Key Tax Changes in Public Law 119-21: What Individuals and Businesses Need to Know

July 28, 2025

The following Buchalter attorneys contributed to the preparation of this Client Alert: Philip Wolman (Los Angeles), Joseph Fletcher (Los Angeles), Stuart Simon (Los Angeles), Jerry Janoff (Los Angeles), Nicholas Gerlach (San Francisco), Marshall Olney (Los Angeles), Agustin Ceballos (San Diego), Jenni Krengel (Sacramento), Zachary Wertheimer (Los Angeles), James Mainzer (Chicago), and Brad Markoff (Los Angeles)

If you have any questions regarding the changes in the law discussed herein, please feel free to contact any of the authors listed at the end of this alert.

On July 4, 2025, the President signed into law Public Law 119-21 (the “Act”). For individuals, the Act makes the tax rate cuts of the 2017 Tax Cuts and Jobs Act (“2017 TCJA”) permanent, and modifies and introduces additional provisions that impact individuals. For businesses, the Act makes permanent many of the business provisions introduced temporarily by the 2017 TCJA and modifies provisions of the Internal Revenue Code (the “Code”) relating to business transactions, international tax, and energy tax incentives. In addition, the Act allows a number of tax incentives, including those introduced by the Inflation Reduction Act of 2022, to expire. Below is a summary of some significant provisions of the Act prepared by the members of Buchalter’s Tax practice group.

INDIVIDUAL TAXPAYERS

Tax Rates Made Permanent

The individual income tax rates established by the 2017 TCJA were set to expire after 2025. The new bill made the these tax rates permanent. Individual income tax rates will range from 10% to 37%, and capital gains rates will be either 0%, 15%, or 20%. Rate brackets and the method used to index rate brackets have been changed.

Standard Deduction Increased; Personal Exemption Eliminated

The 2017 TCJA increase in the standard deduction was made permanent. For 2025, the standard deduction is $31,500 for married joint filers, $23,625 for heads of household, and $15,750 for single filers.

The elimination of the personal exemption deduction was made permanent.

Itemized Deductions for Top Rate Taxpayers

Effective in 2026, taxpayers in the top 37% income tax bracket will be subject to an overall cap on itemized deductions. The Act caps the tax benefit of all itemized deductions at $0.35 for each dollar of itemized deductions deducted (instead of the full $0.37 for each dollar deducted by taxpayers in the 37% bracket).

Limitation on Deducting State and Local Taxes

The 2017 TCJA imposed a $10,000 limitation on the deductibility of state and local income, sales, and property taxes (commonly referred to as the “SALT cap”). Effective for the 2025 tax year, the SALT cap limitation on the deduction for state and local tax increases to $40,000 from $10,000, with 1% annual increases in the SALT cap for each year from 2026 until 2029. The increased limitation phases-out starting with modified adjusted gross income of $500,000 for married joint filers ($250,000 for individual taxpayers), with 1% annual increases of this threshold amount beginning in 2026. In addition, the SALT cap is reduced by 30% of the amount of modified adjusted gross income in excess of the threshold amount, but not below a $10,000 cap. In 2030, the SALT cap limitation reverts to $10,000.

In addition, some states have enacted a workaround for the SALT cap by allowing tax‑partnerships and S corporations to pay state and local taxes that would otherwise be paid by the owners of such entities (commonly known as a “pass-through entity tax” or “PTET”), which would allow the partnership or S corporation to take the deduction for state and local taxes. The PTET workarounds enacted by most states were not affected by the Act and are still available for eligible taxpayers. However, in some states, these laws sunset as of the end of 2025 and will need to be amended in order to be applicable for future tax years.

New $6,000 Temporary Deduction For Seniors

The Act introduces a new temporary above-the-line deduction of $6,000 for seniors aged 65 and older (and their spouses filing joint returns) for the tax years between 2025 and 2028. The exemption for seniors is reduced for taxpayers with modified adjusted gross income in excess of $75,000 (or $150,000 for married joint filers) by 6% of the taxpayer’s modified adjusted gross income over the applicable threshold. The new senior deduction completely phases-out for single taxpayers with income above $175,000 and married joint filers with income above $250,000.

The new senior deduction is available regardless of whether the taxpayer itemizes deductions or takes the standard deduction. Moreover, this new deduction is in addition to the existing extra standard deduction for seniors (which for 2025 is $2,000 for single taxpayers and $1,600 per qualifying spouse for married joint filers).

Savers Credit

The Savers Credit is a tax credit for eligible contributions to either (i) a traditional or Roth IRA, (ii) a 401(k) plan or similar employer-sponsored retirement plan, or (iii) in the case of an ABLE account to which the taxpayer is the designated beneficiary. (ABLE accounts are discussed under the heading “ABLE accounts” below.)

The amount of the Savers Credit is 10%, 20% or 50% of the eligible contribution (depending on the taxpayer’s adjusted gross income and filing status). Prior to the Act, the maximum contribution that qualified for the Savers Credit was $2,000. (A $2,000 qualified contribution prior to the Act would result in a Savers credit of between $200 and $1,000 – i.e., between 10% and 50% of $2,000).

The 2017 TCJA expanded the Savers Credit to qualified contributions to ABLE accounts on a temporary basis that was set to expire. The Act makes this expansion of the Savers Credit permanent.

In addition, the Act increases the maximum amount of an individual’s contributions that are eligible for the Savers Credit from $2,000 to $2,100 for tax years beginning after December 31, 2026.

ABLE Accounts

Achieving a Better Life Experience accounts (“ABLE accounts” and sometimes known as “§ 529A accounts”) are tax‑advantaged savings accounts for eligible persons with disabilities. These accounts help designated beneficiaries save money for qualified disability expenses without jeopardizing their eligibility for certain public benefits. Distributions from ABLE accounts are tax‑free to the extent used for “qualified disability expenses.” The Act makes the following changes to ABLE accounts:

Increased Contribution Limit.
- The 2017 TCJA temporarily increased the annual contribution limit for ABLE accounts. The Act makes this increase permanent.
- The Act provides an additional year of inflation adjustment for the base amount of the contribution limit, effective after December 31, 2025.
- The ABLE account contribution limit for 2025 is $19,000. Certain employed ABLE account beneficiaries may make an additional contribution.
- Savers Credit. As discussed in more detail above, Savers Credit is a tax credit for a percentage (between 10% and 50%) of eligible contributions to certain tax-advantaged accounts. The 2017 TCJA expanded the Savers’ Credit to qualified contributions by designated beneficiaries to their ABLE accounts. The Act makes this expansion permanent. In addition, the Act increases the maximum amount of an individual’s contributions eligible for the Saver’s Credit from $2,000 to $2,100 in 2027 (with the credit amount increasing from $200 – $1,000 to $210 to $1,050).
- Rollovers From 529 Plans. The Act makes permanent provisions that allow rollovers of amounts in 529 plans to certain ABLE accounts. “529 plans” are tax-advantaged savings and investment plans for families to save for qualified education expenses). This change is effective for tax years beginning after December 31, 2025.

Child Tax Credits Increased and Made Permanent

The Act makes the child tax credit permanent. For the 2025 tax year the child tax credit will be increased to $2,200 per child with up to $1,700 of the credit being refundable (each, indexed for inflation). The phase-out amount for the child tax credit begins at $400,000 for married joint filers and $200,000 for other filers. In order to claim the credit, the taxpayer’s and the child’s social security numbers must be provided on the tax return on which the credit is claimed.

Child and Dependent Care Tax Credits Increased

In addition to the Child Tax Credit described above, the Code provides a tax credit for certain child and dependent care expenses that enable the taxpayer to work. The Act increases the maximum credit rate from 35% to 50%. As with pre-Act law, the credit phases-out as the taxpayer’s income increases.

New Tax-Deferred Investment Accounts for Children

For tax years beginning after 2025, the Act creates new tax-preferred accounts for children (referred to in the Act as “Trump Accounts”) that provide tax-deferred growth, similar to a traditional individual retirement account. These accounts may be established for children under age 18. Contributions of $5,000 annually (subject to adjustment beginning in 2028) may be made to these accounts. Distributions from these accounts are generally prohibited until the beneficiary turns 18 years old.

