undocumented workers are ineligible).

– Married taxpayers must file jointly to claim the deduction.

– The deduction phases out for individuals with MAGI over $150,000 and for married couples with MAGI over $300,000. (MAGI includes certain foreign income and income from U.S. territories.)

• Withholding Adjustments: Withholding tables will be updated for the 2026 tax year to reflect this deduction. For 2025, employees may realize the benefit when they file their tax return and receive a refund.

Taxpayer Implications: This temporary change presents a tax-saving opportunity for many employees and independent contractors in tipped occupations. However, it also brings new reporting obligations and potential IRS scrutiny. Taxpayers should review their tip reporting practices and consult with counsel to ensure they are prepared to take advantage of this deduction while remaining compliant with all requirements.

No Tax on Overtime

The Act provides for a temporary federal income tax deduction for eligible overtime pay. This marks a notable change from prior law, under which all overtime pay was fully taxable as regular wages.

Key Highlights

• Deduction for Overtime Pay: For tax years 2025-2028, employees who receive time-and-a-half overtime pay may deduct up to $12,500 (single filers) or $25,000 (married filing jointly) of eligible overtime pay that exceeds their regular rate. This above-the-line deduction reduces AGI, so that employees receiving overtime will benefit even if they do not itemize deductions.
• FICA Taxes Still Apply: Social Security and Medicare (FICA) taxes will continue to apply to overtime pay. Both employees and employers remain responsible for these payroll taxes.
• Temporary Provision: This special tax treatment will sunset after 2028. Beginning in 2029, overtime pay will once again be fully taxable as ordinary income.
• Reporting Requirements: Employers are required to separately report overtime earnings on employees’ Form W-2. Accurate reporting is essential to claim the deduction.
• Eligibility Requirements:

– Taxpayers must provide a valid Social Security number on their tax return; undocumented workers are not eligible.

– Married taxpayers must file jointly to qualify for the higher deduction.

– The deduction phases out for individuals with MAGI over $150,000 and for married couples with MAGI over $300,000. (MAGI includes AGI plus certain foreign income and income from U.S. territories.)

• Withholding Adjustments: Withholding tables will be updated to reflect this deduction beginning in the 2026 tax year. For 2025, employees may realize the benefit when they file their tax return and receive a refund.

Taxpayer Implications: This new deduction offers an opportunity for employees who earn overtime, but it also introduces new reporting requirements. Taxpayers should review their overtime reporting practices and consult with counsel to ensure they are prepared to take advantage of this deduction while remaining compliant with all requirements.

No Tax on Car Loan Interest

Prior Law: Interest on a loan to finance the purchase of a passenger vehicle for personal use is not deductible.

New Law: Interest on the purchase of certain passenger vehicles will be deductible if certain requirements are satisfied:

• Allows as a deduction of up to $10,000 for interest paid on a loan to finance the purchase of a passenger vehicle for a vehicle acquired on or after Jan. 1, 2025. This deduction is an above-the line deduction so that non-itemizers who take the standard deduction will be able to receive the tax benefit of this deduction.
• This deduction will be available for tax years 2025-2028.
• The $10,000 maximum deduction is phased out for single taxpayers if MAGI exceeds $100,000 and phased out for married joint filers if MAGI exceeds $200,000.
• The loan must be secured by a first lien on the vehicle. The loan may not be made by a lender who is related to the taxpayer.
• The vehicle must have had its final assembly in the United States.
• The vehicle: (i) must be new; (ii) must be made for use on public streets; (iii) must be a car, minivan, van, sport utility vehicle, pick-up truck, or motorcycle; and (iv) must have a gross vehicle weight of less than 14,000 pounds.
• A leased vehicle is not eligible for this interest deduction.
• Tax information reporting rules will require lenders to report the interest payments a taxpayer makes on a qualified vehicle loan. These rules do not specify how a lender would know if the vehicle had its final assembly in the United States, and we will need to await guidance from the IRS on this issue.



No Tax on Social Security

Prior Law: Taxpayers over the age of 65 did not receive an additional deduction.

New Law: Although Trump’s campaign pledge was “no tax on Social Security,” this provision of the Act allows a temporary personal exemption for individuals aged 65 and older (whether or not they are receiving Social Security benefits) under the following conditions:

• This benefit is a $6,000 exemption for taxpayers who have attained the age of 65 before the end of 2025. For married couples filing joint returns, if both spouses have attained the age of 65, both would be eligible for this exemption. Married couples filing separate returns are not eligible for this exemption.
• Because this is an exemption, it will benefit qualified individuals whether or not they itemize deductions.
• This exemption for seniors is available only for the 2025-2028 tax years and will no longer be available for the 2029 and later tax years.
• This $6,000 deduction is phased out for single taxpayers with modified gross income in excess of $75,000, and for married joint filers, MAGI in excess of $150,000.
• Each individual claiming this deduction must provide a Social Security number on their tax return.



