Federal Tax Reform Highlights: “One Big Beautiful Bill”

On July 4, 2025, President Trump signed into law landmark tax legislation, commonly known[1] as the “One Big Beautiful Bill” (the “OBBB”).  The new law makes permanent many of the taxpayer-favorable provisions from the Tax Cuts and Jobs Act of 2017 (the “TCJA”).  It also includes important changes from existing law, including several novel provisions, which are mostly beneficial to taxpayers.  Businesses, individuals, and tax practitioners need to understand these changes and incorporate them into their overall tax planning toolkit and compliance processes.  Taxpayers also need to plan for the myriad state and local tax implications that will flow from these federal changes.  And state policymakers, likewise, should be aware of these changes and their potential effects on state tax revenues.

While we will not endeavor to provide a comprehensive summary of all the bill’s tax provisions here, below are some major highlights and opportunities that warrant consideration.  The full text of the bill is available here.

Business Taxes

• 100% Bonus Depreciation Restored and Made Permanent: The OBBB permanently sets first-year “bonus” depreciation at 100% of the adjusted basis of qualified property.  (For example, qualified property generally includes property depreciated under MACRS with a recovery period of 20 years or less, certain computer software, and several other types of property.)  Under the TCJA, the bonus depreciation deduction was 40% for 2025 and was in the process of being phased down to 0% by 2027.  The new 100% bonus depreciation provision generally applies to qualified property under Section 168(k) acquired after January 19, 2025 (the day before President Trump’s inauguration).
• • Extension of 100% Bonus Depreciation to Certain Real Property Used in Manufacturing:
    • New Section 168(n) allows a 100% depreciation deduction for “qualified production property” in the year it is placed in service. Qualified production property must be nonresidential real property used by the taxpayer as an integral part of certain manufacturing or similar activities.  This applies to property that would not be covered by Section 168(k) bonus depreciation.
    • The original use of the qualified production property must generally begin with the taxpayer, and construction of the property must generally begin after January 19, 2025 and before January 1, 2029. However, an exception to these requirements is available for certain property purchased from an unrelated party.
    • The new deduction is subject to recapture if the taxpayer ceases to use the property as an integral part of a qualified production activity within 10 years of the property being originally placed in service.

ZHF Observation:  Permanent Section 168(k) bonus depreciation and the new Section 168(n) deduction for qualified production property provide a welcome incentive for businesses to continue investing in their domestic operations.  Businesses considering the purchase or construction of new manufacturing facilities should carefully assess whether the facility qualifies under Section 168(n).

• Immediate Expensing for Domestic Research and Development:
  • Under the TCJA, taxpayers were required to capitalize and amortize most qualified research or experimental expenditures over a 5-year period for domestic activities and a 15-year period for non-U.S. activities. The OBBB allows immediate expensing for domestic research and experimental expenditures paid or incurred after December 31, 2024—another major win for businesses.
  • Small businesses with average annual gross receipts of less than $31 million can elect to retroactively apply the immediate-expensing rule to qualified expenditures paid or incurred after December 31, 2021.
  • The 15-year amortization requirement still applies to research and experimental activities performed outside the U.S.

• Business Interest Deduction Cap Changes:
  • Under existing law, Section 163(j) imposes limits on the amount of interest expense that businesses may deduct. The deduction is capped at the sum of business interest income, floor-plan financing interest (most relevant for automobile dealers), and 30% of adjusted taxable income.
  • The OBBB amends the definition of “adjusted taxable income” for purposes of the deduction so that depreciation, amortization, and depletion are not accounted for, thus increasing the potential deduction for businesses. In other words, adjusted taxable income, under the OBBB, is computed based on an EBITDA-like formula, reversing a 2022 change that required the use of EBIT-like formula.
  • In addition, the definition of “motor vehicle” for floor-plan financing interest purposes was modified to include certain trailers or campers designed to provide temporary living quarters for recreational, camping, or seasonal use and designed to be towed by, or affixed to, a motor vehicle. This provision will benefit recreational vehicle dealers.
  • The above changes apply for tax years beginning after December 31, 2024.
  • However, for tax years beginning after December 31, 2025, capitalized interest will generally count toward the business interest deduction limitation (subject to certain exceptions), limiting the benefit of the adjustment to the deduction cap calculation for taxpayers with capitalized interest.
  • Additionally, for tax years beginning after December 31, 2025, the definition of “adjusted taxable income” will be modified to limit the amount of the business interest deduction for certain taxpayers with foreign earnings. Specifically, subpart F income and net CFC tested income (“NCTI”) (formerly known as “GILTI,” as discussed below), along with associated Section 78 gross-ups, will not be included in adjusted taxable income for purposes of Section 168(j).  This will mean a tighter business interest deduction cap for businesses with those types of foreign income.