The Act provides that employers may make contributions of up to $2,500 annually for an employee or the employee’s dependent. These employer contributions are not included in the employee’s gross income.

The Act also establishes a pilot program under which the Federal government will make a single deposit of $1,000 into these accounts of U.S. citizen children born between 2025 and 2028.

Enhanced Adoption Credit

Prior to the Act, a taxpayer could claim a nonrefundable credit for “qualified adoption expenses.” The maximum credit amount for 2025 is $17,280. For 2025, the credit starts to phase-out for taxpayers with modified gross income of $259,190 and is completely phased out at $299,190.

Beginning with the 2025 tax year, the Act makes up to $5,000 of the credit refundable (subject to cost-of-living increases after 2024). The non-refundable portion of the credit may be carried forward for up to 5 years to offset future tax liability.

New Tax Credits for Contributions to Scholarship Granting Organizations

For tax years beginning after 2026, an individual taxpayer who is a U.S. citizen or resident is allowed an income tax credit, up to $1,700, equal to the aggregate amount of the taxpayer’s qualified cash contributions during the tax year to a scholarship-granting organization. A scholarship-granting organization must be a § 501(c)(3) public charity and must maintain separate accounts for qualified contributions. Qualified contributions must be used to fund scholarships for eligible students solely within the state in which the organization is listed as a qualifying scholarship-granting organization. The credit is only allowed for organizations in states that elect to participate in this program and provide the IRS with a list of scholarship-granting organizations within the state. A taxpayer who claims this credit may not take a charitable contribution deduction for the same contribution.

Limits on Insurance Exchange Premium Tax Credits for Certain Alien Individuals

Under current law, an applicable taxpayer who enrolls in a qualified health plan through an affordable insurance exchange is allowed a refundable premium tax credit. The Act imposes limitations on the availability of the premium tax credit for individuals who are ineligible for Medicaid due to alien status, effectively narrowing access to subsidized health coverage for certain non-citizens.

Limitation on Deductions for Home Mortgage Interest

The Act permanently lowers the deduction for interest on home mortgage acquisition debt of $750,000 and eliminates the deduction for interest paid on home equity lines of credit. The Act permanently treats mortgage insurance premiums as home mortgage interest.

Temporary New Car Loan Interest Deduction

For tax years between 2025 and 2028, individuals can deduct up to $10,000 of new car loan interest, subject to a phase-out starting at $100,000 of modified adjusted gross income for single filers and $200,000 for married joint filers. The deduction is available to non-itemizers. To qualify for the deduction:

The debt must be incurred after December 31, 2024, for the purchase of a new personal use vehicle, secured by a first lien on the vehicle, and the vehicle’s original use must begin with the taxpayer.
The vehicle must be a car, minivan, van, SUV, pickup truck, or motorcycle, with a gross vehicle weight rating under 14,000 pounds, and final assembly of the vehicle must occur in the United States, and
The taxpayer must report the vehicle identification number (VIN) on their tax return.

Charitable Contributions for Individuals

Subject to certain exceptions, individual taxpayers who do not itemize deductions may take a charitable deduction of up to $1,000 (or $2,000 for married joint filers), effective for tax years beginning after December 31, 2025. Previously, non-itemizing individual taxpayers were limited to a $300 (or $600 for married joint filers) charitable contribution deduction.

For individual taxpayers who itemize deductions, a new rule is in place, effective for tax years beginning after December 31, 2025. These taxpayers can only deduct the aggregate amount of charitable contributions made in a tax year that exceeds 0.5% of the taxpayer’s adjusted gross income for the tax year. In addition, the limitation on cash donations to qualified organizations to 60% of adjusted gross income has been made permanent.

If an individual makes charitable contributions in excess of the applicable percentage limitations, the excess amounts generally can be carried forward for up to five years, but all current year contributions must be deducted first. After the current year deductions have been used, the taxpayer can deduct the carryovers subject to the same ordering and percentage limitations that apply to current year contributions.

In addition, the increased limitation on cash donations to qualified organizations to 60% of adjusted gross income that was set to expire has been made permanent.

Moreover, as discussed under “Itemized Deductions Capped for Top Rate Taxpayers” below, the Act caps the tax benefit of all itemized deductions (including charitable contributions) at $0.35 for each dollar of itemized deductions deducted (instead of the full $0.37 for each dollar deducted by taxpayers in the 37% bracket).

(Charitable contributions for corporations is discussed under “Business Tax Provisions” below.)

Miscellaneous Itemized Deductions Eliminated

The 2017 TCJA temporarily made deductions for most miscellaneous expenses non‑deductible. The Act makes elimination of miscellaneous itemized deductions permanent.

Note that this elimination does not apply to the “qualified business income” deduction (discussed under the heading “BUSINESS TAX PROVISIONS— Qualified Business Income Deduction (Code § 199A).”

Alternative Minimum Tax

The Act makes permanent the current alternative minimum tax exemption of $500,000 for single filers and $1,000,000 for married joint filers (with the exemption increasing for inflation). However, the Act also increases the phase-out rate of the exemptions from 25% to 50% of the excess over the threshold.

New Temporary Deduction for Overtime Pay

The Act creates an above-the-line deduction for qualified overtime wages earned by non-highly compensated employees between 2025 and 2028. The deduction is limited to $12,500 on single returns and $25,000 for joint returns, and is available to both itemizing and non-itemizing taxpayers. This provision is effective for tax years beginning after December 31, 2024 through December 31, 2028.

No Tax on Certain Tips – Temporary

Prior to the Act, taxpayers were taxed on tips in the same manner as other income. The Act makes certain taxpayers who earn qualified tips eligible for an above-the-line deduction of up to $25,000, subject to several limitations. The deduction is not available to all tip earners. The deduction expires on December 31, 2028.

Some of the requirements for tips to qualify include the following:

The tips must be paid in cash and properly reported on a tax return.
The tips must be paid voluntarily and determined solely by the payor. Mandatory service charges do not qualify. Qualifying tips may be pooled or shared among workers.
The taxpayer must work in “an occupation that customarily and regularly received tips as of December 31, 2024,” as will be determined by the Treasury. This means that taxpayers in industries who have not traditionally received tips cannot promote new tipping practices solely to benefit from the new law.
For taxpayers who are employees, their employer must not be a “specified service trade or business” (defined by reference to the qualified business income deduction, discussed under the heading “—Qualified Business Income Deduction (Code § 199A)” below). Very generally, these are businesses treated as having income effectively constituting compensation for services based on the provider’s skill and reputation, such as law, accounting, health, financial services, and brokerage services, among others.

The deduction starts to phase out for single filers with a modified gross income of $150,000 (married joint filers with a modified gross income of $300,000) by $100 for every $1,000 over the applicable phase-out threshold.

The Treasury is mandated to publish new applicable rules and guidance addressing the applicable employer withholding and reporting obligations.

Note that some states may subject tips to state income tax, notwithstanding this deduction.

Discharge of Student Loan Debt and Employer Provided Education Assistance Made Permanent

The Act made permanent both the exclusion from income for student loans discharged due to death or disability of a student and the exclusion of annual payments toward a student’s loan as educational assistance by an employer of up to $5,250 (indexed for inflation).

Gambling Loss Limitation Made Permanent

Gambling or wagering transaction losses are not deductible except to the extent of gains from these activities. The Act has made this rule permanent. In addition, taxpayers may only deduct 90% of the amount of these losses.

Personal Casualty Losses Permanently Not Deductible (Other than for Federally Declared Disasters)

The elimination of the deduction for personal casualty and theft losses, other than losses from federally declared disasters, has been made permanent.

New – 1% Tax on Transfer of Funds to Non-U.S. Persons

The Act imposes a 1% remittance or excise tax on certain cross-border transfer transactions. With some exceptions, a flat 1% excise tax is imposed on remittance transfers after December 31, 2025. This new tax applies to non-U.S. persons sending cash, money orders, or cashier’s checks abroad. The sender is liable, and remittance providers must withhold and remit the amount.

Estate, Gift and Generation Skipping Transfer Tax Exemptions

The combined estate and gift tax exemption and the generation skipping transfer tax exclusion increases to $15,000,000 for decedents dying in 2026 or gifts made in 2026. The $15,000,000 amount will be indexed for inflation. This is an increase from the $13,990,000 in 2025.

