Key Tax Impacts of the One Big Beautiful Bill Act
July 9, 2025
On July 4, 2025, President Donald Trump signed into law “[a]n Act to provide for reconciliation pursuant to title II of H. Con. Res. 14.” (formerly known as the One Big Beautiful Bill Act, referred to herein as the “Act”), an all-encompassing reconciliation bill including sweeping domestic policy changes championed by the president that are expected to impact virtually every industry, business, and household of America.
The Act contains substantial changes to the Internal Revenue Code of 1986, as amended (the “Code”), making many provisions of the 2017 Tax Cuts and Jobs Act (“TCJA”) that were scheduled to expire in 2025 permanent, significantly reversing the green energy policy advanced by the 2022 Inflation Reduction Act (the “IRA”), revising the U.S. international tax regime, and enacting a number of individual policies discussed by the president during his campaign.1
This client alert provides an executive summary of certain key tax provisions in the Act. Links to separate client alerts with additional discussions of specific provisions of the Act and their implications can also be found below.
If you have any questions regarding the Act or how it may affect you, please contact the authors of this alert or your O’Melveny advisor.
Client Alert Resources:
- Impact of the 2025 Reconciliation Act on Businesses
- QSBS Benefits Enhanced and Eligibility Requirements More Relaxed for Stock Issued After 2025 Reconciliation Act
- Impact of the 2025 Reconciliation Act on Qualified Opportunity Zones
- International Tax Provisions of the 2025 Reconciliation Act
- Budget Reconciliation Bill Introduces Significant Restrictions on Clean Energy and Related Tax Credits
- Impact of the 2025 Reconciliation Act on College and Universities
Businesses
Bonus Depreciation for Tangible Property and Depreciation for Qualified Production Property
The Act permanently restores 100% immediate expensing (also known as “Bonus Depreciation”) for qualifying depreciable tangible property acquired and placed in service after January 19, 2025. The Act also allows expensing of certain non-residential real properties that manufacture, produce or refine tangible personal property so long as they are placed in service before January 1, 2031. Bonus depreciation was originally enacted as part of the TCJA and subject to phase-out beginning in 2023.
Interest Expense Deductions
The Act also permanently restores the TCJA-era calculation of the business interest expense deduction limitation under section 163(j) at 30% of earnings before interest, taxes, depreciation and amortization (EBITDA) for tax years beginning after December 31, 2024. The Act thereby provides significant relief to certain taxpayers with substantial levels of depreciation or amortization, as the limitation was calculated at 30% of earnings before interest and taxes (EBIT) since 2022.
Research & Experimentation (“R&D”) Expensing
The Act repeals a TCJA provision that required domestic R&D expenses under section 174 to be capitalized and amortized over five years. Taxpayers can now immediately expense such expenditures paid or incurred in taxable years beginning after December 31, 2024. Certain small businesses may make elections to retroactively accelerate amortization of domestic R&D costs capitalized in 2022, 2023 and 2024.
Pass-Through Deduction
The 20% deduction for “Qualified Business Income” for owners of pass-through entities (excluding certain industries) under section 199A, a cornerstone provision of the TCJA, has been made permanent for tax years beginning after December 31, 2025. The deduction is currently subject to limitations that phase in at $50,000 for single filers and $100,000 for married taxpayers filing jointly. The Act, however, increases these phase in thresholds to $75,000 and $150,000 respectively, making the deduction more favorable to middle-income business owners of qualifying businesses.
Limitation on Excess Business Losses
Effective for tax years beginning after December 31, 2026, the Act permanently extends the limitation on excess business losses, which limits a noncorporate taxpayer’s aggregate business deductions to the amount of aggregate gross income or gain attributable to trades or businesses of the taxpayer plus a threshold amount. The Act provides that the threshold amount will be adjusted for inflation in tax years beginning after 2025.
Qualified Small Business Stock (“QSBS”)
The Act substantially enhances the benefits provided for QSBS under section 1202. Generally, for stock issued after the date of enactment, rather than a single benefit for QSBS held more than 5 years, there is a tiered gain exclusion for QSBS (i.e., 50% exclusion for shares held for at least 3 years, 75% exclusion for shares held for at least 4 years and 100% exclusion for shares held for five years or more). Additionally, the per-issuer limitation on the amount of excludible gain was increased from $10 million to $15 million (indexed to inflation beginning in 2027) and the ceiling with respect to aggregate gross assets a corporation may have to be eligible as a “qualified small business” was increased from $50 million to $75 million (indexed to inflation beginning in 2027). Full client alert here.