ZHF Observation:  While the OBBB generally makes the business interest deduction cap more favorable for taxpayers, the changes related to capitalized interest, NCTI, and subpart F income will limit the benefits for many.  Taxpayers should pay close attention to the business interest deduction limitation when making interest-capitalization decisions and when structuring foreign operations that could result in NCTI or subpart F income.

• Section 199A Qualified Business Income Deduction Made Permanent: The OBBB makes permanent the Section 199A deduction, which is equal to up to 20% of qualified business income (“QBI”) earned by partnerships, S corporations, and sole proprietorships.  The legislation also increases the deduction limit phase-in thresholds for a specified service trade or business (“SSTB”) from $50,000 to $75,000 for single filers and from $100,000 to $150,000 for joint filers, subject to inflation adjustments.  And it introduces a new requirement that a taxpayer have at least $1,000 in “active” QBI from a trade or business in which the taxpayer materially participates to claim the deduction.  These changes are effective for tax years beginning after December 31, 2025.

ZHF Observation:  Corporations received a permanent tax cut under the TCJA, and the qualified business income deduction was intended to provide an approximately similar tax cut for businesses conducted through pass-through or disregarded entities.  However, because the Section 199A deduction was not permanent under prior law, there was a risk that the TCJA’s most significant tax benefits would be limited to corporate taxpayers in the long run.  By making Section 199A permanent, the OBBB helps to maintain broad parity between pass-through or disregarded entities and corporations and to preserve the attractiveness of pass-through structures.

• Section 179 Depreciation Deduction Increase: The OBBB increases the maximum amount of the immediate expensing deduction for certain business property.  For property placed in service during taxable years beginning after December 31, 2024, the maximum deduction is $2.5 million (up from $1.25 million under prior law, as adjusted for inflation in 2025), subject to a phasedown for property in excess of $4 million (up from $3.13 million inflation-adjusted for 2025).  The statutory maximum deduction and phasedown threshold will continue to be adjusted for inflation after 2025.
• Enhanced Section 1202 Stock Exclusion:  The Section 1202 exclusion has increased for a noncorporate taxpayer’s gain on the sale of qualified small business stock (“QSBS”) acquired after July 4, 2025. Generally, for QSBS that is held for at least four years, the exclusion increases from 50% to 75% of the gain, and for QSBS held for at least five years, it increases to 100%.  The OBBB also increases the aggregate gross asset limit used in determining QSBS status and increases the amount of eligible 1202-excluded gain per issuer.

ZHF Observation:  The changes to section 1202 may make QSBS structures more attractive to certain businesses relative to pass-through structures that would avoid double taxation on earnings.  The decision of whether to use QSBS requires careful forecasting, cost-benefit analysis, and planning at the time the entity is created.

• Excess Business Loss Limitation Made Permanent: The OBBB makes permanent the prohibition on noncorporate taxpayers deducting “excess business losses.”  This limitation was previously scheduled to expire for tax years beginning after 2028.  Excess business losses are generally equal to the excess of trade or business deductions over the sum of (1) gross income or gain attributable to such trade or business and (2) a statutory inflation-adjusted dollar amount ($313,000 for 2025).
• Percentage of Completion Method Exception for Certain Residential Construction: The OBBB eliminates the requirement to use the percentage-of-completion method of accounting for certain residential construction contracts entered into in taxable years beginning after July 4, 2025.