INTERNATIONAL TAX PROVISIONS

Background

To provide context, some background to the international tax provisions affected by the Act are discussed briefly. This summary should not be viewed as a full explanation of these provisions, whether in this or any other context

Generally. U.S. persons can establish a foreign corporation that they control (referred to as a “controlled foreign corporation” or “CFC”) that earns income outside the United States. In general, a “CFC” is a foreign corporation where certain U.S. shareholders (defined below) own over 50% of the voting power or value of the foreign corporation. For this purpose, a “U.S. shareholder” generally is a U.S. person who owns 10% or more of the voting stock of the CFC directly, indirectly or through attribution rules. Absent certain “anti-deferral” provisions in the Code, the income earned by the CFC would never be subject to U.S. tax until the income is distributed to its shareholders. These anti‑deferral provisions, where applicable, generally cause certain U.S. shareholders to recognize all or part of the CFC’s income even if the CFC does not dividend these earnings. Very generally, some of the anti-deferral regimes include:

“Subpart F”: Subpart F income generally relates to certain passive and related-party income earned by CFCs. U.S. shareholders are taxed on their share of Subpart F income at ordinary income rates, even if the earnings are not distributed. Upon distribution, this income (referred to as “previously taxed income”) is generally not taxed again.
“Global Intangible Low-Taxed Income” or “GILTI”: A “catch all” bucket that constitutes most CFC income other than Subpart F income, subject to exceptions. GILTI was introduced by the 2017 TCJA.

GILTI Regime as It Applies to Corporate U.S. Shareholders. The GILTI regime aims to ensure that U.S. multinational corporations pay a minimum level of tax on certain foreign earnings. Very generally, prior to the Act, a U.S. shareholder includes in income the shareholder’s pro-rata share of the net income of CFCs in which it holds an interest to the extent exceeding a 10% deemed return on the CFCs’ tangible assets (known as “qualified business asset investment” or “QBAI”).

Prior to the Act, a corporate U.S. shareholder was allowed a 50% deduction on the amount of GILTI included in the shareholder’s gross income. Based on a 21% corporate income tax rate, a U.S. corporation was effectively taxed at 10.5% (i.e., 50% of 21%) on GILTI inclusions (without taking into account foreign tax credits and other deductions, credits, and rules).
A corporate U.S. shareholder under certain circumstances may be eligible to take a credit for foreign taxes paid by the CFC on the GILTI included in the U.S. shareholder’s income (referred to as a “deemed paid credit”). This deemed paid credit can be applied against the GILTI included in the U.S. shareholder’s income. Prior to the Act, if the deemed paid foreign tax credit applied, it allowed for a credit of 90% of applicable foreign taxes paid.

Foreign-Derived Intangible Income (“FDII”). The 2017 TCJA also introduced the FDII deduction for U.S. corporations. FDII is a category of earnings that derive from sale of products related to intellectual property. If a U.S. corporation holds U.S. intellectual property and has sales to non‑U.S. customers based on that property, then the profits from these sales are effectively subject to a lower tax rate. Prior to the Act, a U.S. corporation could deduct 37.5% of its FDII.

Changes to FDII and GILTI (Now FDDEI and NCTI)

Elimination of Net Deemed Tangible Asset Return; New Name. Prior to the Act, the amount of FDII and the GILTI inclusion was reduced by a 10% net deemed tangible income return for qualified business asset investments (known as “QBAI”). The Act eliminates the reduction for 10% net deemed return.

As a result, the FDII and GILTI regimes are renamed as “foreign-derived deduction-eligible income” (“FDDEI”) and “net CFC tested income” (“NCTI”) respectively.

Reduced Deduction Percentage. Effective for the 2025 tax year, the Act reduces the percentage of the deduction for FDDEI and NCTI inclusions under Code § 250 from 50% to 40% (but, there is an increase in deemed-paid foreign tax credits properly attributable to NCTI from 80% to 90% as discussed under “Increased Use of Foreign Tax Credits” below).

The Act reduces the FDDEI deduction against a U.S. corporation’s income from 37.50% to 33.34%. Based on a 21% corporate income tax rate, the effective tax rate on FDDEI has increased to 14% (from 13.125%).

In addition, the Act also reduces the deduction on the amount of NCTI included in a corporate U.S. shareholder’s gross income from 50% to 40%. Based on a 21% corporate income tax rate, starting in 2025, a U.S. corporation is effectively taxed at 12.6% on net CFC tested income inclusions (without taking into account foreign tax credits and other deductions, credits, and rules).

Determination of Foreign Tax Credit Limitation. In order to determine its foreign tax credit limitation, a taxpayer must first determine its taxable foreign source income by allocating and apportioning deductions between U.S.-source vs. foreign-source gross income. Afterwards, the taxpayer allocates its foreign source income among various foreign tax credit limitation categories (or baskets).

One such foreign tax credit limitation category applies to NCTI/net CFC tested income. The Act limits the deductions allocable to income in the NCTI category to only: (1) the 40% deduction for NCTI under Code § 250, discussed under “—Reduced Deduction Percentage” above (and any deduction allowed for state, local and foreign income and certain other taxes imposed on such amounts), and (2) other deductions directly allocable to such income. Notwithstanding the prior sentence, no amount of interest expense or research and experimental expenditures may be allocated to NCTI. Any other directly allocable deduction will instead be allocated or apportioned to U.S.-source income.

Determination of “U.S. Shareholders” of CFCs for NCTI and Other Purposes. The Act changes the rules for determining whether a person is considered a U.S. shareholder of a CFC, including for NCTI inclusion purposes. Similar to the modification of the CFC pro rata share rules for Subpart F purposes (discussed below), if a U.S. shareholder owns stock on any day during the CFC’s tax year, the U.S. shareholder would be required to include its pro rata share of the CFC’s tested income for purposes of calculating a U.S. shareholder’s NCTI inclusion. The CFC pro rata share rule is explained in more detail under the heading “—Controlled Foreign Corporations (CFCs)” below.

Changes in “Deduction Eligible Income” for Determining FDII/FDDEI. Finally, the Act modifies the definition of “deduction eligible income” (“DEI”). DEI is a component of determining FDDEI and represents the portion of income that could potentially qualify for the FDDEI deduction. DEI generally constitutes a U.S. corporation’s gross income (with certain exclusions, such as dividends, financial services income, and CFC inclusions), reduced by allocable deductions. In summary, the Act makes the following modifications:

The Act adds an additional exclusion from DEI for income and gain from the sale or disposition (or deemed disposition) of intangible property or depreciable or amortizable goods.
The Act narrows the allocation of expenses. Only expenses directly related to foreign‑derived DEI are considered (i.e., DEI will no longer be reduced by interest expense and research and experimental expenditures properly allocable to gross income).

Unless otherwise noted, these changes apply to tax years beginning after December 31, 2025.

Increased Use of Foreign Tax Credits

The Act increases the percentage of the deemed paid credit for taxes properly attributable to NCTI from 80% to 90% (thus increasing foreign tax credits available for NCTI purposes). This increase potentially eliminates U.S. tax on foreign income that is taxed at an effective rate of approximately 14%, as explained in the chart below.

However, the reduced percentage of the deduction for FDDEI and NCTI inclusions under Code § 250 (from 50% to 40%) increases U.S. tax on NCTI, which may offset the foreign tax credit benefit. In addition, eliminating the QBAI reduction (as discussed above) also increases the NCTI inclusion, which may further impact foreign tax credit use.

The 14% approximate rate is calculated as follows:

21%	U.S. corporate tax rate
x 60%	Percentage of NCTI income remaining after the 40% deduction under Code § 250
= 12.6%	Effective tax rate on NCTI if foreign tax credits are not considered
/ 90%	90% of foreign tax credits paid
= 14%

Thus, if the foreign tax paid by the CFC is fully creditable (at 90%), no additional U.S. income tax on NCTI should apply, provided that the foreign tax rate on the foreign income is taxed at an effective rate of approximately 14%.

In summary, this change may increase the utilization of foreign tax credits from high-tax jurisdictions.

