Tax Bill Proposes Trillions in Tax Cuts and Significant Tax Increases

By Jeffrey H. Paravano & Peter J. Roskam on May 15, 2025

Key Takeaways:

The House Ways & Means Committee completed its Markup of tax legislation May 14, 2025, and the House plans to vote on the bill next week.
The Markup includes nearly $6 trillion in tax cuts and approximately $2 trillion in tax increases, including a surprising attack on existing SALT cap workarounds targeting pass-through entity owners.
Material tax changes are expected to affect nearly every sector of the economy and every type of taxpayer, including individuals, corporations, pass-through entities and tax-exempt organizations.

The race to remake portions of the Internal Revenue Code (Code) and to prevent expiration of certain Tax Cuts and Jobs Act (TCJA) provisions has begun, with House Ways & Means Committee proposals (the Markup) to spend approximately $3.8 trillion during the 10-year budget window by cutting nearly $6 trillion in taxes and paying for some of those tax cuts with nearly $2 trillion of tax increases. If all of the changes in the Markup were made permanent, the net cost during the 10-year budget window would rise to approximately $5.3 trillion, excluding additional projected interest costs. The Markup is intended to comply with the fiscal year 2025 reconciliation directive and next moves to the House Budget Committee, where it will be combined as early as tomorrow with provisions passed by other House committees, and then to the Rules Committee, where additional changes will be made. House leadership expects the legislation to pass the House before its Memorial Day recess.

The Senate is expected to address tax reconciliation issues in early June; there will be a flurry of lobbying for changes during the next several weeks. Senate Finance Chair Mike Crapo has not yet committed to whether the Senate will hold its own markup or work more informally and then take the bill directly to the Senate floor. We anticipate that the Senate version will differ from the House bill (various senators have already raised issues with the House bill, including such items as energy credits, opportunity zone credits, AI regulation, Medicaid, child tax credits, international tax reforms, SALT cap (including surprising workaround limitations in the Markup), making current law extensions permanent), necessitating a conference on the differing approaches unless the House provides input during the Senate process and then decides to vote on the Senate-passed version without changes. Some House provisions will need to be dropped entirely to comply with the Byrd Rule, which generally prohibits items not germane to federal revenue from being included in a bill moving under budget reconciliation. Under those budget reconciliation rules, only a simple majority in the Senate and House will be required for passage. The stated goal of those working on the tax legislation is a presidential signing ceremony July 4.

The tax changes and extensions expected to be enacted include, among others, corporate, pass-through entity, individual, international, estate and gift, tax-exempt organization, energy, health care and tax credit provisions. The Markup, among other items, extends or makes permanent most of the expiring provisions of the TCJA; permanently extends lower tax rates on multinational corporations (GILTI, FDII and BEAT); allows domestic R&D expensing and bonus depreciation through 2029; modifies the standard deduction, individual tax brackets and Section 199A; phases out early or repeals certain Inflation Reduction Act renewable energy credits; provides a higher estate and gift tax exclusion; and adds various provisions promised by President Trump on the campaign trail, including eliminating taxes on tips and overtime and providing a bonus deduction for seniors. The Markup includes no proposed changes to carried interest or the corporate or capital gains tax rates, no reduced corporate rate for U.S. manufacturing, no repeal of the stock buyback tax, no repeal of the corporate alternative minimum tax, no limitation on corporate deductions of state or local taxes and does not extend the advanced premium tax credit for Affordable Care Act Marketplace health plans.

Research and Development

Since 2022, taxpayers have been required to capitalize and amortize U.S.-based research or experimental expenditures ratably over a five-year period and non-U.S.-based research or experimental expenditures ratably over a 15-year period. These include costs to develop or improve a product, including software. Examples of costs are the salaries of the persons engaged in the research or experimentation efforts, overhead incurred to operate and maintain the facility, and materials and supplies that are consumed in the course of the research or experimental activities. The requirement to capitalize and amortize these costs has been a source of contention since 2022.

The Markup would suspend the capitalization of domestic research or experimental expenditures for amounts paid or incurred in taxable years beginning after Dec. 31, 2024, and before Jan. 1, 2030. However, a taxpayer may elect to capitalize and amortize the expenditures by filing an election with its tax return. This is an important election for some taxpayers, who benefit more from FDII (which permanently lowers their tax rate) when they capitalize (a mere timing issue) research and development expenditures. Foreign research or experimental expenditures still must be capitalized and amortized over a 15-year period.

Bonus Depreciation

The Markup extends and modifies bonus depreciation, generally through tax year 2029, generally allowing 100 percent depreciation in the first year for property acquired and placed in service after Jan. 19, 2025. The Markup also makes permanent the percentage of completion method for allocation of bonus depreciation to long-term contracts.