ZHF Observation:  This change is primarily targeted at developers of large residential complexes, who should benefit as a result.  Prior law generally provided an exception to the percentage-of-completion method for buildings containing four or fewer dwelling units.  Now, larger residential construction projects can fully benefit from alternative tax accounting methods (such as the accrual method or completed-contract method).  Previous law generally demanded that they use the percentage-of-completion method for 70% of the contract.

• REIT Subsidiary Asset Test: For taxable years beginning after December 31, 2025, the limitation on the amount of securities that can be held by taxable real estate investment trust (“REIT”) subsidiaries is increased from 20% to 25% of the value of the REIT’s total assets.
• New 1% Floor on Corporate Charitable Deductions: The OBBB imposes a new floor on the minimum amount of charitable contributions that a corporation must make in order to claim a deduction.  The deduction is only available to the extent that aggregate contributions exceed 1% of the corporation’s taxable income. The existing cap on charitable contributions in excess of 10% of corporate taxable income continues to apply as well.  Disallowed deductions under the floor or above the cap can be carried forward for up to five years.
• Maybe Next Time? Notable corporate tax proposals not included: 
  • Corporate Income Tax Rate: Some commentators and legislators had advocated for a decrease or increase to the federal corporate income tax rate of 21%.  The OBBB leaves this rate in place.
  • Corporate Alternative Minimum Tax: The OBBB leaves largely untouched the burdensome corporate alternative minimum tax (“CAMT”) enacted in 2022.  This complex alternative tax regime only applies to the very largest corporations, and it has somewhat limited revenue-raising potential despite the complex compliance efforts required for corporations who are subject to it.  Some had called for its repeal, but the CAMT survives the OBBB unscathed.
  • Public Law 86-272: A darling (or nemesis) of many state-tax practitioners, Pubic Law 86-272 (codified at 15 U.S.C. §§ 381–384) is a federal provision that limits the ability of states to impose net income taxes on out-of-state taxpayers whose only in-state activity is the solicitation of orders for tangible personal property, under certain conditions.  The House version of the OBBB had included a definition of “solicitation” that was intended to breathe new life into Public Law 86-272 and restrict state taxation on out-of-state businesses.  However, this provision was dropped in final version of the OBBB, which did not address Public Law 86-272.

ZHF Observation:  Several states have adopted increasingly narrow interpretations of Public Law 86-272 in recent years.  Without clearer guidance from Congress, it is likely that Public Law 86-272 will be a continued source of costly litigation and uncertainty for taxpayers for years to come.  For additional detail about Public Law 86-272, click here.

Provisions for Individuals

• Permanent TCJA Tax Rates: The OBBB makes permanent the individual income tax rate cuts enacted by the TCJA, which were set to expire at the end of this year.  The legislation also made favorable changes to the inflation adjustments used to determine tax brackets.
• Permanent TCJA Standard Deduction Increase: The increased standard deduction amounts enacted by the TCJA are made permanent, and the inflation-adjustment method for the standard deduction has been modified.  For 2025, standard deduction rates are increased to $31,500 for joint filers, $23,625 for heads of household, and $15,750 for single filers or married taxpayers filing separately.
• Personal Exemption Permanently Eliminated; New Senior Deduction: The personal exemption is permanently eliminated.  However, a new deduction was added for certain individual taxpayers aged 65 or older who may qualify for a deduction of up to $6,000 per qualified individual for tax years beginning before January 1, 2029.

• SALT Deduction Cap Increase: One of the most hotly contested provisions in the OBBB was its change to the cap on the deduction for state and local taxes (the “SALT deduction”).  The new law temporarily increases the TCJA’s $10,000 SALT deduction cap to $40,000 for 2025.  In each subsequent year through 2026, the cap will increase by 1% annually.  In 2030, the cap is scheduled to revert to $10,000.  The increased SALT deduction cap will also phase down for taxpayers with modified adjusted gross income (“MAGI”) over $500,000 (adjusted for inflation after 2025) by 30% of the amount by which the taxpayer’s MAGI exceeds the threshold.  However, in no event will the deduction cap phase down below $10,000.