Controlled Foreign Corporations (CFCs)

The Act makes the following changes with respect to CFCs:

Related CFC Look-Through Rule Permanently Extended. The Act permanently extends the look-through rule for related CFCs of Code § 954(c)(6). In general, this rule allows U.S. shareholders to “reinvest” active foreign earnings of one CFC in a related CFC without current taxation, as long as the underlying income of the payor CFC would not otherwise have been subject to current U.S. taxation (i.e., as Subpart F income or effectively connected income with a U.S. trade or business).
Partial Foreign Tax Credit Disallowance. The Act includes a partial foreign tax credit disallowance under Code § 901 for 10% of any foreign income taxes paid or accrued (or deemed paid) with respect to certain amounts excluded from gross income under Code § 959(a) by reason of an inclusion in gross income for NCTI purposes/Code § 951A (applicable after June 28, 2025).
- Restoration of Limitation of Downward Attribution of Stock Ownership. The Act limits downward attribution of stock ownership in applying constructive ownership rules for purposes of determining whether a foreign corporation constitutes a CFC. More specifically, the Act reinstated Code § 958(b)(4) (which was repealed in the 2017 TCJA). This provision limits the circumstances in which a U.S. corporate subsidiary is treated as constructively owning the stock of a CFC held by the U.S. subsidiary’s owner. Prior to the Act, in determining whether a foreign corporation is a CFC, attribution of certain stock of a foreign corporation owned by a foreign person to a related U.S. person is required for purposes of determining whether the U.S. person is a U.S. shareholder of the foreign corporation.
- Downward Attribution From Foreign Persons – New. The Act includes a new Code § 951B tax regime to allow for downward attribution from a foreign person in certain cases. The Act introduces the following new terms to achieve this purpose”: “foreign‑controlled United States shareholder” and “foreign-controlled foreign corporation.”
- Modification of CFC Pro Rata Share Rules. The Act modifies the pro rata share rules under Code § 951. Prior to the Act, a U.S. shareholder who owns stock in a CFC on the last day of the CFC’s tax year must include in gross income its pro rata share of the CFC’s Subpart F income (subject to certain adjustments). The last-day ownership requirement is eliminated under the Act, and (applicable to tax years of foreign corporations beginning after December 31, 2025), a U.S. shareholder would be required to include its pro rata share of Subpart F income if it owns stock on any day during the CFC tax year. A special transition rule applies to dividends paid (or deemed paid) by CFCs on or before June 28, 2025.

Base Erosion and Anti-Abuse Tax (BEAT)

The Base Erosion and Anti-Abuse Tax (or “BEAT”) is a tax meant to prevent U.S. and non-U.S. corporations operating in the U.S. with gross receipts of at least $500 million a year from avoiding U.S. tax liability by shifting profits outside the United States. BEAT is similar to a minimum tax; corporations pay BEAT to the extent it exceeds their ordinarily corporate income tax liability. BEAT equals the excess of 10% of the excess “modified gross income” over the corporation’s regular income tax liability.

The Act repeals the scheduled increase in the BEAT rate from 10% to 12.5% after the tax year 2025.
In addition, prior to the Act, BEAT generally does not apply unless “base erosion payments” (i.e., payments made to related foreign corporations) exceed 3% of the corporation’s total deductions. The Act reduces this percentage from 3% to 2%, exempting high-taxed foreign payments from base erosion classification.
There is no specification of a new rate cap, which suggests a reversion to the BEAT rate of 12.5%.

Repeal of 1-Month Election for Specified Foreign Corporations

The Act repeals the election for 1-month deferral in determination of tax year of specified foreign corporations. Prior to the Act, “specified foreign corporations” (defined in Code § 898(b)) are required to use the tax year of their majority U.S. shareholder. Specified foreign corporations, however, may elect a tax year beginning one month earlier than the majority U.S. shareholder year. The Act repeals the election, applicable to tax years of specified foreign corporations beginning after November 30, 2025.

Sourcing Rules

The Act changes how to determine whether certain income from the sale of inventory produced in the U.S. is considered income for U.S. sources or from non-U.S. sources. Prior to the Act, all income from inventory produced in the U.S. is treated as U.S.‑source, regardless of the location of the sale (and, conversely, income from inventory produced outside the U.S. is treated as foreign source income).

The Act introduces a foreign-source exception (for purposes of the foreign tax credit limitation) applicable when: (i) a U.S. person sells U.S.-made inventory outside the U.S., (ii) the inventory is for use outside the U.S. (or falls within related rules), and (iii) the U.S. person has a foreign office or fixed place of business to which the income can be attributed. In such cases, up to 50% (i.e., not more than) of that income can be reclassified as foreign-source. The changes to these rules apply to any sale or other disposition occurring after December 31, 2025.

BUSINESS TAX PROVISIONS

Expansion of Qualified Small Business Stock Exclusion

The Code allows U.S. non-corporate taxpayers to exclude from gross income up to 100% of eligible capital gain from the sale or exchange of stock of a U.S. C corporation that qualifies as a “qualified small business stock” (also known as “§ 1202 stock”), subject to certain caps. Certain requirements must be satisfied for this exclusion, including active business and asset thresholds, a holding period requirement, and the stock being acquired at original issuance.

Under prior law, non-corporate taxpayers that held qualified small business stock (“QSBS”) for more than 5 years, could exclude all or a part of the gain recognized on the sale or exchange of such stock, if a number of requirement were satisfied. Prior to the Act, a taxpayer who disposed of QSBS could exclude the greater of (i) $10 million or (ii) 10 times the adjusted basis of the QSBS disposed in that tax year (the “10X Basis Rule”). The Act increases the amount of gain that can be excluded from income from the sale of QSBS for tax years beginning after July 4, 2025, to $15 million (up from $10 million). The exclusion is indexed for inflation. However, the 10X Basis Rule remains unchanged so that the gain exclusion now applies to the greater of (i) $15M or (ii) 10X the taxpayer’s tax basis in the stock.

The Act also reduces the holding period required to qualify for QSBS benefits from five years to three years, with 50% of the gain exclusion benefit phasing in beginning after a three-year holding period. A four-year holding period increases the gain exclusion to 75% and the full 100% gain exclusion is available when the stock is held for five years or more.

Under prior law, the aggregate gross assets of the qualified small business at all times before the issuance and immediately after the issuance of the QSBS stock could not exceed $50 million. The Act increases the aggregate gross asset limit from $50 million to $75 million.

The changes to the aggregate gross assets test applies to QSBS issued after July 4, 2025 and the other changes to the QSBS provisions apply to tax years beginning after July 4, 2025.

Qualified Opportunity Zones Made Permanent and Enhanced

A “qualified opportunity zone” (“QOZ”) is a designated economically distressed community within the United States where new investments may be eligible for the deferral and/or reduction of capital gains on investments under certain conditions. The Act makes qualified opportunity zones tax benefits (established by the 2017 TCJA) permanent.

Every 10 years, state governors will propose new QOZs to be certified by the Secretary of the Treasury. The effective date of the designations for new QOZs will be July 1, 2026 and every 10 years thereafter. Once the QOZ is certified by the Treasury Secretary, each census tract will remain a QOZ for 10 years beginning January 1 of the following year.

Investments in QOZs permit gain deferral. In general, to defer a capital gain, a taxpayer has 180 days after the date of the sale of an appreciated asset to invest the realized capital gain dollars into a qualified opportunity fund (“QOF”), a fund that is organized for the purpose of investing in a QOZ. Taxpayers that reinvest capital gains in a QOF and satisfy certain requirements were eligible for gain deferral until the earlier of (i) the date that the investment in the QOF is disposed of, or (2) December 31, 2026. The gain deferral under the Act is generally the same as under prior law (i.e., previously deferred eligible gains will become taxable on the sooner of (i) disposition of the investment in the QOF or (ii) December 31, 2026), except for investments made after December 31, 2026, where such gains will be deferred until the earlier of the date of disposition of such investment or five years from the date of the investment (as opposed to a fixed date).