Gambling Losses

Prior Law: Gambling losses are deductible to the extent of gambling winnings. For example, assume an individual has $100,000 in gambling winnings during the year, but also has $110,000 in gambling losses. This individual can offset their winnings by all of their losses (but may not deduct losses in excess of winnings). Thus, in this example, the individual would have $0 in net winnings and not have to report any of their gambling winnings.

New Law: Beginning in 2026, 90% of gambling losses will be able to be deducted against winning. Therefore, under the above example, the individual with $100,000 in gambling winnings and $110,000 in gambling losses would be able to deduct $99,000 in gambling losses (90% of their $110,000 in losses), requiring this individual to report $1,000 in gambling winnings on their tax return.

Potential Responsive Legislation: As of July 7, Rep. Dina Titus (D-NV) introduced the FAIR Bet Act to restore the complete exemption on gambling losses up to the amount of earned winnings. The proposed legislation garnered bipartisan support upon its introduction, with many members of Congress having expressed a lack of knowledge of the existence of the provision as drafted in the Act. Last Thursday, Sen. Catherine Cortez Masto (D-NV) introduced a similar measure in the U.S. Senate, which would have accomplished the same “fix.” Through a process known as “unanimous consent,” the proposal would have been approved, so long as there were no objections, but one senator held the effort back from approval. While the concept of restoring the prior law has received broad, bipartisan support, the risk is that the effort may become bogged down by politics or other attempts to make “fixes” to the Act.

Trump Accounts

Prior Law: No accounts for children, which can grow tax-free, other than Section 529 Plans, which may only be used to pay for educational expenses.

New Law: Trump Accounts may be created on behalf of a child under the age of 18. The account grows tax free, like an IRA account, except contributions to the account are made in after-tax dollars. The Act allows $5,000 in annual contributions to the plan until the year the child turns 18. In addition, a provision allows an employer to contribute up to $2,500 per year into a Trump Account for the benefit of the children of an employee, which would not be reported as compensation paid to the employee. Such employer contribution is limited to $2,500 per employee, not the number of children of the employee. Furthermore, the federal government will fund a Trump Account with $1,000 for every child with a valid Social Security number born after Dec. 31, 2024, and before Jan. 1, 2029. The requirements for a Trump Account are:

• Contributions to the account cannot be made until after July 4, 2026.
• A contribution to the account may only be made in a calendar year in which the beneficiary (the child) has not attained the age of 18.
• The beneficiary must have a Social Security number.
• The aggregate contributions for the calendar year may not exceed $5,000 (which limit will be adjusted for inflation). This $5,000 maximum contribution amount does not include the $1,000 contribution the federal government funds.
• The contribution to the account is made in after-tax dollars (no deduction for contributions to the account).
• The account must only be invested in a mutual fund or exchanged traded fund that: (i) tracks the returns of a qualified index (either the S&P 500 Market Index or other index comprised primarily of stocks of U.S. companies and for which regulated futures contracts are traded); (ii) does not use leverage; (iii) does not charge annual fees and expenses of more than 0.1 % of the balance of the investment fund; and, (iv) satisfies any other conditions the Treasury Department determines.



International Tax

Foreign-Derived Intangible Income (FDII) – Now FDDEI

The Act significantly reforms the FDII regime under IRC Section 250, rebranding it as Foreign-Derived Deduction Eligible Income (FDDEI) starting with tax years beginning after Dec. 31, 2025. The changes aim to broaden the scope of eligible income and simplify compliance, while also modifying key tax mechanics.

Key Changes

1. Terminology Shift:

• “FDII” becomes “FDDEI,” eliminating references to “intangibles.” This shift removes interpretive ambiguity and potentially widens the pool of foreign income that qualifies for the deduction.

2. Deduction Percentage:

• The FDDEI deduction will be 33.34%, yielding an effective tax rate of approximately 14%, slightly less favorable than the current 13.125% rate, but lower than the previously scheduled 16.4% rate under the old law for 2026 and beyond.

3. Revised Income Calculation:

• FDDEI now excludes interest and R&E expenses from the deduction calculation and eliminates the 10% deemed tangible income return (DTIR). This may result in a larger deduction base and a more favorable tax position for some companies.

4. Narrowed Definition of Qualifying Income:

• Sales or deemed transfers of intangible property Section (367(d)(4)) or depreciable assets are excluded from FDDEI, limiting benefits for taxpayers with foreign IP or tangible property transactions.

5. Effective Dates:

• Most changes take effect for tax years beginning after Dec. 31, 2025; however, asset sale restrictions apply starting June 17, 2025.