ZHF Observation:  Previous versions of the bill included proposals that would have substantially limited certain businesses’ ability to claim the SALT deduction.  Some of these proposals would have disallowed the deduction entirely for SSTBs, which include accountants, lawyers, doctors, and many other professionals.  Further, other proposals would have limited or eliminated the ability of pass-through entities to elect into state pass-through entity tax regimes, commonly referred to as “SALT cap workarounds.”  Some lawmakers also discussed the possibility of limiting the SALT deduction for corporate taxpayers.  None of these provisions were included in the final legislation.

Now that the SALT deduction cap has been increased, policymakers in some states may push for new tax increases.  If this occurs, taxpayers will effectively have their federal tax burden shifted to the state level.  It remains to be seen whether the increased federal deduction cap will spur states to adopt tax increases.

• Increased Estate and Gift Tax Exclusion Made Permanent: The OBBB sets the estate and lifetime gift tax exclusion at $15 million for decedents dying or gifts made after December 31, 2025.  The exclusion will be indexed for inflation after 2026.  The TCJA had doubled this exemption (which is $13.99 million for 2025 after inflation adjustments), but the increased exemption had been scheduled to expire and be cut in half at the end of 2025.
• Individual Alternative Minimum Tax Exemption Made Permanent; Phaseout Threshold Modified: The TCJA’s increase to the exemption for individual alternative minimum tax (“AMT”) is now permanent.  However, for tax years beginning after December 31, 2025, the phaseout threshold for the exemption is reduced to its 2018 level of $500,000 for single taxpayers ($1 million for joint filers), which will be indexed for inflation in future years, and the phaseout rate is increased from 25% to 50% of the amount by which alternative minimum taxable income exceeds the threshold.
• Mortgage Interest Deduction: The mortgage interest deduction is permanently limited to the first $750,000 in home mortgage acquisition indebtedness (rather than the pre-TCJA $1 million limitation).

ZHF Observation:  As home prices continue to rise, this change will affect more taxpayers, especially in parts of the country where even modest homes may sell for well over $750,000.

• Permanent Repeal of Most Casualty and Theft Loss Deductions: The OBBB makes permanent the TCJA’s limitation of personal casualty losses to losses attributable to a federally declared disaster.  However, the exemption is now also available for certain state-declared disasters.
• Permanent Elimination of Miscellaneous Itemized Deductions Other than Educator Expenses: The TCJA’s suspension of miscellaneous itemized deductions is made permanent.  Unreimbursed educator expenses, however, are made eligible for their own itemized deduction under Section 67(b).

ZHF Observation:  Permanently suspending miscellaneous itemized deductions will make litigation more expensive for some individual plaintiffs.  While personal attorney’s fees were previously deductible in many cases before the TCJA, subject to the 2%-of-AGI floor, they will now permanently be nondeductible in many cases.  Unless another specified deduction or exclusion from income applies (such as the deduction for expenses incurred in the ordinary course of a trade or business or the deduction for attorney’s fees in certain cases involving unlawful discrimination), personal attorney’s fees will continue to be nondeductible for the foreseeable future.

• Elimination and Replacement of “Pease Limitation”: The overall limitation on itemized deductions under Section 68 (known as the “Pease Limitation”), which had been suspended under the TCJA, is eliminated.  Under this pre-TCJA rule, itemized deductions for individuals with adjusted gross income (“AGI”) over a threshold amount were reduced by the lesser of 3% of such excess or 80% of the otherwise allowable itemized deductions.  Instead, a new limitation will be enacted for tax years beginning after December 31, 2025.  Itemized deductions must be reduced by 2/37 of the lesser of the otherwise allowable amount of the deductions or of the taxpayer’s taxable income that exceeds the dollar amount at which the 37% tax bracket applies.