Immediate Expensing for Qualified Production Property

The Markup contains a special provision for qualified production property, intended to encourage domestic manufacturing and production, that allows for the immediate expensing of costs up to $2.5 million to develop new manufacturing facilities or improve existing manufacturing facilities, with a phaseout threshold that begins to reduce the deductible amount when costs exceed $4 million. Under current law, up to $1 million may be expensed and the phaseout threshold amount is $2.5 million.

Qualified production property means the portion of any nonresidential real property (1) used as an integral part of a qualified production activity; (2) placed in service in the United States; and (3) whose original use begins with the taxpayer. The construction of the property must begin after Dec. 31, 2024, and before Jan. 1, 2030. Qualifying production activities include manufacturing, production or refining of tangible personal property. In addition, production is limited to agricultural and chemical production.

Business Interest Deductibility

Under the TCJA, Section 163(j) generally limited the amount of business interest that a taxpayer may deduct to 30 percent of its “adjusted taxable income” (ATI) – which generally corresponded to its EBITDA. However, for calendar years 2023 and beyond, the TCJA essentially defined ATI as EBIT, which had the impact of severely limiting interest deductibility (i.e., because depreciation and amortization deductions were required to be taken into account in determining the ATI number against which the 30 percent limitation was applied). The Markup brings back the “DA” by again equating ATI with EBITDA for calendar years 2024 through 2029.

The TCJA included permanent favorable rules for deducting business interest associated with the financing of dealership inventories, which was largely designed to benefit auto/truck, boat and farm machinery/equipment dealers. The Markup would extend that benefit to recreational vehicle dealers for calendar years 2025 and beyond.

FDII

The Markup seeks to maintain the attractiveness of the U.S. as a profit center for international distribution and the provision of global services by eliminating the FDII rate increase that was scheduled for calendar year 2026 (by decreasing the deduction to 21.875 percent; potentially increasing the effective rate on FDII to 16.406 percent) and making the existing FDII rate (13.125 percent) permanent.

BEAT

The Markup would repeal the scheduled increase in the base erosion and antiabuse tax (BEAT), which was scheduled to increase from 10 percent to 12.5 percent for tax years beginning after Dec. 31, 2025.

GILTI and Implications Regarding Pillar 1 and Pillar 2

The Markup makes clear by its silence, as expected, that the U.S. Congress believes Pillar 1 is dead and has no intention of aligning U.S. tax laws with Pillar 2. Treasury officials have stated that the U.S. tax system is robust enough that other countries should refrain from applying the 15 percent global minimum tax (Pillar 2) to any income that the U.S. taxes.

The old draft legislative text intended to help conform GILTI to Pillar 2 (i.e., a country-by-country approach from the draft Build Back Better Act) was rejected by the Markup, which makes only two changes to the GILTI regime. The first change would eliminate the rate increase that was scheduled for calendar year 2026, thus making the existing GILTI rate (10.5 percent) permanent. The second change would add “qualified Virgin Island services income” to the categories of income that are excluded from the definition of “tested income.” This second change, while ostensibly intended to preserve the benefits of tax incentives that the U.S. Virgin Islands offers to persons that create jobs by investing in the local economy (e.g., Economic Development Commission program participants), has a limited reach. It would apply only to “specified” U.S. shareholders, meaning individuals, trusts, estates or closely held C corporations that acquired interests in the relevant CFC before the end of 2023.

New Remedy Against Unfair Foreign Taxes

The Markup would add new Code Section 899, which picks up on and refines earlier legislative proposals from Chairman Smith and Ways & Means member Estes aimed at discouraging foreign countries from enacting and applying discriminatory, extraterritorial or similar taxes that disproportionately have a direct or indirect impact on U.S. persons. The new statutory provision specifically targets foreign countries that enact undertaxed profits rules, digital services taxes (DSTs), diverted profits taxes and similar measures, and, when applicable, the provision would generally modify the regular U.S. tax rates applicable to the governments of, and individuals and companies tax resident in, such “discriminatory foreign countries” by incrementally increasing the rate by 5 percentage points each year (but capping the overall increase at 20 percentage points). The statutory provision applies to all net basis and gross basis U.S. taxes that are potentially relevant to foreign persons (subject to a carve-out for foreign companies that are majority owned by U.S. persons), but does take into account U.S. tax treaty commitments. For example, if a tax resident of a foreign country with a DST earns U.S.-source fixed, determinable, annual and periodic income, then that income could at some point be subject to U.S. withholding taxes at rates potentially as high as 50 percent (i.e., the normal statutory rate plus up to 20 additional percentage points or, for tax residents of treaty partner countries, the applicable treaty rate plus up to 20 additional percentage points). The new statutory provision also would modify the application of the BEAT in relation to such foreign persons.

Proposed new Section 899 is a potential sledgehammer to be used in negotiations with U.S. trading partners – particularly those within the European Union, where the DST concept originated and where early Pillar 2 adoption was mandated. Given its significant revenue score (i.e., it is scored as raising over $116 billion over 10 years), new Section 899 is almost certain to be included in any final bill.