Taxpayer Implications: U.S. C corporations should review their cross-border operations and income streams to assess eligibility under the FDDEI framework. Planning strategies may need revision, particularly around expense allocation and asset transfers. Updates to compliance systems, accounting policies, and documentation may be necessary to align with the new definitions and calculation methodologies.

Global Intangible Low-Taxed Income (GILTI) – Now Net CFC Tested Income

The Act made substantial changes to the GILTI regime (Section 951A), renaming it Net CFC Tested Income and increasing the effective tax burden on foreign subsidiaries of U.S. multinational groups. These changes apply primarily to tax years beginning after Dec. 31, 2025.

Key Changes

1. Terminology Update:

• “GILTI” is now referred to as Net CFC Tested Income, signaling a shift from a focus on intangible income to a broader taxation of all foreign earnings of controlled foreign corporations (CFCs).

2. Repeal of QBAI Exclusion:

• The 10% deemed return on tangible assets, known as qualified business asset income (QBAI) is repealed, meaning U.S. shareholders are taxed on all CFC income, with no offset for tangible investments. This change may particularly impact capital-intensive businesses.

3. Section 250 Deduction Adjustment:

• The deduction for Net CFC Tested Income is set at 40%, resulting in an effective tax rate of 12.6%, higher than the current 10.5%, but lower than the previously scheduled 13.125% rate. This may soften the blow of the broader inclusion base, but still raises overall tax exposure.

4. Foreign Tax Credit (FTC) Changes:

• The FTC percentage is increased to 90%, but 10% of FTCs related to previously taxed income (PTI) are now disallowed. Additionally, the amount of deductions allocable to the GILTI basket is reduced, potentially easing FTC limitations but adding complexity to repatriation planning.

5. Effective Dates:

• The provisions take effect for tax years beginning after Dec. 31, 2025.

Taxpayer Implications: Multinational enterprises with CFCs should model the financial effects of losing the QBAI exclusion, especially if they rely heavily on tangible asset returns. The increased inclusion and reduced FTC utilization might raise effective tax rates. Companies should begin reviewing entity structures, reconsidering capital deployment, and updating tax and compliance systems to align with the new rules.

Based Erosion and Anti-Abuse Tax (BEAT)

BEAT is a U.S. federal income tax regime the TCJA added to the code.

The Act raises the BEAT rate from 10% to 10.5% for taxable years beginning after Dec. 31, 2025, which is higher than the current BEAT rate but lower than the 12.5% BEAT rate that would have applied for those years under current law.

The Act also makes permanent a favorable treatment for BEAT purposes in respect of the research credit and certain other tax credits, which were scheduled to expire for tax years beginning after Dec. 31, 2025. This favorable treatment allows the taxpayer, in calculating its BEAT liability, to not reduce its regular tax liability by the research credit under Code Section 41(a) and a portion of certain other tax credits, which may result in a higher regular tax liability and thus minimizing the extent to which the base erosion tax is imposed.

Taxpayer Implications: Multinational corporations subject to BEAT should prepare for an increased minimum tax burden beginning in 2026 due to the higher BEAT rate of 10.5%, which, though lower than the previously scheduled 12.5%, still reflects a tightening of the regime. The permanent extension of favorable treatment for research and other specified credits may offer limited relief by reducing BEAT exposure, particularly for taxpayers with significant U.S.-based R&D activity. Taxpayers should revisit BEAT liability projections, reevaluate cost-sharing arrangements and cross-border payment strategies, and consider how credit utilization may influence their effective tax rate under the modified regime.

Limit ‘Downward Attribution’ Rule in Determining CFC Status

The TCJA repealed Code Section 958(b)(4), which meant that a so-called “downward attribution” rule applies in determining whether a foreign corporation is classified as a controlled foreign corporation (CFC) for U.S. federal income tax purposes. The repeal of Code Section 958(b)(4) resulted in more foreign corporations becoming classified as CFCs for U.S. federal income tax purposes, even if they were not directly or indirectly owned by U.S. persons.

The Act reinstates Code Section 958(b)(4) for tax years of foreign corporations beginning after Dec. 31, 2025 (and tax years of U.S. persons in which or with which such tax years of foreign corporations end), thereby reinstating the non-applicability of the “downward attribution” rule in determining whether a foreign corporation is classified as a CFC for U.S. federal income tax purposes.

Instead, the Act enacts new Code Section 951B for tax years of foreign corporations beginning after Dec. 31, 2025 (and tax years of U.S. persons in which or with which such tax years of foreign corporations end), which creates a new, more targeted category of CFCs termed “foreign controlled foreign corporations,” which is determined without applying the “downward attribution” rule.