ZHF Observation:  Notably, the Section 199A deduction for QBI is not subject to this new 2/37 limitation.  This exception will allow business owners to enjoy the full benefit of the Section 199A deduction.

• New Gambling Loss Limitation: For tax years beginning after December 31, 2025, the deduction for wagering losses is newly limited to 90% of losses from wagering transactions, and such losses are only deductible to the extent of gains from wagering transactions during the year.

ZHF Observation:  The inability to fully deduct gambling losses has already drawn widespread scrutiny.  This deduction would appear to tax gamblers on “gains” that they arguably have not received.  One Nevada legislator has already introduced a bill in an attempt to restore the full gambling loss deduction.  But for now, gambling just got riskier.

• Restored Car Loan Interest Deduction for Qualifying New Vehicles: The OBBB makes certain personal automobile loan interest deductible up to $10,000 (subject to a phaseout beginning at MAGI of $100,000 for single filers or $200,000 for joint filers).  Importantly, the final assembly of the vehicle must occur within the U.S.  Lenders will be required to file information returns reporting interest received on qualified loans.  The deduction is available for non-itemizers.  The indebtedness must be incurred after December 31, 2024 and secured by a first lien on an applicable passenger vehicle for personal use.  The deduction is scheduled to expire at the end of 2028.  Used vehicles are not eligible.

ZHF Observation:  Consumers and lenders may have difficulty determining whether “final assembly” of a vehicle occurred in the U.S.  In the context of clean vehicle credits, the IRS has previously published lists of eligible vehicles, and it is possible that similar guidance will be issued for purposes of this deduction.

• New Deduction for Tips (“No Tax on Tips”):
  • The OBBB creates a new deduction (Section 225) for individuals receiving qualified cash tips in an occupation where tipping was customary prior to January 1, 2025. The IRS is required to publish a list of eligible occupations within 90 days of the OBBB’s enactment.  Both employees and independent contractors can be eligible for the deduction.
  • The maximum deduction is $25,000, and it phases out beginning at MAGI of $150,000 for single filers ($300,000 for joint filers).
  • The deduction is available for tax years beginning after December 31, 2024 and will expire for tax years beginning after December 31, 2028.
  • This is an above-the-line deduction, meaning it is available for non-itemizers and can be claimed in addition to the standard deduction.

ZHF Observation:  Enhanced reporting procedures and withholding adjustments for tipped workers will require careful compliance from employers and other reporting entities.  For cash tips required to be reported for periods before January 1, 2026, reporting entities are permitted to use reasonable methods to approximate designated tip amounts for reporting purposes.  Employers should work with tax professionals to develop supportable methods for tracking and approximating 2025 tips before the end of this year and should prepare for more robust reporting requirements beginning in 2026.

• New Deduction for Overtime (“No Tax on Overtime”):
  • Similar to the deduction for tips, the OBBB adds a new deduction (Section 226) for qualified overtime compensation.
  • Single taxpayers can deduct up to $12,500 per year, and joint filers may deduct up to $25,000. The deduction begins to phase out for at MAGI of $150,000 for single filers or $300,000 for joint filers.
  • The deduction is available for tax years beginning after December 31, 2024 and will expire for tax years beginning after December 31, 2028.
  • This is an above-the-line deduction, meaning it is available for non-itemizers and can be claimed in addition to the standard deduction.
  • To be deductible, overtime must be separately reported on Form W-2 for employees or on Form 1099 for independent contractors. For overtime required to be reported for periods before January 1, 2026, reporting entities are permitted to use reasonable methods to estimate and report overtime.

ZHF Observation:  As above-the-line deductions, the deductions for tips and overtime will affect the majority of states, which use federal AGI as a baseline for calculating state income tax liability, if such states choose to conform to the updated federal tax law.  State policymakers will need to evaluate the revenue effects and administrative burdens of these deductions before deciding whether to conform with or decouple from them.