Modifications to Renewable Energy Provisions of the Inflation Reduction Act

The Markup phases out and in some instances repeals various renewable energy credits and provisions that were enacted as part of the Inflation Reduction Act of 2022. There are, however, indications that the Senate may treat renewable energy provisions more favorably than the House. What follows is a summary of the most significant changes.

Prohibited Foreign Entities

One modification that is uniformly made to nearly all the remaining renewable energy credits relates to preventing entities that are prohibited foreign entities from claiming credits. The modification is an attempt to prevent entities that are controlled or influenced by certain foreign persons and governments (i.e., the People’s Republic of China, North Korea, the Russian Federation and the Islamic Republic of Iran) and certain entities identified by the U.S. government (e.g., certain Chinese companies such as BYD Company Limited, EVE Energy Co. and entities in the Xinjiang Uyghur Autonomous Region that mine, produce or manufacture goods with forced labor) from economically benefiting from federal income tax credits. The Markup provisions are more expansive than other foreign entity of concern restrictions, and also apply where a prohibited foreign entity “materially assists” with the construction or production of renewable energy property eligible for credits under either Sections 45Y (clean electricity production tax credit) or 48E (clean electricity investment tax credits), or the manufacture of an eligible component under Section 45X (advanced manufacturing tax credits). The Markup should be carefully reviewed by any developer or owner of renewable energy property attempting to claim the 45Y or 48E credits, and manufacturers of eligible components attempting to claim the 45X credit, as the Markup could impact where taxpayers will source components from in the future. Sellers of credits also should consider what the provisions will mean when selling credits to a buyer.

Clean Fuel Production Credit – Section 45Z

The clean fuel production credit under Section 45Z would be modified by the Markup to require feedstocks be produced or grown in the United States, Mexico or Canada. Previously, there were no sourcing requirements with respect to feedstocks, and clean fuel producers were therefore able to import feedstocks such as sugar cane from abroad. The Markup also contains amendments to the greenhouse gas emissions requirements for land use changes and emissions rates for animal manure used as a feedstock. Finally, the Markup extends the clean fuel production credit to Dec. 31, 2031, which aligns it with the modified phaseout and expiration dates made to other credits.

Clean Electricity Production Credit and Investment Tax Credit – Sections 45Y and 48E

The Markup would modify the expiration dates for the clean electricity production credit and the clean electricity investment tax credit and replace them with a phaseout concept. All energy property placed in service after Dec. 31, 2028, would face a phaseout of 80 percent in calendar year 2029, 60 percent in calendar year 2030 and 40 percent in calendar year 2031, with a complete phaseout in calendar year 2032.

As noted above, both credits would also be modified by the Markup to prevent prohibited foreign entities from claiming the credits and also to limit a project’s ability to qualify for the credit if the project received material assistance from a prohibited foreign entity.

Nuclear – Section 45U

Similar to the clean electricity production and investment tax credits, the zero-emission nuclear power production credit under Section 45U would be phased out by the Markup in taxable years beginning after Dec. 31, 2028.

Advanced Manufacturing Production Tax Credit – Section 45X

The Markup proposes to move up the complete phaseout of the advanced manufacturing production tax credit under Section 45X to 2032, meaning eligible components sold after Dec. 31, 2031, would not receive any advanced manufacturing production tax credits. In addition, wind energy components sold after Dec. 31, 2027, would no longer be eligible for an advanced manufacturing production tax credit.

Portions of the Inflation Reduction Act Repealed

While the Markup’s proposed net changes to provisions of the Inflation Reduction Act raise $515 billion of revenue, many expect changes in the Senate that may decrease that number. The Markup would repeal the Section 25E credits for previously owned clean vehicles, the Section 30D clean vehicle credit, the Section 45W commercial clean vehicle credit, the Section 30C alternative fuel vehicle refueling property credit, the Section 25C energy efficient home improvement credit, the Section 25D residential clean energy credit, the Section 45L new energy efficient home credit, and the clean hydrogen production credit under Section 45V. The repeals, with limited exceptions, are proposed to be effective for vehicles and property acquired after Dec. 31, 2025.

The Markup also would repeal the ability to transfer certain renewable energy credits one time in exchange for cash. The repeal would generally be effective for property construction that begins or that is produced or sold two years after the date the proposed legislation is enacted.

SALT Cap and Surprising Attack on Most SALT Cap Workarounds

The Markup would nominally triple the cap on deductions for state and local taxes (SALT Cap) but also imposes numerous additional caveats and burdens that would leave many taxpayers worse off under the Markup rules than they were in calendar year 2024. Currently, a taxpayer’s deduction for state and local taxes generally is capped at $10,000. The Markup proposes to raise the SALT Cap to $30,000 for taxpayers ($15,000 for taxpayers who are married filing separately), with significant new restrictions and caveats.