Taxpayer Implications: The reinstatement of Code Section 958(b)(4) may reduce the number of foreign corporations treated as CFCs solely due to downward attribution from related U.S. entities. Taxpayers who have faced compliance burdens or unintended Subpart F and GILTI inclusions, and disallowance of the portfolio interest exemption due to the TCJA repeal of this rule, may see relief beginning in 2026. However, the introduction of new Code Section 951B, which creates foreign controlled foreign corporations (FCFCs), may still require reporting and analysis in certain cases. U.S. multinational groups should reassess their foreign entity classifications, attribution analyses, and information-reporting obligations under Forms 5471 and 8992.

Other CFC Changes

Timing of Inclusion of “Subpart F” Income and GILTI (renamed Net CFC Tested Income): Prior to the Act, a U.S. shareholder (who owns an interest of at least 10% of a CFC directly, indirectly, or by applying certain attribution rules) is required to report as taxable income its pro rata share of Subpart F and GILTI of the CFC only to the extent the U.S. shareholder held stock of the foreign corporation on the last day of the year on which such foreign corporation was a CFC. Accordingly, a U.S. shareholder of a CFC that sold its CFC shares mid-year would not be required to report as taxable income any of the CFC’s Subpart F or GILTI for the year.

The Act modifies this rule for tax years of foreign corporations beginning after Dec. 31, 2025, by providing that U.S. shareholders of CFCs may have to report as taxable income Subpart F or Net CFC Tested Income (previously, GILTI) of the CFC if they own stock of the CFC (representing an interest of at least 10% of a CFC directly, indirectly, or by applying certain attribution rules) at any time during the year, even if they do not own such stock on the last day of the year on which the corporation is a CFC, to the extent that the CFC’s Subpart F or Net CFC Tested Income is attributable to the stock of the CFC directly or indirectly owned by the U.S. shareholder during the year. The Act does not provide for a methodology for determining the CFC’s income that is “attributable” to each U.S. shareholder when there is mid-year change in ownership of a CFC, leaving this to be addressed in regulations.

Taxpayer Implications: This rule change may increase compliance complexity and the potential for unexpected inclusions by capturing Subpart F and Net CFC Tested Income on a look-through basis for any period during which the U.S. shareholder holds the CFC’s stock, even if not held at year-end. This might particularly affect M&A transactions, redemptions, or reorganizations involving CFC interests during the year. Taxpayers should carefully monitor CFC ownership throughout the tax year and may need to coordinate closely with counterparties to secure necessary financial information for partial-period inclusions. Regulatory guidance will be key in developing acceptable allocation methods.

Make Permanent the CFC “Look-Through” Under Code Section 954(c)(6): The Act makes permanent the “look-through” rule under Code Section 954(c)(6), which may operate to mitigate “subpart F” income inclusions from CFCs that receive payments of dividends, interest, rents, and royalties from related CFCs. Prior to the Act, the “look-through” rule under Code Section 954(c)(6) was scheduled to expire on Dec. 31, 2025.

Taxpayer Implications: This update provides continued relief from Subpart F for intra-CFC payments. Structures involving intercompany royalties, interest, or dividends between CFCs may operate with greater certainty and efficiency.

Repeal of Election for One-Month Deferral in CFC Tax Year: A foreign corporation that is classified as a CFC for U.S. federal income tax purposes that a single U.S. shareholder majority owns is generally required to adopt, for U.S. federal income tax purposes, the tax year of its majority U.S. shareholder.

Prior to the Act, an exception existed that allowed a CFC that a single U.S. shareholder majority owns to elect to use a tax year that begins one month earlier than its majority U.S. shareholder’s tax year.

The Act eliminates this one-month deferral election for taxable years of CFCs beginning after Nov. 30, 2025, with a transition rule for a CFC’s first tax year beginning after Nov. 30, 2025.

Taxpayer Implications: The elimination of the one-month deferral election may require some U.S.-owned CFCs to align their tax years with that of their majority U.S. shareholder, eliminating a long-standing timing benefit. This may accelerate Subpart F and Net CFC Tested Income inclusions and may create short tax years that complicate compliance and reporting in the transition year.

U.S. Inventory Production Sourcing Rule

Under current law, Code Section 863(b) treats as “U.S. source” income (a) all income from the sale or exchange of inventory property produced (in whole or in part) by the taxpayer within the United States, even if such inventory property is then sold or exchanged outside the United States, and (b) all income from the sale or exchange of inventory property within the United States, even if produced (in whole or in part) by the taxpayer outside of the United States.

The Act modifies the foreign tax credit limitation rules under Code Section 904(b) by introducing a special sourcing rule for certain inventory produced in the United States and sold through foreign branches in taxable years beginning after Dec. 31, 2025. This special sourcing rule may allow U.S. taxpayers who produce inventory in the United States for use outside the United States to classify as foreign source income (thereby increasing the availability of foreign tax credit offset) up to 50% of the income from the sale or exchange of such inventory outside the United States through an office or other fixed place of business that the U.S. taxpayer maintains in the foreign jurisdiction.