Federal Tax Credits

• Curtailing Certain IRA Clean-Energy Credits:
  • The OBBB places many of the Biden administration’s clean-energy tax credits on the chopping block. Various incentives added or expanded under the Inflation Reduction Act of 2022 (the “IRA”) are now scheduled for an early expiration, including:
    • Clean-Vehicle or Clean Fuel Credits
      • Credits for previously owned, new or commercial clean vehicles (under Sections 25E, 30D, and 45W) are set to expire in just a couple of months: September 30, 2025.
      • The Section 30C credit for alternative fuel vehicle refueling property (e.g., electric vehicle charging stations) will expire on June 30, 2026.
      • The sustainable aviation fuel credit of Section 6426(k) expires September 30, 2025.
      • However, the Section 45Z clean fuel credit is extended from its original 2027 expiration date through December 31, 2029. The OBBB limits the credit to fuels derived from feedstocks produced or grown in the U.S., Mexico, or Canada.
    • Credits (and One Deduction) for Energy-Efficient Homes or Buildings
      • Energy-efficient home improvement and residential clean energy credits (Sections 25C and 25D) expire December 31, 2025.
      • The energy-efficient commercial buildings deduction of Section 179D expires for property that begins construction after June 30, 2026.
      • The Section 45L new energy-efficient home credit also expires on June 30, 2026.
    • Clean Electricity Production and Investment Credits
      • The Section 45Y clean electricity production credit and the Section 48E clean electricity investment credit will expire for wind and solar facilities placed in service after December 31, 2027 (unless construction of the facility begins within 12 months of the OBBB’s enactment).
      • For other qualifying projects, the Section 45Y and 48E credits will begin to phase out for facilities that begin construction in 2034 and will completely phase out for construction beginning in 2036 or later.
    • Advanced Manufacturing Production
      • The Section 45X advanced manufacturing production credit terminates for wind energy components produced and sold after December 31, 2027. The credit for most critical minerals is subject to a phaseout beginning in calendar year 2031, reaching 0% for applicable critical minerals produced in 2034 or later.
    • Clean Hydrogen Production
      • The Section 45V clean hydrogen production credit is set to expire for contracts beginning construction after December 31, 2027.
  • Restrictions for Specified Foreign Entities: The OBBB also restricts “foreign entities of concern” (“FEOCs”) and other specific foreign entities from directly or indirectly receiving the benefits of many IRA credits.  An FEOC is, broadly speaking, an entity owned, controlled, or subject to the jurisdiction or direction of the government of a covered nation (China, Russia, Iran, or North Korea).  Control need not be achieved through direct ownership and can even exist as the result of a contractual relationship between unrelated entities in certain cases.  Restricted IRA credits include Section 45Q (carbon oxide sequestration credit), Section 45U (zero-emission nuclear power credit), Section 45Y (clean energy production credit), Section 45X (advanced manufacturing production credit), Section 45Z (clean fuel production credit), and Section 48E (clean energy investment credit).  Taxpayers are also disallowed from transferring these credits to such foreign entities in exchange for cash, as had previously been allowed under Section 6418.

ZHF Observation:  Taxpayers planning projects that benefit from these IRA credits need to carefully plan around these new deadlines and the FEOC restrictions.  This may require careful attention to, and documentation of compliance with, the IRS’s guidance for determining the “start of construction” on affected projects.  See generally IRS Notice 2013-29.  Diligence to ensure compliance with foreign-entity restrictions will also be essential.

• Advanced Manufacturing Investment Credit Increase (Section 48D): The rate of the Section 48D credit (also known as the “CHIPS credit”) is increased from 25% to 35% for qualifying property placed in service after December 31, 2025.  This credit relates to investments in qualifying facilities primarily focused on the manufacture of semiconductors or semiconductor manufacturing equipment.
• Employee Retention Credit Processing and Enforcement:
  • The OBBB prohibits the IRS from issuing any new Employee Retention Credit (“ERC”) refunds unless the claim for the refund was filed on or before January 31, 2024.
  • The limitations period for assessments arising from erroneous ERC claims is also generally extended to 6 years after the date on which the claim was made.
  • The new law defines “COVID-ERTC promoter[s]” and imposes certain due diligence requirements on them. Such promoters are subject to penalties for failure to comply with the diligence rules and for excessive refund claims.