To the extent a taxpayer’s modified adjusted gross income (MAGI) is greater than $400,000 (or $200,000 in the case of taxpayers who are married filing separately), the proposed SALT deduction is reduced by 20 percent of the taxpayer’s MAGI above $400,000 (or $200,000 in the case of taxpayers filing separately). The reduction would not phase down below the current cap of $10,000 for most taxpayers (or $5,000 for a married taxpayer filing separately). The new SALT Cap would apply permanently for taxable years after Dec. 31, 2025.

The Markup also proposes various changes to prevent various types of well-known SALT Cap workarounds and also grants the secretary of the Treasury regulatory authority to prevent most SALT Cap avoidance efforts. Shockingly, the Markup would, for example, disallow deduction of “disallowed specific income taxes” at the entity level for partnerships and S corporations (exceptions apply for qualified trades or businesses within the meaning of Section 199A(d)). If the Markup in its current form becomes law, 2025 would be the last year individuals would benefit from pass-through entity tax workarounds many partnerships and S corporations have put in place in recent years (generally with IRS approval) – significantly increasing the effective federal tax rate of many partners and S corporation shareholders.

There is great dissatisfaction among some congressmen with the proposed SALT Cap changes, including the surprising attack on workarounds targeting pass-through entity owners. This proposal is expected to be adjusted before the House vote on the Markup.

State Income Tax Nexus Protection (Public Law 86-272)

Some were hoping that the Markup would modernize and expand Public Law 86-272’s protections from state income taxes, which has remained unchanged since 1959. In short, Public Law 86-272 prevents states from imposing net income taxes on businesses whose only contact with the state is the solicitation of orders for tangible personal property. An increasing number of states have taken the position that Public Law 86-272 does not protect companies operating a modern website and conducting other virtual activities. Public Law 86-272 modernization protections likely were left out of the Markup because their inclusion would not comply with the Senate Byrd Rule.

Section 199A

As background, Section 199A provides a non-corporate taxpayer a deduction for up to 20 percent of (i) “qualified business income,” including from pass-through entities, (ii) certain real estate investment trust (REIT) dividends, and (iii) certain income of publicly traded partnerships (PTPs). This benefit is available for taxable years beginning after Dec. 21, 2017, but is scheduled to sunset Dec. 31, 2025.

Qualified business income includes certain “qualified” income, gain, deduction and loss with respect to a “qualified trade or business.” Income, gain, deduction or loss is qualified for this purpose if it is effectively connected with the conduct of a trade or business in the United States (defined by reference to Section 864(c)) and is included or allowed in determining taxable income for the applicable taxable year. The statute provides that certain income, gain, deduction and loss is not qualified, including (i) capital gain and loss, dividends, and non-business-related interest income; (ii) reasonable compensation paid by an S corporation; and (iii) guaranteed payments for services and certain other payments described in Section 707(a). A trade or business can be a qualified trade or business unless it is a “specified service trade or business” (the trade or business of performing services as an employee also does not count). Specified service trades or businesses include law, accounting and consulting firms, as well as investment management and finance-related businesses.

A taxpayer’s qualified business income is determined with respect to each of the taxpayer’s qualified trades or businesses. If the taxpayer is a partner in a partnership or a shareholder in an S corporation, their share of the partnership’s or S corporation’s qualified business income, and any limitations (described below), are taken into account at the partner or shareholder level, respectively.

The deduction as related to qualified business income is subject to limitations. First, the deduction cannot exceed the greater of (i) 50 percent of the qualified trade’s or business’s W-2 wages or (ii) the sum of 25 percent of such W-2 wages and 2.5 percent of the “unadjusted basis immediately after acquisition of all qualified property” (UBIA). Qualified property generally includes certain depreciable property used in the qualified trade or business. Also, as noted above, a trade or business is not qualified if it is a specified service trade or business. These limitations do not apply if the taxpayer’s income is below specified income thresholds and are phased in for taxpayers with income above the income thresholds.

The Markup amends Section 199A in several taxpayer-favorable ways, including:

Making the Section 199A deduction permanent.
Increasing the deduction to up to 23 percent of qualified business income, certain REIT dividends and certain PTP income.
Providing a new, two-step process for applying the W-2 wages, UBIA, and specified service trade or business phase-in limitations.
Expanding the definition of combined qualified business income in Section 199A(b)(1)(B) to include certain dividends paid by electing business development companies (“qualified BDC interest dividends”). An “electing business development company” is a “business development company” (defined by reference to Section 2(a) of the Investment Company Act of 1940) that has elected to be treated as a regulated investment company under Section 851. Qualified BDC interest dividends are dividends from an electing business development company attributable to the company’s net interest income from a qualified trade or business.
Adjusting the income threshold amounts for inflation for taxable years beginning after 2025.