Taxpayer Implications: This special sourcing rule offers an opportunity for U.S. manufacturers with foreign branches to shift a portion of U.S.-produced inventory income into the foreign-source category. Doing so may enhance foreign tax credit utilization, potentially reducing residual U.S. tax on foreign operations. However, the 50% limitation and need for a fixed place of business abroad may require careful operational and legal planning.

No Section 899 ‘Revenge Tax’

The Act does not include the Section 899 “Revenge Tax” that was previously proposed in the House and the Senate versions of the bill, and which would have increased the U.S. withholding tax rates on U.S. source income derived by non-U.S. taxpayers from “discriminatory foreign countries.” See GT Alerts Section 899: Proposed Legislation Would Increase U.S. Tax Rates on Many Foreign Individuals, Companies, and Governments and ‘One Big Beautiful Bill Act’: Senate Version Caps Section 899 ‘Revenge Tax’ at 15% and Carves Out ‘Portfolio Interest.’

The proposed Section 899 “Revenge Tax” may have been removed from the Act due to an agreement reached between the United States and the other G-7 countries (comprised of major western trading partners) that U.S.-parented groups would be largely exempt from the OECD Pillar Two minimum tax regime in recognition of the existing GILTI and corporate alternative tax rules in the Code.

Taxpayer Implications: The exclusion of the proposed Section 899 “Revenge Tax” may be a reprieve for non-U.S. persons investing in the United States, who otherwise might have faced increased withholding taxes on U.S.-source income. Taxpayers and sovereign investors from countries that were previously at risk of being deemed “discriminatory” may maintain their current U.S. investment strategies without facing retaliatory tax consequences.

Tax-Exempt Organizations and Philanthropy

Endowment Tax

Prior Law: Under the TCJA, private colleges and universities with at least 500 students and over $500,000 in assets per student were required to pay a flat 1.4% excise tax on their net investment income. This tax mainly affected around 50-60 wealthy, private institutions and was designed to raise revenue from schools with large endowments. Small colleges and public universities were generally exempt.

New Law: The Act raised the threshold so that the endowment tax now only applies to private institutions with at least 3,000 students. It also introduced a new tiered tax system: 1.4% for schools with $500,000–$749,000 of investment assets per student, 4% for those with $750,000–$2 million of assets per student, and 8% for those with over $2 million of assets per student. The Act also expanded what counts as taxable income and removed some exemptions, such as for religious institutions.

Taxpayer Implications: The result of this change is that some smaller schools are no longer taxed, regardless of their endowment size. Larger universities with significant endowments now face higher rates and may need to consider the impact of the tiered regime, additional reporting requirements, and application to multi-entity corporate structures.

Charitable Deductions

Prior Law: Under prior law, only taxpayers who itemized deductions were eligible to claim a deduction for charitable contributions, which meant that the majority of Americans—who instead claim the standard deduction—received no tax benefit for making donations. Cash contributions to public charities could be deducted up to 60% of a taxpayer’s AGI, and this limit had been temporarily extended under the TCJA. Earners in the top tax bracket could deduct charitable gifts at their full marginal tax rate, yielding up to 37 cents in tax savings per dollar contributed. For corporations, charitable deductions were limited to 10% of taxable income, with no floor on deductible amounts. Temporary above-the-line deductions for non-itemizers (up to $1,000 for single filers and $2,000 for joint filers), introduced during the COVID-19 pandemic, expired at the end of 2021.

New Law: The Act introduced significant reforms to the charitable deduction framework. Notably, the COVID-19 above-the-line deductions were made permanent, thereby extending charitable tax benefits to non-itemizing taxpayers. For taxpayers who do itemize, the Act implements a new 0.5% AGI floor, meaning only charitable contributions exceeding 0.5% of a taxpayer’s AGI are deductible. In addition, the maximum deduction benefit for top-bracket taxpayers was reduced from 37% to 35% per dollar donated, and the 60% AGI limit on cash donations to qualifying charities was made permanent. For corporate taxpayers, a new rule requires a minimum of 1% of taxable income in charitable giving before any charitable deduction can be claimed. Lastly, the Act introduces a non-refundable tax credit of up to $1,700 for contributions made to qualified K-12 scholarship organizations, expanding incentives for education-related philanthropy.

Taxpayer Implications: The Act’s provisions might encourage charitable giving by the majority of Americans, who do not itemize deductions. The Act may discourage philanthropy by higher income taxpayers and itemizers, as well as corporate donors, although it may take several years to determine the impact. We may see accelerated charitable contributions in 2025, and bunching of contributions in future years.