ZHF Observation:  Many employers made ERC claims and received a refund based on aggressive interpretations of whether their businesses were partially suspended by a governmental order.  We continue to urge taxpayers to review whether their ERC claims were appropriate and well-documented.  If the IRS disallows ERC claims in the extended limitations period, the resulting interest and penalties could be substantial.

• Permanent New Markets Tax Credit: The New Markets Tax Credit (Section 45D), a credit related to certain investments in distressed communities through qualified Community Development Entities, is now made permanent.  The credit was scheduled to expire at the end of 2025 under previous law.

• Permanent Opportunity Zones Incentives: The OBBB also makes permanent federal opportunity zones, which were first enacted under the TCJA and were set to expire at the end of 2025.  Like the New Markets Tax Credit, the opportunity zone program is designed to encourage investment in low-income communities.  Qualified investments in opportunity zones are eligible for certain federal tax benefits, including income exclusions or deferrals.  The OBBB did, however, narrow the definition of “low-income community” and made other changes that could reduce the number of opportunity zones.
• Permanent Low-Income Housing Tax Credit Enhancement: The state allocation ceiling for the low-income housing tax credit (“LIHTC”) is increased by 12% beginning in 2026.  This increases the aggregate per-capita amount of LIHTCs that states can award.  In addition, the private activity bond-financing threshold has generally been lowered from 50% to 25% for properties placed in service after December 31, 2025.  The lower threshold will make it easier for projects to qualify for the LIHTC.
• Permanent Credit for Paid Family and Medical Leave: Section 45S has been amended to make permanent the employer credit for paid family and medical leave, which had been scheduled to expire at the end of 2025.  This is a credit available for employers who pay at least 50% of an employee’s normal wages under a qualified written policy that provides at least two weeks of annual paid family and medical leave for full-time qualifying employees (and a prorated amount of leave for part-time employees).  The credit ranges from 12.5% to 25% of the wages paid to employees on leave.

• Enhanced Employer-Provided Child Care Credit: The Section 45F credit for employer-provided child care is increased and expanded for amounts paid or incurred after December 31, 2025.  The credit for “qualified child care expenditures” increases from 25% to 40% for most businesses and to 50% for eligible small businesses.  The maximum amount of the credit will also increase from $150,000 to $500,000 for most businesses and $600,000 for eligible small businesses (adjusted for inflation).  The credit will also be expanded to cover certain third-party intermediary arrangements and jointly owned or operated child care facilities.

International Tax Changes

• Changes to GILTI and FDII: The OBBB makes several significant changes to the “global intangible low-taxed income” (“GILTI”) and “foreign derived intangible income” (“FDII”) regimes enacted under the TCJA.
  • Under current law, the effective GILTI tax rate is 10.5%, but this was scheduled to increase to 13.125% in 2026. The OBBB sets the GILTI deduction under Section 250 at 40% of GILTI, resulting in an effective rate of 12.6% for tax years beginning after December 31, 2025.  The deemed paid credit for foreign taxes also increased from 80% to 90%, meaning that there will generally be no residual U.S. tax to the extent the foreign tax rate is at least 14% (14*0.9=12.6), assuming a full foreign tax credit is available.  Similarly, the effective FDII rate, which was scheduled to increase from 13.125% to 16.4% will now be 14% for tax years beginning after December 31, 2025 as a result of the OBBB.
  • For such tax years, both GILTI and FDII will be calculated without respect to the deemed return on tangible property. In other words, the “qualified business asset investment” (“QBAI”) concept is eliminated from both regimes.
  • Consistent with the elimination of QBAI, both GILTI and FDII have undergone name changes as they are no longer solely targeted at “intangible” income. GILTI is renamed “net CFC tested income” or “NCTI,”, and FDII is renamed “foreign derived deduction eligible income” (“FDDEI”).
  • Further, various rules related to NCTI and the calculation of the foreign tax credit and expense allocations have been modified, as have certain rules related to the calculation of deduction eligible income for FDDEI.