The modifications in the Markup are effective for taxable years beginning after Dec. 31, 2025.

Opportunity Zones

As background, Section 1400Z-2 of the Code was created as part of the TCJA with the goal of increasing long-term investments in low-income communities. The program permits taxpayers to defer recognizing certain types of realized gains (and in some cases to permanently exclude from gross income a portion thereof) if they invest the amount of their gain into a qualified opportunity fund (QOF) within a 180-day period. The QOF then must invest substantially all of its funds, either directly or indirectly, in qualifying property located in certain designated low-income communities known as opportunity zones (OZs). In addition to the gain deferral/partial exclusion benefits, a taxpayer that invests in a QOF also has the ability to exclude from gross income any appreciation of its QOF investment if it holds such interest for at least 10 years.

The Markup proposes to make the following changes to the existing OZ program:

New Opportunity Zone Designations

After the enactment of the TCJA, the governor of each state designated 25 percent (in most cases) of the qualifying “low-income community” (LIC) census tracts in his or her state as OZs. Those designations were set to expire at the end of 2028. The Markup accelerates the expiration of these prior OZ designations to the end of 2026 and allows each governor to designate new OZs in his or her state that will become effective Jan. 1, 2027 (giving each state a chance to reconsider its prior designations or remove designations from tracts that no longer meet the requirements of an LIC to newly qualifying census tracts). While the definition of a qualifying “low-income community” census tract generally remains the same as it was under the TCJA, some “narrowing” changes were made. Additionally, for this new round of OZs, while each governor generally has the ability to designate 25 percent of his or her state’s qualifying LIC census tracts as OZs, a minimum number of qualifying LIC tracts that are comprised entirely of a “rural area” would be required to be designated as OZs.

Extension/Modification of Current OZ Benefits

For eligible investments made into newly designated OZs, a taxpayer may defer recognizing the amount of the gain invested until Dec. 31, 2033 (an extension from Dec. 31, 2026). Additionally, the ability to exclude 10 percent of a taxpayer’s deferred gain if he or she holds his or her QOF investment for at least five years is available for qualifying investments made after 2026 (though the additional 5 percent exclusion for a seven-year hold included in the TCJA is not available for this new round of investments). The Markup also would permit taxpayers to invest a limited amount of ordinary income ($10,000 over the life of the program) into a QOF in order to obtain some, but not all, of the tax benefits associated with the OZ program.

New Benefits for Investments in Rural Area OZs

In addition to the requirement that each state governor designate a certain number of qualifying LICs located in rural areas as OZs, taxpayers would receive additional benefits for investing in QOFs that hold property in these new rural OZs. Specifically, if an investor holds an interest in a QOF that invests, directly or indirectly, in a sufficient amount of tangible property used in a rural OZ, the 10 percent exclusion attributable to a five-year holding period is increased to 30 percent. Additionally, the “substantial improvement” requirement for qualifying OZ property is relaxed for property located in a rural OZ.

New Reporting

The Markup would create new annual reporting requirements for QOFs and qualifying entities in which QOFs invest (i.e., qualified opportunity zone businesses, or QOZBs) and institute penalties for late filing. Among other items, information on the number of residential units held by, and full-time employees of, the QOF and/or QOZB would now be required to be reported annually. The Markup also would require the Treasury to prepare publicly available reports summarizing information related to, among other things, the number and dollar value of investments in QOFs and the impact of such investments on the designated OZs.

Low-Income Housing Tax Credit

The Markup would make the following changes to the low-income housing tax credit (LIHTC) under Section 42 of the Code:

State Housing Credit Ceiling Increase

The Markup would increase the number of 9 percent credits available by 12.5 percent for calendar years 2026-2029.

Expansion of Tax-Exempt Bond Financing Provision

Under the current LIHTC rules, if 50 percent or more of the aggregate basis of a building and land is financed with tax-exempt bonds that are subject to the state’s volume cap, that entire building would be eligible for 4 percent credits without an allocation from the state (as opposed to just the portion of the building financed with the bonds). The Markup would generally expand that favorable rule to buildings, at least 25 percent of the aggregate basis of which are financed with tax-exempt bonds.

Expansion of ‘Difficult Development Areas’

Under the current LIHTC rules, a building located in a “difficult development area” is eligible for a higher tax credit. The Markup would temporarily expand the definition of “difficult development areas” to include rural areas and certain “Indian areas.”

Information Reporting and Form 1099K – Repeal of Revision to De Minimis Rules for Third-Party Network Transactions

Under current law, third-party settlement organizations (TPSOs), such as online marketplaces, are required to report certain payment transactions for goods and services that exceed a minimum threshold of $600 to the IRS and to the sellers using their platforms (“participating payees”) on Form 1099-K. A TPSO is the central organization that provides a third-party payment network and has the contractual obligation to make payments to participating payees.