Under previous law, a taxpayer that deferred capital gains through a QOF would receive a 10% tax basis step-up after holding their investment for five years and an additional 5% tax basis step-up if held for seven years. The Act eliminates the 5% tax basis step-up which applied at the seven-year mark, but the Act makes permanent the 10% basis step-up benefit, which takes effect immediately before the end of the five-year gain deferral period. A newly defined designation in the Act provides an investor a step-up in tax basis of 30% of the deferred gain if an investment is held for at least five years in a “qualified rural opportunity fund.” The changes in the Act relate to future investments and there are no apparent changes to any current investors in a QOZ; thus, any deferred gain under the prior QOZ rules will still be recognized at the end of 2026.

Under the Act, tax will not be imposed on gain realized when an investment is sold or exchanged if the QOZ investment is held for at least ten years. However, additional appreciation after thirty years will be subject to tax.

The Act also introduces new reporting requirements for QOFs and QOZ businesses and adds a new penalty provision. QOFs will be required to report to the IRS on certain items including the value of its QOZ property, the value of its total assets, the North American Industry Classification System (NAICS) codes that apply to its businesses, the QOZ census tracts it invests in, the amount invested in each QOZ, the value of its tangible and intangible property and whether leased or owned, and the approximate number of full time employees employed, and the number of residential units owned. Any failure to satisfy the new reporting requirements will result in penalties of up to $10,000 per return or up to $50,000 for QOFs with over $10 million in assets. There will be harsher penalties for willful non-compliance by a taxpayer.

Most of the new QOZ provisions will take effect after December 31, 2026.

Relaxed Limitation on Deducting Business Interest (Code § 163(j))

Section 163(j) of the Code, which was enacted in the 2017 TCJA, limits the amount of business interest expense that is deductible (the “business interest limitation”). In summary, a taxpayer may only deduct business interest to the extent it does not exceed the sum of: (1) the taxpayer’s business interest income, (2) 30% of the taxpayer’s “adjusted taxable income,” and (3) “floor plan financing interest” (applicable to retail sellers and lessors of motor vehicles). Any interest expense disallowed as a deduction as a result of this limitation is carried forward indefinitely. This limitation generally only applies taxpayers with average annual gross receipts of at least $25 million during the preceding three tax years.

The Act modifies the application of the business interest limitation in several ways, including:

Changes to “adjusted taxable income.” Prior to the Act, “adjusted taxable income” referred to taxable income without regard to (i) items of non-business income, gain, deduction, and loss, (ii) business interest income or expense, (iii) net operating loss deductions, (iv) “qualified business income” deductions (discussed under the heading “Qualified Business Income Deduction (Code § 199A)” below.
- The Act adds depreciation, amortization, and depletion to taxable income in determining “adjusted taxable income,” effective for tax years beginning after December 31, 2024. Originally, an EBITDA-like definition of adjusted taxable income was used, but was replaced in 2022 with a definition more similar to EBIT. The Act reinstates EBITDA, thereby increasing the deductibility of business interest for taxpayers with significant capital investments or amortizable intangibles. This change may be particularly relevant for companies engaging in acquisitions that result in the deductible amortization of goodwill.
- The Act removes certain international tax items from the determination of “adjusted gross income,” including GILTI (now referred to as “net CFC tested income”), Subpart F income, the § 78 gross-up for deemed paid foreign tax credits, and certain related deductions, effective after December 31, 2025. This change may have the effect of decreasing the business interest limitation for U.S. corporations with CFCs (particularly those that elected to treat their CFCs as a group for purposes of calculating the business interest limitation).
Extending the business interest limitation to certain capitalized interest.
- Prior to the Act, a taxpayer may reduce the amount of interest disallowed by the business interest limitation by increasing the amount of capitalized interest (which was not subject to disallowance). Interest capitalized in property was recoverable as depreciation (or, for inventory, recoverable as cost of goods sold).
- Beginning after December 31, 2025, business interest expense that the taxpayer elects to capitalize will retain its character as interest and will be subject to the business interest limitation (subject to exceptions).
- The amount allowed as business interest expense after applying the business interest limitation will apply: (i) first to the capitalized business interest and (ii) then to business interest that is in the current year. This provision does not apply to interest capitalized under Code § 263(g) (carrying costs in the case of straddles) and Code § 263A(f) (special rules for allocating interest to taxpayer-produced property).
- As under the law prior to the Act, any disallowed interest can be carried over to the future years.
- This change may be important to businesses that previously used elective capitalized interest as a tool for timing interest deductions to mitigate the business interest limitation.

Limitation of Excess Business Losses of Non-Corporate Taxpayers

Non-corporate taxpayers may be subject to limitations on the deduction of an “excess business loss.” An “excess business loss” is the amount by which the total deductions attributable to all of the taxpayer’s businesses exceeds the sum of (i) the taxpayer’s total gross income and gains attributable to those businesses plus (ii) a threshold amount adjusted for cost of living.

Effective for years beginning after December 31, 2025, the Act makes the excess business losses limitation permanent. In any tax year, an individual cannot deduct business losses of more than $250,000 (or $500,000 for married joint filers) adjusted for inflation. The inflation adjustment begins in 2026 (using 2024 as the base year). If a taxpayer has business losses that exceeds the limitation, the excess amount is carried forward to future tax years as a net operating loss (“NOL”). The present limitation on excess business losses is effective through December 31, 2025.

Accelerated Depreciation and Expensing

Election to Expense Certain Depreciable Assets. Section 179 of the Code allows a taxpayer to elect to treat the cost of qualifying property as a current expense in the year the property is placed in service (in lieu of depreciation). Generally, qualifying property includes tangible personal property, off the shelf computer software, and qualified real property. Effective for years beginning after December 31, 2024, the maximum expense deduction is $2,500,000. The deduction is reduced dollar-for-dollar when the total cost of qualifying property placed in service during the year exceeds $4,000,000. Both the maximum deduction and the phase-out threshold will be annually adjusted for inflation.

A further limitation is that this deduction is limited to the taxable income derived from the active conduct of any trade or business. Passive income is not included in determining the income limitation. Any unused amount can be carried forward indefinitely.

The expensing deduction under Code § 179 operates in tandem with bonus depreciation under Code § 168(k) (see below).

Bonus Depreciation. Section 168(k) of the Code provides for bonus depreciation in the first year that property is placed in service. The 2017 TCJA allowed for 100% immediate expensing of qualified property, which was to be phased out between 2023 and 2026.

The Act allows for 100% first year depreciation for property acquired and placed in service after January 19, 2025. The Act also provides a transitional election to apply 40% or 60% bonus depreciation on certain property placed in service during the first tax year ending after January 19, 2025. (This election is relevant to fiscal year taxpayers and calendar year taxpayers for property placed in service between January 1, 2025 and January 19, 2025.)

“Qualified property” includes:

Tangible property with a recovery period of 20 years or less;
Computer software (not amortized under Section 197);
Qualified real estate improvement property;
Qualified film, television and live theatrical production; and
Water utility property.

Qualified property may be purchased new or used.

Taxpayers should consider the effect of a bonus depreciation deduction on their ability to utilize NOLs. If bonus deprecation would increase an NOL deduction, a taxpayer may prefer not to elect bonus depreciation because of the limitation on NOL deductions.

“Disguised” Payments From Partnerships to Partners for Property or Services

The Code generally provides rules applicable to (i) “disguised” sales of property between a partner and a partnership (including LLCs classified as partnerships for income tax purposes) and between partners of a partnership and (ii) “disguised payments” to a partner for the provision of services to a partnership. For example:

A partner may purportedly contribute appreciated property to a partnership in connection with the partnership purportedly distributing cash to the partner. Under certain circumstances, the distribution could be recharacterized as sale proceeds to the partner for the appreciated property.
A partner may perform services for a partnership, waive compensation for services performed (e.g., a management fee waiver), and in connection therewith the partnership purportedly distributes cash to the partner. Under certain circumstances, the distribution could be recharacterized as a compensation payment to the service partner.
A partner may purportedly make a cash contribution to a partnership and in connection therewith the partnership may purportedly make a cash distribution to another partner. Under certain circumstances, the purported contribution and distribution may be recharacterized as a “disguised sale” of all or part of the distributee partner’s interest in the partnership.

