Five policy areas to watch in the House-passed tax bill

Key business, energy, and international tax changes to monitor as Senate deliberations begin.

In brief

• What are the key business tax incentives proposed in the House-passed tax bill, and who would benefit from them?
• How does the bill propose to change clean energy tax credits introduced under the Inflation Reduction Act (IRA)?
• What changes are proposed to international tax rules under the TCJA?

Five policy areas to watch in the House-passed tax bill

The House-passed budget reconciliation bill includes provisions that would have wide ranging tax implications across many industries and business types – from international taxes to energy tax incentives, pass-through taxes and employee compensation. While the tax portions of the legislation are likely to undergo changes in the Senate, below are five tax policy areas to watch as the process unfolds.

1. Business tax incentives

Description of key proposals: The bill includes several extensions, generally from 2025 through 2029, and certain new provisions favorable to businesses, among them:

• Restoring 100% bonus depreciation
  
  
• Reinstating the ability to increase the deductible business interest expense limitation by depreciation, amortization or depletion deductions
  
  
• Reinstating expensing for domestic R&D instead of 5-year amortization
  
  
• Introducing expensing for certain new US factories and certain improvements to existing US factories

Taxpayers affected:

Corporations, pass-through entities and other businesses that plan to make capital investments in domestic R&D, domestic manufacturing assets, and certain other domestic assets. Leveraged businesses may also benefit by being able to deduct business interest expense that is otherwise limited under current law.

EY insight:

It will be important to pay attention to effective dates, since these provisions are temporary, and most are retroactive to January 2025. While these provisions may be modified in the Senate, the core proposals will likely make it into the final bill due to their general support in both chambers.

3. Extension of TCJA international tax provisions and proposed Section 899

Description of key proposals: The legislation would permanently extend and modify certain international tax rates that would otherwise have become less favorable in 2026.

It would also impose tax increases aimed at eliminating or offsetting the effects of “unfair foreign taxes” deemed discriminatory against US taxpayers (directly or indirectly). In this context, unfair taxes include undertaxed profits rules, digital services taxes, diverted profit taxes, and other taxes as determined by the U.S. Treasury Department.

Taxpayers affected:

US corporations with foreign operations, particularly those that generate income from intangible assets or engage in cross-border transactions, US shareholders of CFCs, and large multinational corporations that make significant deductible payments to foreign affiliates. The new “unfair foreign taxes” rule is aimed at foreign-parented companies, particularly those with parent companies in a country that has adopted one of the taxes deemed unfair.

EY insight:

The provision could significantly impact a broad range of taxpayers. The proposed tax increase may also pressure foreign countries to repeal any taxes that would fall under this rule or exempt US-headquartered groups from those taxes.

4. Provisions affecting employee compensation and employers

Description of key proposals: The legislation includes several provisions that would affect employers, among them:

• Modifying the limit on deductions for compensation. The bill would expand the $1m deduction limitation on compensation paid to certain “covered employees” of publicly held corporations to include compensation paid by all entities within a public corporation’s controlled group (relying on different aggregation rules than under current regulations), which can include non-corporate entities such as partnerships.
  
  
• Tax-exempt organizations that pay $1m or more to their top five highest-compensated current or former employees are subject to a 21% excise tax. The bill would expand this to include any employee or former employee of the tax-exempt organization.
  
  
• Exempting tip income from federal tax. The legislation would provide a federal income tax deduction for tip income. It would also expand the business tax credit for the portion of FICA/payroll taxes an employer pays on tips to apply to employers in beauty businesses. The tip deduction is limited to cash tips in occupations for which tips are customary and to employees with compensation under a certain threshold.
  
  
• Eliminating federal tax on qualifying overtime pay. The legislation would allow a federal deduction for qualified overtime compensation, which doesn’t include tips or payments to highly compensated individuals.

Taxpayers affected:

The compensation deduction changes could impact a wide range of publicly traded companies and their subsidiaries, depending on their compensation structures. The tip and overtime proposals would affect individuals in industries that customarily receive tips and employers, who would need to track and report federal overtime payments and tips.

EY insight:

Many employers may face additional reporting requirements under these provisions, and some could find themselves subject to the compensation deduction limit or 21% excise tax for the first time. 

5. Provisions affecting pass-through entities

Description of key proposals: The legislation contains several provisions of particular interest to pass-through entities. Among them are:

• Extending and expanding the pass-through deduction. The provision would increase the deduction on certain pass-through income to 23% and make it permanent. Changes to the deduction’s phase-out for taxpayers in a specified service trade or business (SSTB) (such as attorneys and physicians) would allow some of these taxpayers to now benefit from the deduction.
  
  
• Modifying the excess business loss deduction. The legislation would place new limits on deducting net business losses each year by changing the calculation method.
  
  
• Denying the federal income tax deduction for state and local taxes (SALT) paid by SSTBs and investment activities. The bill would deny the federal income tax deduction for SALT paid by SSTBs and investment activities. (Increasing the SALT deduction cap for individuals has been a key point of contention in the negotiations, and that will likely continue as the bill makes its way through the Senate.)

Taxpayers affected:

Owners of sole proprietorships, partnerships, S corporations, some trusts and estates, and taxpayers in SSTBs and investment activities.

EY insight:

The legislation would allow many more taxpayers to benefit from the pass-through deduction. However, the proposed changes to the excess business loss deduction could negatively impact certain taxpayers by reducing their ability to use large business losses. Loss of the SALT deduction for pass-throughs could increase taxes for some SSTB taxpayers. Therefore, it will be important to model out the potential interactions among these different provisions to determine the net impact for a particular taxpayer. 

Conclusion

The provisions outlined above are just some of those contained in the budget reconciliation legislation the Senate is now considering. As the legislation progresses, further changes are expected. It is critical to stay informed, model potential tax impacts and maintain engagement with policymakers on issues relevant to your business.