The American Rescue Plan Act of 2021 (ARPA) lowered the threshold for Form 1099-K reporting applicable to third-party payment network transactions to $600, effective for calendar year 2022. However, the IRS has repeatedly delayed full implementation of the $600 threshold. Prior to the change, a de minimisexception only required reporting if the gross amount of the payment transactions with respect to a participating payee for the year exceeded $20,000 and the aggregate number of such transactions exceeded 200. Due to the delays in implementing the change in reporting thresholds, for calendar year 2024, TPSOs were required to file a Form 1099-K for participating payees receiving gross payments exceeding $5,000, regardless of the number of transactions. This threshold decreases to $2,500 for calendar year 2025 and then to $600, as originally mandated by the ARPA, for calendar years after 2025.

The Markup would revert to the previous de minimisreporting exception for TPSOs so that a TPSO would not be required to report with respect to payment transactions of their participating payees unless the gross amount of the transactions exceeds $20,000 and the aggregate number of such transactions exceeds 200. The reinstatement of the de minimisexception would apply as if included in the ARPA and thus would apply to returns for calendar years beginning after Dec. 31, 2021.

Increase in Threshold for Requiring Information Reporting with Respect to Certain Payees

The Markup would increase the information reporting threshold for certain payments made by persons engaged in a trade or business to another person (IRC Section 6041(a)) and payments of remuneration for services (IRC Section 6041A(a)) from $600 to $2,000 in a calendar year. The threshold amount would be adjusted for inflation in calendar years after 2026. No change is made to the information reporting threshold for direct sales (IRC Section 6041A(b)). The increase in the information reporting threshold would apply with respect to payments made after Dec. 31, 2025.

Individual Tax Proposed Changes

With respect to individual taxes, the Markup would, among other items:

Make TCJA individual tax rates and the standard deduction permanent, with some helpful adjustments; specifically, it would permanently extend and increase individual tax bracket values and provide an additional year of inflation indexing; and increase the standard deduction from January 2025 through the end of 2028 by an additional $1,000 ($2,000 for married couples filing jointly);
Repeal personal exemptions and miscellaneous itemized deductions;
Permanently increase the Section 199A deduction from 20 percent to 23 percent and marginally broaden eligibility;
Increase the child credit from January 2025 through the end of 2028 by $500 to a total of $2,500, and back to $2,200 in 2029 with inflation adjustments thereafter;
Enhance the standard deduction by $4,000 for seniors for tax years 2025 through 2028 (to help offset taxation of Social Security income);
Eliminate tax on tips for tax years 2024-2028, generally limited to an income tax deduction for those earning less than $160,000 in 2025;
Eliminate tax on overtime for tax years 2024-2028, excluding tips and generally limited to an income tax deduction for those earning less than $160,000 in 2025; and
Allow a deduction for certain car loan interest (only if the vehicle’s final assembly occurs in the United States) for tax years 2025 through 2028.

Estate and Gift Tax Exemption Proposed Changes

Currently, the federal estate and gift tax exemption is an inflation-adjusted amount of $13.99 million per individual for 2025, though under present law that amount is set to drop to an estimated inflation-adjusted amount of $7.14 million for tax year 2026. The Markup would permanently increase the estate and gift tax exemption to $15 million per individual for tax years 2026 and beyond. The $15 million exemption amount is indexed for inflation, meaning for tax years after 2026 the $15 million exemption amount would be increased based on inflation adjustments. The federal generation-skipping transfer tax exemption would be permanently increased by the Markup to an inflation-indexed amount of $15 million.

Premium Tax Credit Limitations

The Premium Tax Credit, which helps lower-income individuals afford health insurance through the federal exchange, would be restricted by the Markup to a narrower group of lawfully present noncitizens. Eligible individuals must either be lawful permanent residents, Cuban nationals with approved petitions awaiting visa availability or individuals lawfully residing under a Compact of Free Association.

Excluded from eligibility would be asylum seekers, parolees, Temporary Protected Status recipients, individuals granted deferred action or enforced departure, and those granted withholding of removal. These individuals, though lawfully present, would no longer qualify for the credit. Additionally, the Markup proposes to repeal the provision that allowed noncitizens with incomes below 100 percent of the federal poverty level to access the credit if they were ineligible for Medicaid due to immigration status. It also updates Affordable Care Act provisions to align with these new restrictions, including related subsidies and health program access.

New Excise Tax on Remittance Transfers

A new 5 percent excise tax would apply to international remittance transfers from the United States. Such transfers would not include certain small-value transactions. If the excise tax is not paid by the sender, the provider would be required to collect and remit it. The Markup provides two exceptions for U.S. citizens and nationals. Taxpayers may use a qualified provider that verifies citizenship or claim a refundable tax credit by providing a Social Security number (SSN) and proof of payment to avoid implication of the excise tax. Providers must also report detailed remittance data, including sender information, amounts transferred and taxes collected for credit-eligible individuals.