Prior to the Act, the Code stated that these provisions were applicable “[u]nder regulations prescribed by the Secretary.” Some taxpayers have argued that the prior language indicates that the “disguised sale” and “disguised services” rules only apply to the extent that the Treasury promulgates applicable final regulations. There are no currently effective final regulations that relate to “disguised services” and “disguised sales” between partners (although there are final regulations for disguised sales from a partner to a partnership).

The Act replaces “[u]nder regulations prescribed by the Secretary” with “[e]xcept as provided by the Secretary.” This change clarifies that the disguised sale and disguised services rules do not need final regulations to be applicable, thereby eliminating the argument that these provisions only apply to the extent that applicable final regulations have been promulgated.

Restoration of the Taxable REIT Subsidiary Asset Test

A “real estate investment trust” (“REIT”) is a company that owns, operates, or finances income-producing real estate and its related assets. REITs must satisfy specific asset tests, income tests, and organizational requirements. Although a REIT is taxable as a corporation, the REIT is entitled to an income tax deduction for the dividends it pays, if it satisfies certain requirements, including distributing (via dividends) at least 90% of its taxable income each year, thereby achieving modified pass-through status and avoiding double taxation.

Provided that certain rules are satisfied, a REIT may utilize a “taxable REIT subsidiary” (“TRS”) to engage in certain activities that would otherwise be prohibited or would jeopardize the REIT’s status as such. The Act amends Code § 856(c)(4)(B) to increase the limitation on the value of the REIT’s taxable REIT subsidiaries. Effective for tax years beginning after December 31, 2025, the permissible value of a REIT’s TRS securities will increase from 20% to 25% of the value of the REIT’s total assets. This adjustment restores a higher threshold than that which applied prior to 2018.

This change is expected to provide REITs that use taxable REIT subsidiaries in order to comply with the asset tests for REIT qualification with greater flexibility in structuring their TRS operations. This adjustment should be particularly relevant to REITs in the healthcare, hospitality, and data center industries.

Qualified Business Income Deduction (Code Section 199A)

The Act expands the scope of the deduction for “qualified business income” (the “§ 199A Deduction”), which was originally enacted as part of the 2017 TCJA.

Background to the § 199A Deduction. To explain the Act’s changes to the § 199A deduction, it is helpful to provide some general background prior to its modification by the Act.

The 2017 TCJA introduced a deduction of up to 20% of “qualified business income” for most taxpayers other than C corporations. Very generally and subject to numerous exceptions, “qualified business income” is net income of a U.S.-conducted “qualified trade or business” held by the taxpayer directly or through a pass-through entity. Certain investment‑related items (e.g., dividends and interest) and employment-like payments (e.g., certain guaranteed payments from partnerships) are excluded. In addition, the § 199A Deduction also applies to qualified real estate investment trust (“REIT”) dividends and qualified publicly traded partnership income.
Taxpayers with taxable income not exceeding certain thresholds (for 2025, $197,300 for single filers and $394,600 for married joint filers) (the “Threshold Amount”) may take a § 199A deduction on their qualified business income without having to satisfy certain requirements applicable to higher-income taxpayers.
Taxpayers with taxable income exceeding the sum of the Threshold Amount plus $50,000 (or $100,000 for married joint filers) (such sum, the “Phase‑In Amount”) are ineligible for § 199A deduction with respect to certain categories of services business (“specialized service businesses”). With respect to each non‑specialized service business, the § 199A deduction applies only to qualified business income exceeding the higher of two limitations: (i) one based on the business’ W‑2 wages and (ii) the other based on W-2 wages and the unadjusted tax basis of certain depreciable property (collectively, the “wage and property limitations”). These two limitations are phased-in for taxpayers with taxable income between the Threshold Amount and the Phase-In Amount.

Changes to the § 199A Deduction.

The § 199A deduction (originally set to expire on December 31, 2025) has been permanently extended.
A new minimum deduction of $400 applies to taxpayers with $1,000 of qualified business income, but only to the extent that it derives from businesses in which the taxpayer “materially participates” (defined by reference to the Code’s passive activity loss rules). The $400 and $1,000 amounts are indexed for inflation for tax years beginning in 2017.
The Phase-In Amount is increased to the sum of the Threshold Amount plus $75,000 ($150,000 for married joint filers). Also, the $75,000 and $150,000 amounts are now annually indexed for inflation (in addition to the Threshold Amount).
The exception to the deduction for income from specialized service businesses and the wage and property limitations remain applicable for those with taxable income exceeding the new higher Phase-In Amount.

Deduction for Qualified Production Activities (Entertainment Productions)

Current law allows allow taxpayers to elect an immediate deduction for certain production costs associated with qualified film, television, or live theatrical productions, up to specified limits. The Act expands the deduction by adding new provisions which include up to $150,000 per year in aggregate costs for qualified sound recording productions as part of the existing $15 million deduction limit ($20 million if produced in a low-income community or distressed county), provided the production is created and recorded within the United States. This expansion applies to sound recording projects commencing in tax years ending after July 4, 2025.

Research or Experimental Expenditures

Under prior law, research and development activities were not immediately deductible. Instead, “research or experimental expenditures” (“R&E”) were required to be capitalized and amortized ratably over a 5-year period (or 15 years if the R&E expenses were attributable to research conducted outside the U.S.).

The Act no longer requires taxpayers to capitalize and amortize domestic R&E. Instead, taxpayers may immediately deduct domestic R&E for tax years beginning after December 31, 2024. The 15-year amortization rule remains for foreign R&E. Moreover, foreign R&E still does not qualify for a research tax credit under Code § 41.

The Act provides retroactive R&E relief for certain small businesses with average gross receipts of $31 million or less for the 3-tax year period ending in 2024. Qualifying small businesses are able to (1) amend their 2022 through 2024 tax returns to retroactively deduct domestic R&E (provided that the amendment must be filed by July 4, 2026), (2) take a catch up deduction in 2025, or (3) split the deduction between 2025 and 2026.

Companies that do not qualify as a small business for this purpose are prohibited from amending prior tax returns, but are eligible to accelerate any remaining 2022 through 2024 amortization from over one or two tax years starting in 2025.

Charitable Contributions for Corporations

Effective for tax years beginning after December 31, 2025, corporations may only take deductions for charitable contributions where the aggregate amount of contributions exceed 1% of the corporation’s taxable income (subject to modifications). As was the case prior to the Act, the corporate charitable deduction is capped at 10% of the corporation’s taxable income (as modified).

Charitable contributions in excess of the 10% cap may be carried forward by the corporation for up to five tax years. However, corporations may only carry forward contributions below the 1% floor if the corporation also has contributions that exceed the 10% cap in the same year.

Partial Exclusion on Interest Earned on Loans Secured by Rural or Agricultural Real Property

The Act, in tax years ending after July 4, 2025, provides a qualified lender with an exclusion from gross income of 25% of the interest received on any qualified rural or agricultural real estate. The income exclusion is only available to regulated lenders, not private lenders. The refinancing of a loan that was made on or before July 4, 2025 does not qualify the loan for interest exclusion.

Qualified rural or agricultural real estate means (i) any U.S. real property which is substantially used for the production of one or more agricultural products, (ii) any U.S. real property which is substantially used in the trade or business of fishing or seafood processing and (iii) any U.S. aquaculture facility. An “aquaculture facility” is defined as any land, structure, or other appurtenance that is used for aquaculture (including any hatchery, rearing pond, raceway, pen or incubator).

Employer Provided Child Care Credit

Starting in 2026, the employer-provided child-care credit is increased for “qualified child care expenditures” from 25% to 40% for regular businesses and 50% for “eligible small businesses.” Generally, to qualify as an “eligible small business” the entity (together with certain affiliates) must have average annual gross receipts for the 5-years period ending with the tax year preceding the applicable tax year that do not exceed $25 million (indexed for inflation from 2018). For 2025, the “eligible small business” gross receipts threshold amount is $31 million.

The Act increases the maximum annual credit amounts to $500,000 for regular businesses and $600,000 for “eligible small businesses,” with both amounts subject to annual inflation adjustments beginning in 2027.

Paid Family and Medical Leave Employer Credit Made Permanent

The paid family and medical leave credit is equal to the applicable percentage (12.5% to 25% depending on the rate of payment) of the amount of wages paid to qualifying employees during any period in which the employees are on family and medical leave, up to a maximum of 12 weeks of leave for any employee for the tax year.