ZHF Observation:  The change from GILTI to NCTI will also cause state tax complications for many taxpayers.  These modifications to the international tax regime at the federal level are likely to cause unintended ripple effects in the 21 states that have wholly or partially incorporated GILTI into their corporate tax bases.  States that automatically conform to federal tax changes will immediately make the switch from GILTI to NCTI, while others will continue to use GILTI unless and until state legislation adopts the new NCTI regime.  Additionally, because states generally do not allow a foreign tax credit, the elimination of QBAI and the increased reliance on foreign tax credits at the federal level may lead to harmful state tax outcomes unless policymakers take steps to prevent these unanticipated state tax increases.

• Reduced Increase in BEAT Rate: The base erosion and anti-abuse tax (“BEAT”) rate was previously scheduled to increase from 10% to 12.5%.  Under the OBBB, the BEAT rate will only increase to 10.5% for taxable years beginning after December 31, 2025.
• Changes for CFCs: The OBBB enacts several notable changes for controlled foreign corporations (“CFCs”).  While a full discussion of these is outside our scope here, some highlights include (1) making the CFC look-through rule of Section 954(c)(6) permanent, (2) reinstating Section 958(b)(4)’s downward attribution prohibition and replacing it with a significantly narrower attribution rule (new Section 951B), (3) expanding subpart F’s pro rata share rules to U.S. shareholders that hold CFC stock at any time during the year rather than solely at year-end, and (4) eliminating CFCs’ ability to elect a taxable year beginning one month earlier than their majority U.S. shareholder’s tax year.
• Foreign Tax Credit Sourcing for Sale of Inventory Produced in the U.S.: The OBBB allows up to 50% of income from the sale or exchange of eligible inventory to be treated as foreign-source for purposes of the foreign tax credit if the inventory is produced in the U.S., is sold by a foreign branch of a U.S. taxpayer for use outside the U.S., and meets other requirements.  This provides a more favorable foreign tax credit limitation for eligible taxpayers who sell U.S.-produced inventory abroad.  The change applies for tax years beginning after December 31, 2025.
• No “Revenge” Tax: Prior versions of the OBBB had included a retaliatory tax (proposed Section 899) targeted at foreign countries deemed to be enforcing discriminatory taxes against the U.S.  These proposals would have imposed an additional tax on the U.S. income of foreign entities, individuals, or governments from applicable countries.  This provision was removed from the final version of the OBBB.

ZHF Observation:  The OBBB’s international tax provisions are significant and complex.  While the NCTI rate is more favorable than the increased GILTI rate that was scheduled to go into effect under the TCJA, the OBBB’s net overall tax benefit or detriment for multinationals will be highly fact-specific.  Affected taxpayers should carefully review their corporate structures for risks and opportunities.  Moreover, state tax complications that may arise from these changes should not be overlooked.

Conclusion

Unlike the TCJA, which passed in December 2017, the OBBB’s July passage gives taxpayers more time to plan around new rules going into effect at the end of this year—or sooner in some cases.  The time to begin planning to maximize the benefits and mitigate any disadvantages is now.

All taxpayers should carefully assess this legislation and incorporate it into their federal and state tax planning strategies.  While most of its landmark provisions involve the extension of the TCJA, the OBBB does introduce significant new tax concepts that will require the attention of businesses and individual taxpayers alike.

We will continue to monitor forthcoming regulatory guidance that is likely to be issued to implement the OBBB, as well as the ways that state policymakers may respond to the evolving federal tax landscape.  If you would like to discuss these changes or how they apply to your business, please reach out to one of our ZHF professionals.

[1] While this title was technically removed from the final version of the legislation, we continue to refer to it as the OBBB for convenience.