Other Charitable Provisions

Earlier versions of the bill contained provisions of interest to private foundations; these provisions were eliminated from the final bill. Notably, the proposed increase to the private foundation net investment income excise tax (which might have raised the rate from 1.39% to as much as 10% for certain foundations) was struck from the final bill. Also struck was a provision to amend the excess business holdings rules.

The Act contains no changes with respect to donor advised funds or unrelated business income tax. The proposed provision permitting easier revocation of tax-exempt status for nonprofits found to be supporting terrorism was removed.

The 21% excise tax payable by nonprofits on an employee’s compensation exceeding $1 million now applies to all employees, rather than only the top five most highly compensated. Both current and former employees (from 2017 forward) must now be considered, requiring potentially more burdensome tracking by nonprofits and potentially capturing additional severance and other deferred compensation arrangements.

Estate and Gift Tax Exemption

Prior Law: Under the TCJA, the federal estate, gift, and generation-skipping transfer (GST) tax exemptions were temporarily doubled, subject to annual adjustments for inflation. In 2025, the exemption stood at $13.99 million per individual ($27.98 million for married couples). Unless Congress acted, the exemptions would have reverted in 2026 to pre-TCJA levels (around $7 million).

New Law: The Act permanently increases the estate, gift, and GST tax exemptions to $15 million per individual ($30 million per married couple), and mandates annual inflation increases beginning in 2027.

Taxpayer Implications: For some, the permanent increase to the exemptions may entirely eliminate their potential federal estate tax exposure. For high-net-worth individuals and families, the new law presents planning opportunities.

Lifetime gifting to properly structured trusts to which GST exemption is allocated may preserve assets without incurring gift, estate, or GST tax for multiple generations.

Lifetime gifting is commonly used in connection with estate planning freeze techniques, the limits of which, in some respects, depend on the amount that can be gifted as “seed capital” for those structures. A permanent increase in the exemption amounts may permit those with available assets to commit more value to those structures and eliminate the need for those contemplating gifting to rush to complete those transactions before the end of 2025.

Tax Incentives

Opportunity Zones

Section 70421 of the Act makes the Federal Qualified Opportunity Zone (QOZ) income tax incentive permanent. With a few exceptions, the changes take effect for qualified opportunity fund (QOF) investments made on or after Jan. 1, 2027. Investments made before that date are subject to the QOZ rules in effect before the Act’s enactment.

The changes provide for periodic designations and certifications of new QOZs. State governors and Treasury will designate and certify new QOZs during the next designation period that begins on July 1, 2026, and are expected to complete the process before Jan. 1, 2027. Developers may wish to identify and evaluate candidates for designation as a QOZ and provide the results to responsible state officials. New designation periods begin every 10 years on July 1 and become effective on Jan. 1 following designation and certification. However, designations made before the Act’s enactment are scheduled to expire on Dec. 31, 2028, unless Treasury provides favorable transition guidance, and the Act repeals deemed QOZ designations and certifications of low-income population census tracts in Puerto Rico. Although some expiring QOZs may be redesignated and recertified, investors and developers developing a qualified opportunity zone business (QOZB) in an expiring QOZ should strive to place their projects into service by Dec. 31, 2028.

The changes also provide a five-year income tax deferral period to investors with respect to capital gains timely contributed to a QOF on or after Jan. 1, 2027. This deferral period is a “rolling” deferral period that ends on the date that is five years after the date of investment in a QOF, instead of a date certain (e.g., Dec. 31, 2026, as provided under the TCJA). The Act also provides a step-up in the tax basis of their investments equal to 10% of their deferred capital gains for investments that are held until the end of their respective five-year deferral periods that reduces the amount of deferred capital gain recognized at the end of each deferral period by 10%. However, the deferral of capital gain timely invested into a QOF before Jan. 1, 2027, still expires on Dec. 31, 2026, without any step-up in basis for amounts invested into a QOF after 2021. Consequently, the fund-raising community is concerned that investors may be reluctant to invest capital gains into a QOF before Jan. 1, 2027.

Finally, the changes provide additional tax incentives for investments into a Qualified Rural Opportunity Fund – a 30% step-up in the tax basis of their investment, and the threshold for satisfying the “substantial improvement” requirement with respect to QOZB property undertaken in QOZs comprised entirely of a “rural area” is reduced from an amount equal to the adjusted basis of the property to 50% of the adjusted basis of such property.

The Act also imposes mandatory reporting requirements on QOFs and QOZBs, including penalties for non-compliance that take effect for reporting periods that commence after Dec. 31, 2025.

Permanence for New Markets Tax Credits

The Act made the New Markets Tax Credits (NMTC) incentive permanent after over 20 years of tax extension status. This permanency is critical for the long-term success of this community development incentive for high impact businesses and not-for-profits in targeted communities. The NMTC extension, while permanent, is still subject to annual or periodic allocation for tax credit allocation. The formerly approved double round of allocation in the amount of $10 billion is expected in the Fall of 2025. 