Qualified Opportunity Zones (“QOZs”)
The Act makes the QOZ program permanent and creates a new system of designating 10-year QOZs on a rolling basis. The definition of a low-income community is more limited and a census tract contiguous to a qualifying low-income community will no longer be eligible to be designated as a QOZ. The Act enhances the benefits and expands the eligibility for qualified rural opportunity funds, requiring at least 33% of designated QOZs be comprised entirely of a rural area. Full client alert here.
Pass-through Entity Tax (“PTET”)
Notably, despite prior versions of the Act in its bill form, the Act does not affect PTET elections that allow eligible pass-through entities to be taxed at the entity level for state income tax purposes and to allocate the related credits and deductions to their owners without being subject to the federal cap on state and local tax deductions.
Payments from Partnerships to Partners for Property or Services
The Act clarifies that the “disguised sales” and “disguised payments” rules under section 707(a)(2) are self-executing, and that section 707(a)(2) applies even in the absence of final Treasury Regulations. Effective for services performed and property transferred after the enactment of the Act, distributions and allocations that are considered disguised sales of property or disguised payments for services between a partner and a partnership, and disguised sales of property between partners in a partnership are treated as payments for services or property rather than as distributions and allocation from a partnership to a partner. We understand that it is the IRS’ position that section 707(a)(2) has always been self-executing, but this revision appears to clarify this position, in particular with respect to the disguised sales of partnership interests for which no final Treasury Regulations currently exist.
Corporate Alternative Minimum Tax (“CAMT”) – Intangible Drilling and Development Costs
For taxable years beginning after December 31, 2025, intangible drilling and development costs will be taken into account for purposes of computing adjusted financial statement income, which is the basis for calculating CAMT liability. Specifically, the Act provides that a taxpayer’s adjusted financial statement income, for CAMT purposes, will be reduced by deductions allowed for expenses with respect to intangible drilling and development costs for oil and gas wells and will be appropriately adjusted to disregard any depletion expense taken into account on the taxpayer’s applicable financial statement with respect to the intangible drilling and development costs of such wells.
Charitable Deductions
The Act establishes a floor for deductions for charitable contributions by a corporation. Deductions are now limited to contributions in excess of 1% of a corporation’s taxable income for tax years beginning after December 31, 2025. The ceiling limiting such deductions to 10% of a corporation’s taxable income remains.
Taxable Real Estate Investment Trust Subsidiaries (“TRSs”)
The Act relaxes the asset test required to qualify as a real estate investment trust (“REIT”) and maintain REIT status by increasing the percentage of a REIT’s total assets that may be represented by securities of one or more TRSs from 20% to 25% for tax years beginning after December 31, 2025.
Employee Retention Tax Credit (“ERTC”) Abuse
Generally, anti-abuse measures with respect to ERTC misconduct are strengthened as of the date of the enactment of the Act. Penalties under the ERTC rules are expanded, section 6676 penalties for erroneous refunds now include ERTC refunds and the statute of limitations for ERTC claims is extended to 6 years.
US International Tax
Global Intangible Low-Tax Income (“GILTI”)
The Act replaces the GILTI regime with the “net controlled foreign corporation tested income” or “NCTI” regime and the section 250 deduction applicable to this category of foreign earnings is decreased to 40% for tax years beginning after December 31, 2025.
Foreign-Derived Intangible Income (“FDII”)
The Act replaces the FDII regime with the “foreign-derived deduction eligible income” or “FDDEI” regime and reduces the section 250 deduction applicable to FDDEI to 33.34% for tax years beginning after December 31, 2025.
Foreign Tax Credits (“FTCs”)
The FTC rules have been relaxed in alignment with the changes to the GILTI provisions. Section 960 will allow U.S. corporations to claim a credit for up to 90% of foreign income taxes paid or accrued by their controlled foreign corporations (“CFCs”) for income included under the NCTI regime, in contrast to the 80% “haircut” under the GILTI regime. FTCs are disallowed on 10% of foreign taxes related to distributions of income previously taxed as GILTI (known as “PTEP”) on or after June 28, 2025.
Base Erosion and Anti-Abuse Tax (“BEAT”)
The BEAT rate is permanently fixed at 10.5% for tax years beginning after December 31, 2025. The BEAT rate is currently 10% but was scheduled to increase to 12.5% in 2026.
Section 954(c)(6) Look-through Rule
The look-through rule for related CFCs under section 965(c)(6) is made permanent for tax years of foreign corporations beginning after December 31, 2025.