Information Reporting

The Act increases information reporting requirements for persons engaged in a trade of business from $600 to $2000 for certain types of income and as remuneration for non-employee compensation.

Master Limited Partnerships “Qualifying Income” Expands to Include Clean Energy

The Act expands the definition of “qualifying income” for master limited partnerships (“MLPs”) to include income from hydrogen production/storage, carbon capture facilities, renewable (clean) electricity generation including advanced nuclear, hydropower and geothermal. In order to treat a MLP as a partnership for federal income tax purposes, 90% of the MLP’s gross income for every tax year must consist of “qualifying income.” The expansion of the definition of “qualifying income” will allow companies in such sectors to organize as MLPs and be able to attract investment via pass-through vehicles.

ENERGY AND ENVIRONMENTAL TAX PROVISIONS

The Act introduced extensive changes to energy-related tax credits. In most cases, these changes significantly limit existing incentives for individuals, businesses, and energy projects. Many of the clean energy tax credits previously available to consumers are set to expire as early as September 2025, with many more slated for termination by year-end or mid-2026. Generally, the Act imposes earlier deadlines for energy projects. In addition, new restrictions on these credits are tied to foreign ownership and the use of foreign components. Principally, these changes affect tax credits based on investment in clean energy projects or generated from the production of clean energy, which will be phased-out.

New Terminology for Affecting Foreign Investors and Suppliers in the Clean Energy Sector

The Act also introduces several new definitions that affect foreign investors and suppliers. Until clarified, these new terms suggest a restrictive interpretation aimed at controlling foreign influence in domestic energy infrastructure and supply chains.

A “prohibited foreign entity” is either a “specified foreign entity” or “foreign-influence entity.” The entity must make this determination as of the last day of the year (other than for a newly formed entity, which must make its determination as of the first day of its tax year.

The term “specified foreign entity” encompasses a broad range of foreign entities deemed to pose a threat to U.S. national security, technological leadership, or supply chain integrity. The definition encompasses any “foreign-controlled entity” of certain specified countries (which include Russia, China, North Korea, and Iran), including any government, agency, person, or business unit affiliated with a “covered nation.” In addition, it specifically includes Chinese military companies operating in the U.S. in accordance with certain laws.

The term “foreign-influence entity” refers to a business that is significantly tied to certain foreign actors, through either ownership, control, or contractual relationships. This definition includes companies where a foreign entity appoints senior leadership, owns a sizable share (25% or more from a single foreign entity, or 40% combined), or holds a substantial portion of its debt (15% or more). It also includes companies that give a foreign entity control over key clean energy infrastructure—such as a solar facility or energy storage system—through contracts or agreements. In short, if a foreign party has meaningful influence over leadership, ownership, financing, or operations, the business may be treated as foreign-influenced under these new rules.

Consumer and Business Focused Energy Incentives and Credits

Terminating on September 30, 2025.

Clean Vehicle Credit for New or Previously Owned Vehicles. Prior law provided a tax credit to individuals for the purchase of qualifying new or previously owned clean vehicles. For new vehicles, the Act accelerates the termination of this credit by making it unavailable for vehicles purchased after September 30, 2025. (Under prior law, the taxpayer had to take possession of the vehicle by December 31, 2032.) Similarly, the previously owned clean energy vehicles credit has been accelerated to terminate on September 30, 2025, but the taxpayer must take possession of the vehicle prior to September 30, 2025 (not merely purchased).

Qualified Commercial Clean Vehicles Credit. Under the Act, businesses and tax-exempt organizations will no longer be eligible for a credit on the purchase of new qualified commercial clean vehicles, including electric and hydrogen-powered trucks and vans, that are acquired after September 30, 2025.

Terminating or Phasing-Out on December 31, 2025.

Energy Efficient Home Improvement Credit. Prior to the Act, the Code provided a nonrefundable credit to individual taxpayers for a percentage of qualified energy-efficient improvements made to their primary residence, such as insulation, windows, doors, and certain HVAC systems. The Act eliminates this credit for improvements placed in service after December 31, 2025, and narrows eligible oil furnaces and boilers to those meeting 2021 Energy Star criteria and compatible with 20% eligible fuel blends.

Residential Clean Energy Credit. Prior to the Act, a credit was allowed for a percentage of the cost of qualifying residential energy systems, such as solar, wind, and fuel cell property, installed on a taxpayer’s primary or secondary residence. The Act eliminated the credit for residential clean energy expenditures made after December 31, 2025. The changes do not require the taxpayer to place the property into service by December 31, 2025, only that the taxpayer make the expenditure on such property before that date and place it in service before January 1, 2033, when the applicable percentage no longer applies. Moreover, the Act’s new changes also impose a flat credit rate of 30% for property subject to the section that is placed in service after December 1, 2016 and before January 1, 2033.

Terminating in 2026.

Alternative Fuel Vehicle Refueling Property Credit. Prior law provided a credit for the cost of installing qualified refueling equipment for alternative fuels, including electric vehicle charging stations and hydrogen fueling infrastructure, at residential or commercial properties. The Act accelerates the sunset of this credit by ending the credit for property placed in service after June 30, 2026, instead of December 31, 2032.

New Energy Efficient Home Credit. Prior law provided homebuilders and manufacturers a credit for constructing or manufacturing qualifying new energy-efficient homes that meet specified energy saving standards. The credit was previously scheduled to expire for homes constructed after December 31, 2032. The Act accelerates the termination of the credit by cutting off eligibility for homes constructed after June 30, 2026.

Energy Efficient Commercial Buildings Deduction Eliminated. Prior law provides a deduction for businesses and certain tax-exempt entities that install qualifying energy-efficient systems in commercial buildings or government-owned property. The Act eliminates the credit for property whose construction begins after June 30, 2026.

New Rules Affecting Clean Energy Projects and Investment

Carbon Oxide Sequestration Credit. The Act terminates the credit for capturing and disposing, injecting, or utilizing qualified carbon oxide for any taxpayer that is a prohibited foreign entity beginning after July 4, 2025. Moreover, the Act equalizes the credit amount for different carbon oxide uses at $17 per ton (adjusted for inflation after 2026), which will reduce the overall value of the credit.

Zero-Emission Nuclear Power Production Credit. The Code grants credits for production of zero-emission electricity from qualified nuclear facilities. The Act prevents prohibited foreign entities from claiming this credit for tax years beginning after July 4, 2025.

Clean Hydrogen Production Credit. Prior law provides a credit for the production of qualified clean hydrogen. The Act terminates this credit for facilities beginning construction after December 31, 2027.

Advanced Manufacturing Production Credit. Prior law provided a credit of up to 10% of the manufacturing cost of the domestic production and sale of eligible clean energy components and critical minerals (such as solar panels, wind turbine parts, inverters, and batteries) intended to bolster U.S. clean manufacturing and supply chain resilience.

The Act significantly modifies the credit by initiating a multi-tiered phase out for processing critical minerals other than certain types of coal and manufacturing of clean energy components. The credit begins to sunset for most minerals used in clean energy manufacturing that are processed after December 31, 2030 with complete elimination by December 31, 2033. However, the credit does not terminate for wind energy components produced and sold after December 31, 2027. In addition, metallurgical coal remains eligible for the credit after December 31, 2029, at a reduced 2.5% credit rate.

The Act further restricts the advance manufacturing production credit’s eligibility to U.S.‑produced components that are sold to unrelated parties. The Act also tightens standards for integrated components, which qualify for the credit only if (i) the components are assembled in the same facility, (ii) 65% of the direct costs are primarily attributable to components that are mined, produced, or manufactured in the United States, sourced from at least 65% from U.S. materials, and (iii) free from material assistance from prohibited foreign entities. These changes apply to tax years beginning after July 4, 2025, and will require manufacturers to reassess sourcing, facility design, and production timelines to preserve eligibility.

Clean Electricity Production Credit. The Code provides a credit for the production of clean electricity from qualified zero-emission facilities. The Act (i) limits the availability of this credit for facilities constructed after December 31, 2025, if built with material assistance from prohibited foreign entities, (ii) eliminates credit eligibility for wind and solar leasing arrangements, and (iii) begins a general phase-out for all non-wind/solar facilities after 2032, regardless of national greenhouse gas benchmarks.