 Low-Income Housing Tax Credits

The Act increases the significant competitive “9%” low-income housing tax credits by 12%. This increase in credit amount is critical in increasing tax equity and capital to affordable housing projects nationwide. 

Further, the Act reduces the tax-exempt financing requirement for “4%” low-income tax credits from 50% to 25% of eligible basis for such projects. This provision applies to financings following Dec. 31, 2025. This less restrictive requirement may lead to more transactions being financed with state bond allocations, along with broader project eligibility due to capital stack and underwriting requirements for such projects. 

Energy

The Act accelerates the phaseout of tax credits for wind and solar projects, which may hasten the development of projects to meet the new deadlines. New and complex foreign entity of concern (FEOC) rules have been added in connection with credits under Sections 48E, 45Y, 45X, 45Q, 45Z, and 45U that will restrict the availability of credits in a variety of circumstances, including the use of certain amounts of Chinese equipment or Chinese inputs into U.S. manufacturing processes. In addition, Trump issued an executive order on July 7, 2025 (the EO), directing the Treasury Department to issue “new and revised guidance” within 45 days to restrict the use of “broad safe harbors” to establish the beginning of construction of a project “unless a substantial portion of the subject facility has been built.” The EO has created uncertainty regarding the timing of the phaseout of tax credits and the phase-in of the FEOC rules.

1. ITCs and PTCs under Sections 48E and 45Y

• Solar and Wind

Prior Law: Under prior law, technology-neutral PTCs and ITCs generally began to phase out for projects that begin construction after 2033.

New Law: Under the Act, solar and wind projects must either begin construction before July 5, 2026, or be placed in service by Dec. 31, 2027. Solar and wind projects are subject to the new FEOC restrictions described below. Solar and wind energy property are no longer listed as five-year MACRS property in Section 168(E)(3)(B)(vi).

Taxpayer Implications: The new placed-in-service deadline compresses planning timelines for developers seeking Section 48E and 45Y credits. Projects that begin construction before Dec. 31, 2025, may avoid the new FEOC rule restricting material assistance from a prohibited foreign entity, and projects that begin construction before July 5, 2026, would have four years to complete construction under current IRS guidance. However, it should be noted that the EO has created uncertainty about how a taxpayer can demonstrate that a project has begun construction, and these rules may become more restrictive. The effect of the depreciation change is unclear, and energy property would appear to remain subject to the general MACRS class life rules.

• Energy Storage and Other Technologies

Prior Law: Under prior law, energy storage, hydropower, geothermal, and other eligible technologies followed the same placed-in-service rules as solar and wind projects under Sections 48E and 45Y.

New Law: The Act does not accelerate the placed-in-service deadline for these technologies, although they are subject to the FEOC rules, described below.

Taxpayer Implications: Developers of storage, hydropower, geothermal, and other eligible projects retain flexibility without a near-term placed-in-service cutoff. However, taxpayers should monitor the 2033 phasedown schedule and consider beginning construction before Dec. 31, 2025, to avoid additional compliance complexity under the FEOC rules.

2. Section 45V Clean Hydrogen Credit

Prior Law: Under prior law, the Section 45V clean hydrogen credit generally began to phase out for projects that begin construction after 2033.

New Law: The 45V clean hydrogen credit is terminated for projects that begin construction after Dec. 31, 2027. The new FEOC rules may not apply to the Section 45V credit.

3. Section 45X Advanced Manufacturing Credit

Prior Law: Section 45X provides a credit for the production and sale of eligible solar, wind, and battery components and for producing and purifying certain critical minerals. Under prior law, the credit generally began to phase out after 2029 for eligible components, while credits related to critical minerals were available indefinitely.

New Law: Under the Act, credits for wind components will terminate for sales after 2027, and a new category for “metallurgical coal” is added as an eligible critical mineral. The Act also phases out most critical minerals after 2030, with a complete termination after 2033, except for metallurgical coal, which terminates after 2029. The Act subjects manufacturers to FEOC rules similar to those applicable under Sections 48E and 45Y and refines eligibility requirements for battery modules, requiring that they include all essential equipment needed for battery functionality. The Act also permits stacking of credits for integrated components if they are produced in the same facility, the end product is sold to an unrelated party, and at least 65% of the direct material costs are attributable to U.S. sourcing.

Taxpayer Implications: Manufacturers should review production schedules to align with the revised phaseout timelines and consider accelerating production to maximize claimed credits before phaseouts take effect. Taxpayers should also implement processes to comply with the FEOC restrictions, update supply chain documentation, and confirm that battery module configurations align with the new eligibility criteria.