Specified Foreign Corporations (“SFCs”)
The one-month deferral election for SFCs under section 898(c)(2) is repealed for tax years beginning after November 30, 2025.
Downward Attribution
The Act restores the TCJA-removed section 958(b)(4), which limited downward attribution from a foreign person when determining whether a U.S. person is a “United States Shareholder” (as defined in section 951(b)) and whether a foreign corporation is a CFC. A new section 951B is added to allow downward attribution from a common foreign parent to a U.S. person that would be a “United States Shareholder” when increasing the applicable threshold from 10% to 50%.
Clean Energy Tax Credits
Tech Neutral Credits
The “tech-neutral” production tax credit under section 45Y and investment tax credit under section 48E (the “Tech-Neutral Credits”) for wind and solar energy are only available for projects that either (i) begin construction prior to the date that is 12 months after enactment or (ii) are placed in service prior to January 1, 2028.
The Tech-Neutral Credit remains available for other qualifying technologies if the relevant facility begins construction prior to January 1, 2034 (with a phase-out period thereafter). However, the extended eligibility period under prior law that would have continued Tech-Neutral eligibility until U.S. green-house gas emissions from energy production are equal to or less than 25% of the emissions rate for 2022 was eliminated.
Prohibited Foreign Entity Restrictions
The Act introduced new “prohibited foreign entity” restrictions (the “Prohibited Foreign Entity Restrictions”) that limit the availability of Tech-Neutral Credits and a broad range of other clean energy and manufacturing credits to entities with ties to China, North Korea, Russia and Iran (“Prohibited Foreign Entities”).
Likewise, the Prohibited Foreign Entity Restrictions prohibit transfers of many credits to certain categories of Prohibited Foreign Entities.
The Prohibited Foreign Entity Restrictions are discussed in greater detail in the linked discussion of changes introduced by the Act to clean energy tax credits.
Advanced Manufacturing Credits
The Act terminates the section 45X credit for the production of wind equipment for equipment produced and sold after December 31, 2027.
EV Credits
EV and related EV infrastructure credits are sharply curtailed – generally terminating this year (or, in the case of certain EV infrastructure credits, June 30, 2026).
Carbon Capture Credits
The Act increases the credit amount for carbon oxide captured and used in a commercial process or in connection with enhanced oil recovery to the credit amount applicable to carbon oxide that is stored in a secure geological formation.
Tax-Exempt Organizations
Private Colleges and Universities Endowment Excise Tax
The Act increases the excise tax imposed on the endowment of certain private colleges and universities to 1.4% for endowments with an endowment to student ratio of at least $500,000 and not in excess of $750,000, 4% for a ratio in excess of $750,000 and not in excess of $2,000,000 and 8% for a ratio in excess of $2,000,000 for tax years beginning after December 31, 2025. These rules apply only to private colleges or universities with at least 3,000 tuition paying students.
Excise Tax on Covered Employees
For tax years beginning after December 31, 2025, the definition of covered employees under section 4960 relating to excess remuneration includes all current employees of an applicable tax-exempt organization and former employees who were employees during any tax year beginning after December 31, 2016, rather than only the 5 most highly compensated employees under the TCJA.
Individuals
The Act includes significant changes affecting individual taxpayers, providing temporary relief from the state and local tax (“SALT”) deduction limitation, and making a number of TCJA provisions permanent while also enhancing such items (e.g., tax rates, childcare credits, standard deductions, alternative minimum tax and limitations on business). The Act also introduces a deduction against tips and overtime compensation and establishes a new tax-advantaged account for children and a tax credit for qualified contributions to a scholarship granting organization.
1 Section references are to the Code or the United States Treasury regulations thereunder (the “Treasury Regulations”) unless otherwise specified.
This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Alexander Anderson, an O’Melveny partner licensed to practice law in New York; Luc Moritz an O’Melveny partner licensed to practice law in California; Robert Fisher, an O’Melveny partner licensed to practice law in California; Billy Abbott, an O’Melveny partner licensed to practice law in California and New York; Will Becker, an O’Melveny partner licensed to practice law in Texas; Alexander Roberts, an O’Melveny partner licensed to practice law in New York; Dawn Lim, an O’Melveny counsel licensed to practice law in New York; Arsalan Memon, an O’Melveny associate licensed to practice law in California, New Jersey, and New York; Eleanor Gilbert Dunn, an O’Melveny associate licensed to practice law in Texas; and Lauren Lekey, an O’Melveny associate licensed to practice law in California, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.
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