SSN Requirement for Education Credits

The Markup tightens requirements for claiming the American Opportunity and Lifetime Learning education credits. A valid SSN would be required for the taxpayer, spouse (if applicable) and any student for whom education expenses are claimed, replacing the more flexible taxpayer identification number requirement.

Exempt Organization Proposed Changes

Increased University Endowment Tax

The proposed modifications to Section 4968 would substantially expand the scope and impact of the tax, with new tiered rates – 21 percent is the highest rate for institutions with a “student adjusted endowment” above $2 million. The proposed changes are estimated to cost universities $6.7 billion over 10 years. The Markup would also expand which institutions are subject to the tax but would exclude “qualified religious institutions.” Assets and net investment income of related organizations generally would be included in the calculation of the tax, unless the assets/income are not intended or available for the institution’s benefit.

Significant Tax Increases: Institutions with large endowments per student face potentially dramatic increases in excise tax liability, with some incurring as much as a 1,400 percent increase in applicable tax rate.
Broader Scope: Many institutions previously not subject to the tax may become subject to the tax due to the expanded definitions and inclusion of related organizations’ assets and income.
New Compliance Burdens: Enhanced reporting and antiavoidance rules will require careful review of endowment structures and related entities.
Immediate Planning: Institutions should begin modeling the impact of these changes and consider how their endowment management, investment strategies and organizational structures may be affected and optimized.

Increased Private Foundation Investment Income Tax

The Markup would raise the excise tax on the net investment income of private foundations, estimated to tax $15.9 billion from foundations over the next 10 years. The tax rate on larger private foundations would be increased by as much as 619 percent under a new tiered rate structure. The Markup would replace the current flat 1.39 percent excise tax on the net investment income with a progressive rate structure from 1.39 percent for private foundations with assets of less than $50 million to 10 percent for private foundations with assets of more than $5 billion.

Substantial Tax Increases for Large Foundations: Foundations with significant asset bases, particularly those exceeding $250 million, would face a dramatic increase in their excise tax liability. The highest tier, at 10 percent, represents a fundamental shift in the tax treatment of the largest private foundations.
Broader Asset Base for Tax Calculation: The inclusion of related organizations’ assets in the calculation may further increase the tax exposure of foundations with complex organizational structures.
Immediate Impact: With the effective date tied to the date of enactment, foundations should promptly assess their current asset levels, organizational relationships and potential tax exposure under the new regime.
Strategic Review Recommended: Foundations may wish to review their investment, grantmaking and structural strategies in light of the proposed changes, including the potential impact on endowment management and related entities.

Expansion of the Tax on Excess Compensation (Section 4960)

A notable provision in the Markup would be the expansion of the application of the tax on excess compensation within tax-exempt organizations. The Markup would broaden the definition of “covered employee” to include any employee (including any former employee) of an applicable tax-exempt organization, as well as any related person (including related corporations, partnerships or limited liability companies) or governmental entity. This proposed expansion could significantly increase the number of individuals triggering the excise tax on compensation exceeding $1 million, as well as certain severance payments.

Revival of UBTI Increase for Disallowed Fringe Benefit Expenses (fka the ‘Parking Tax’)

The Markup would reintroduce a controversial provision that includes certain disallowed fringe benefit expenses as unrelated business taxable income (UBTI). This would require many tax-exempt organizations to increase their UBTI by the amount of certain transportation and parking benefits provided to employees. This provision has a notable legislative history, having been enacted and then repealed in recent years following significant opposition, particularly from religious organizations.

Renewed Compliance Burden: Nonprofits that provide transportation or parking benefits to employees will need to revisit their payroll and accounting systems to track and report these expenses for UBTI purposes.
Targeted Exemption for Churches: The explicit exemption for churches and certain church-affiliated organizations reflects the lessons learned from the prior controversy and is likely intended to avoid a repeat of the backlash that led to the earlier repeal.
Potential for Broader Impact: While churches are exempted, a wide range of other tax-exempt organizations – including educational institutions, hospitals and social service agencies – could face significantly increased UBTI and associated tax liabilities.
Strategic Planning: Organizations should assess the potential impact of this provision on their operations and consider whether changes to employee benefit offerings or facility arrangements this year may be warranted.

Expansion of UBTI to Name and Logo Royalties and Limitation of Research Income Exclusion

The Markup includes two significant provisions that would expand the scope of UBTI for tax-exempt organizations, particularly those with affinity programs. These changes, if enacted, would affect how nonprofits treat income from the sale or licensing of their names and logos, as well as income from research activities. The Markup is estimated to cost nonprofit organizations $3.8 billion over 10 years.