4. FEOC Rules

New Law: The Act introduces new FEOC rules that will apply to taxpayers claiming credits under Sections 48E, 45Y, 45X, 45Q (carbon capture), 45Z (clean transportation fuels), and 45U (nuclear). The new rules restrict “material assistance” during the construction of a project from “prohibited foreign entities” (generally, entities with ties to China, Russia, North Korea, or Iran), prohibit the claiming or selling of credits by “specified foreign entities” or “foreign-influenced entities,” and prohibit counterparties that are “specified foreign entities” from having “effective control” (broadly defined) over a taxpayer or a project.

Taxpayer Implications: The FEOC rules will require taxpayers to confirm that projects and supply chains do not exceed the specified thresholds for sourcing equipment or components from prohibited foreign entities and to determine whether certain entities are owned or controlled by specified foreign entities. There are separate compliance obligations at both the project and taxpayer levels and significant penalties for noncompliance. There may be compliance issues with determining whether and when the foreign control rules apply. Although the new material assistance restrictions only apply to projects that begin construction after Dec. 31, 2025, the EO has created uncertainty about how beginning of construction will be determined. Other FEOC provisions generally apply to tax years beginning after July 4, 2025.

5. Transferability

Prior Law: Section 6418 allows for the transfer of energy credits, including Sections 48E, 45Y, 45X, 45Q, 45Z, and 45U, for cash to unrelated parties.

New Law: The Act maintains transferability but bars sales to ineligible buyers under the FEOC rules. It also adds a new transferable credit: the Section 40A small agri-biodiesel producer credit, which is extended through 2026 and doubled to 20 cents/gallon.

Taxpayer Implications: Taxpayers may continue to monetize credits efficiently through sales, but buyers and sellers should incorporate FEOC diligence into transfer transactions to ensure eligibility and avoid recapture or disallowance risks.

Employee Retention Credit

Prior Law: The employee retention credit (ERC) was a pandemic era credit that allowed a refundable tax credit for wages paid to employees if certain conditions were satisfied. The maximum credit for wages paid from March 13-Dec. 31, 2020, was $5,000 per employee, and for wages paid in the first, second, and third quarters in 2021, the maximum credit was $7,000 per employee per quarter ($21,000 maximum credit per employee for 2021). Employers were eligible to claim the ERC for wages paid in 2020 up until April 15, 2024, and for wages paid in 2021 up until April 15, 2025. There was no specific penalty for consultants who may have advised employers to file improper ERC claims. The statute of limitations for the IRS to audit an ERC for the third quarter of 2021 is April 15, 2027. In addition, if an ERC is claimed, the employer must amend its income tax return to reduce its deduction for wages paid by the amount of the ERCs claimed.

New Law: Due to the volume of improper ERC claims, some of which were aggressively marketed by ERC consulting firms, the Act makes several changes which apply only to ERC claims made for wages paid during the third quarter of 2021 but are not applicable to ERC claims for earlier quarters. The reason for this limited application of these changes is that the ERC for 2020 quarters and the first and second quarters of 2021 were credits against the employer’s share of Social Security taxes. On the other hand, the ERC for wages paid during the third quarter of 2021 are a credit against the employer’s share of Medicare tax. Under the special rules for a reconciliation bill to which the Act is subject, no matters regarding Social Security may be included in the legislation. Consequently, only ERCs claimed for wages paid during the third quarter of 2021 are affected by the following changes the Act makes:

• ERC claims for the third quarter of 2021 that were filed after Jan. 31, 2024, that have not already been paid are retroactively disallowed (even though the statute of limitations to file such ERC claims under the prior law was open until April 15, 2025).
• The statute of limitations for the IRS to audit ERC claims for the third quarter of 2021 is extended until six years from the time the IRS pays the ERC refund.
• The statute of limitations for an employer to amend its income tax return for the year the ERC was claimed is also extended to allow the employer to reinstate its deduction for the wages paid that generated the ERC (since the employer was not allowed to deduct wages, which generated the ERC). The extension to file the amended income tax return matches the extended statute of limitations for the IRS to clawback a third quarter 2021 ERC refund. Accordingly, if the employer must pay back some or all of its ERC claimed for the third quarter of 2021, it will still be able to file an amended income tax return to reinstate its deduction for wages paid.
• The IRS may assess a 20% penalty for improper third quarter 2021 ERC claims. However, it appears that this penalty may only be assessed for ERC refunds claimed on or after the Act’s July 4, 2025, effective date.
• Specific ERC promoter penalties may be assessed against ERC consultants for assistance in filing an improper ERC claim for the third quarter of 2021, however, it appears that these penalties are effective only for assistance rendered on or after the Act’s July 4, 2025, effective date.



Conclusion

The Act represents significant changes to the U.S. tax code that may affect businesses and individuals differently based on their specific circumstances. Treasury regulations and IRS guidance expected in the coming months may provide further clarity on these provisions’ implementation.