Qualifying Advanced Energy Project Credit. The Code provides an investment tax credit for facilities that manufacture components used in clean energy production for “qualified advanced energy manufacturing projects,” including facilities producing clean energy components, carbon capture equipment, and critical minerals. The Act reduces the amount of this credit by preventing any barring allocations revoked for failure to place projects in service within two years from increasing the overall limitation, thereby reducing the pool of reallocated credits.

Clean Electricity Investment Credit. Current law provides a credit for investments in clean electricity generation property, including zero-emission facilities, grid interconnection systems, and energy storage technology, aimed at promoting long-term clean energy deployment. The Act disallows the credit for wind and solar facilities placed in service after December 31, 2027 (unless construction begins before July 4, 2026, although energy storage systems installed alongside wind and storage projects remain eligible).

The Act also introduces a fixed phase-out for non-wind/solar facilities beginning after December 31, 2032, regardless of U.S. emissions targets. Projects that begin construction, reconstruction, or erection after December 31, 2025, will not qualify for the credit if they involve any material assistance (i.e., financial support, goods, services, or other aid) from a prohibited foreign entity. In addition to excluding prohibited foreign entities from credit eligibility, the provision imposes a recapture tax if payments are made to prohibited foreign entities within 10 years after the project is placed in service.

In addition, the Act eliminates the zero-emission requirement for fuel cell property if construction begins after 2025 and increases the minimum required percentage of domestic content for components—rising to 55% by 2027 (or 35% for offshore wind). These changes apply to tax years beginning after July 4, 2025.

Tax Credit for Semiconductor Plants – Enhanced. Current law provides for the “Advanced Manufacturing Investment Credit” for eligible investments in semiconductor manufacturing facilities or equipment used in such production, which is intended to support domestic chip manufacturing and supply chain security. The Act increases the credit rate from 25% to 35% for qualifying property placed in service after December 31, 2025.

HEALTH SAVINGS ACCOUNTS; HIGH DEDUCTIBLE HEALTH PLANS

Current law generally permits individuals enrolled in a high deductible health plan to contribute to a health savings account (“HSA”) on a pre-tax basis and use the funds to pay for qualified medical expenses. The Act expands the types of high deductible health plans that are compatible with HSAs to include bronze and catastrophic plans offered in the individual market on an exchange. The change is effective for months beginning after December 31, 2025.

The Act further provides that direct primary care service arrangements would not be disqualifying coverage in a high deductible health plan, meaning HSAs may be used to pay for direct primary care instead of having care reimbursed through a health insurance plan. The provision is limited to primary care services provided by primary care practitioners for a fixed periodic fee not in excess of designated maximums adjusted for inflation. The change is effective for months beginning after December 31, 2025.

The Act makes permanent a COVID-era safe harbor that allows telehealth services to be covered on a pre-deductible basis for individuals enrolled in a high deductible health plan. The change is effective for plan years beginning after December 31, 2024.

FRINGE BENEFITS

Dependent Care Assistance Program

Current law excludes from gross income employer-provided dependent care assistance pursuant to a “dependent care assistance program” (“DCAP”). The Act increases the DCAP maximum annual exclusion to $7,500 (or $3,750 for separate returns filed by a married individual). The change is effective for tax years beginning after December 31, 2025.

Qualified Bicycle Commuting Reimbursements – Eliminated

Prior law provided an exclusion for qualified bicycle commuting reimbursements made by employers on a pre-tax basis. This exclusion was suspended in 2018 by the 2017 TCJA, and the suspension was originally scheduled to last only until the end of 2025. The Act permanently eliminates the exclusion for qualified bicycle commuting reimbursement. It also modifies the inflation adjustment calculation used to determine the limitation on the exclusion for all qualified transportation fringe benefits. The change is effective for tax years beginning after December 31, 2025.

Moving Expense Reimbursement Exclusion – Eliminated

The elimination of the moving expense reimbursement exclusion from income has been made permanent except for members of the armed forces.

529 PLANS

Code § 529 provides that distributions from a 529 plan are not taxable for federal purposes if the distributions are used for qualified higher education expenses. “Qualified higher education expenses” are generally defined to include college tuition, room and board, and fees, books, supplies, and equipment required for enrollment, as well as $10,000 of tuition for public, private and religious elementary and secondary schools.

The Act expands what constitutes a “qualified higher education expense” for purposes of 529 plans to include additional expenses in connection with enrollment or attendance at an elementary or secondary school, including curriculum, instructional materials, online education, tutoring classes, fees for certain tests and certain educational therapies. It also increases from $10,000 to $20,000 the amount of expenses for tuition in connection with enrollment or attendance at an elementary or secondary public, private, or religious school that may be treated as qualified higher education expenses. This change is effective for distributions made after the date of enactment.

The Act treats certain post-secondary credentialing expenses as qualified higher education expenses eligible for distributions from 529 plans. This change is effective for distributions made after July 4, 2025.

EXECUTIVE COMPENSATION AND EXEMPT ORGANIZATIONS

Code § 162(m) limits the deduction for compensation paid to covered employees of a publicly held corporation to $1 million per employee. The Act applies entity aggregation rules for purposes of the deduction limitation for compensation paid to covered employees of a publicly held corporation ($1 million per employee). This means that remuneration paid to a specified covered employee by any member of the controlled group of entities (under Code § 414(b), (c), (m) and (o)) is aggregated to determine the loss of deduction for amounts over $1 million. This change is effective for tax years beginning after December 31, 2025.

Current law applies an excise tax on certain tax-exempt organizations that pay more than $1 million in remuneration (or excess parachute payments) to certain covered employees, which generally refers to the organization’s five highest compensated employees (or former covered employees). The Act amends the rules under Code § 4960 to apply the excise tax with respect to any employee or former employee of the applicable tax-exempt organization or a predecessor of such organization receiving the requisite remuneration, not only the five highest compensated employees. The change is effective for tax years beginning after December 31, 2025.

Current law imposes an excise tax for investment income for private colleges and universities with 500 or more students and with investment assets of $500,000 or more per student. The Act modifies the excise tax structure (ranging from 1.4% to 8%) based on the entity’s student adjusted endowment (ranging from $500,000 to more than $2 million), and increases the threshold at which the excise tax applies from 500 or more students to 3,000 or more students. In addition, the Act expands net investment income that is subject to the excise tax to include certain interest income the college or university receives from student loans and royalty income from federally funded research, which are currently excluded by the Treasury regulations. The changes are effective for tax years beginning after December 31, 2025.

COMBAT ZONE

Treatment of Income from Services Performed by Armed Forces Personnel in Specified Areas

The Act makes permanent the special tax treatment previously granted on a temporary basis to U.S. Armed Forces personnel serving in the Sinai Peninsula. Starting January 1, 2026, service members serving in high-risk regions officially designated as qualified hazardous duty areas stationed in the Sinai Peninsula of Egypt, Kenya, Mali, Burkina Faso, and Chad will be eligible for combat zone tax benefits, including the exclusion of certain military compensation from gross income.

FIREARMS TAX

Elimination of Excise Tax on Certain Firearms

The Act eliminates the excise taxes imposed on the transfer and manufacture of firearms regulated under the National Firearms Act—excluding machine guns and destructive devices, by reducing the tax rate to zero. The Act, however, retains the statutory process for registration. The zeroing out of the tax effectively removes the financial burden for most NFA firearms and silencers, while preserving their exemption from the general firearms excise tax. This change applies to calendar quarters beginning after October 2, 2025.

If you have any questions regarding the changes in the law discussed herein, please feel free to contact us.

Philip Wolman (Los Angeles)

Joseph Fletcher (Los Angeles)

Stuart Simon (Los Angeles)

Jerry Janoff (Los Angeles)

Nicholas Gerlach (San Francisco)

Marshall Olney (Los Angeles)

Agustin Ceballos (San Diego)

Jenni Krengel (Sacramento)

Zachary Wertheimer (Los Angeles)

James Mainzer (Chicago)

Brad Markoff (Los Angeles)

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