Broader UBTI Exposure: Many tax-exempt organizations, including universities, hospitals and national charities, license their names and logos for use on merchandise, sponsorships or affinity products. Under this provision, all such income would be subject to UBTI, potentially resulting in new or increased tax liabilities.
Administrative and Compliance Burden: Organizations will need to identify, track and report all name and logo licensing income as UBTI, which may require changes to accounting systems and processes.
Strategic Review of Licensing Arrangements: Nonprofits should review existing and planned licensing agreements to assess the potential tax impact and consider whether changes to contract terms or business models are warranted.
Potential for Reduced Revenue: The imposition of UBTI on these income streams may reduce the net benefit of licensing arrangements, potentially affecting funding for exempt activities.
UBTI Exclusion Limited to Publicly Available Research: Only income from research the results of which are made publicly available would be excluded from UBTI. Income from proprietary or private research would no longer qualify for the exclusion.
Impact on Research Universities and Institutes: Many universities and research organizations conduct both publicly available and proprietary research (such as contract research for private companies). Income from proprietary research would now be subject to UBTI, potentially increasing tax exposure.
Need for Careful Documentation: Organizations may need to clearly document which research activities and related income qualify for the exclusion, based on the public availability of results and when the determination of public availability is made.
Potential Changes to Research Funding Models: The change may incentivize organizations to structure more research as publicly available or to reconsider the terms of research contracts with private sponsors.
Compliance and Reporting: Enhanced tracking and reporting will be necessary to distinguish between publicly available and proprietary research income for UBTI purposes.

Employer-Provided Benefits

The Markup includes several provisions that affect benefits provided by employers as well as provisions related to compensation paid to certain employees.

Health Care Benefits

With respect to health care benefits provided by employers, the Markup modifies the rules applicable to health savings accounts (HSAs) and individual coverage health reimbursement accounts (ICHRAs).

HSA Changes

Current HSA rules disqualify individuals from making contributions to an HSA under certain circumstances. The Markup liberalizes the rules regarding who can make HSA contributions. The Markup also expands the scope of items for which tax-free distribution can be made, such as for a gym membership; increases the contribution limit for HSAs under certain circumstances; and provides liberalized rules regarding the interaction of employer-sponsored health care flexible spending accounts and HSAs.

ICHRA Changes

ICHRAs are health reimbursement arrangements that employers offer to employees to assist them in purchasing individual health insurance policies. ICHRAs are currently authorized by regulation, but the Markup codifies ICHRAs, modifies the ICHRA rules, and renames them as Custom Health Option and Individual Care Expense or CHOICE arrangements.

Employer Fringe Benefits

The Markup also impacts certain fringe benefits offered by employers.

Educational Assistance

Code Section 127 allows employers to offer certain amounts of educational assistance tax-free to employees. The definition of “educational assistance” was previously expanded to include assistance related to an employee’s student loans. The Markup makes this expansion, which was set to expire at the end of 2025, permanent. The Markup also adds language providing for an inflation adjustment with respect to the maximum tax exclusion (currently $5,250) for education assistance furnished in a calendar year.

Commuter Benefit Programs

The ability to offer tax-free reimbursement for bicycle commuting expenses, sometimes called a “transportation fringe,” has been permanently eliminated under the Markup.

Executive Compensation in Excess of $1 Million

Currently, public companies cannot deduct more than $1 million with respect to compensation for a small number of top employees (technically called “covered employees”). The Markup modifies the rule to apply it to the public company’s controlled group. Specifically, (i) a covered employee’s compensation from all controlled group members will be considered; and (ii) in determining who the covered employees are, identifying the five highest-paid employees would be determined by analyzing the entire controlled group’s employee population. The other three criteria for identifying covered employees would still apply based solely on the public company’s employee population.

The Code contains a corollary provision for nonexempt organizations in the form of an excise tax on compensation exceeding $1 million, which the Markup modifies. This modification is addressed above, in the “Exempt Organization Proposed Changes”section.

Conclusion

As the House and the Senate continue to work on tax legislation, clarifications and details regarding the various provisions and proposals will emerge. Depending on a taxpayer’s specific facts and circumstances, tax savings may be achieved by those who anticipate expected tax changes and take steps regarding their business plans, transaction pipelines, restructurings, operational affairs and estate plans in a manner that takes advantage of benefits available under current law or expected tax law changes.

BakerHostetler will continue to keep our clients and friends updated on these developments.

Authorship Credit: Jeffrey H. Paravano, Peter J. Roskam, Paul M. Schmidt, Nicholas C. Mowbray, Christina Novotny, Naomi Meisels, J. Brian Davis, Morgan W. Holtman, Matthew P. Wochok, Addison Schroeder, Elizabeth Ann Smith (“Betsy”), Matt Hunsaker, George R. McCormick, John R. Lehrer, Christian B. Jones, Kevin R. Edgar, Keith C. Durkin, Jennifer A. Mills, Susan N. Lubow, Matthew R. Elkin, Alexander L. Reid, Edward J. Beckwith, Michael R. Durnwald and James B. Wise