New law brings in significant tax changes — and opportunities

Qualified opportunity zones

The bill makes permanent the benefits available to investments in qualified opportunity zones (QOZs) that were introduced by the TCJA, with certain modifications. The changes contained in the bill generally impact investments made after Dec. 31, 2026.

 To ensure that the tracts designated as QOZs reflect updated census information, the bill provides for the recurring designation of census tracts as QOZs for 10-year periods. The bill also tightens the qualifications for a census tract to qualify as a QOZ and repeals the “contiguous census tract” rule that applied to the initial tranche of QOZ designations following the TCJA.

Deferred gains invested in qualified opportunity funds (QOFs) after Dec. 31, 2026, will be included in income on the earlier of either (i) the date the investment is sold or exchanged, or (ii) five years after the date the investment in the qualified opportunity fund was made. Taxpayers holding their QOF investments for at least five years will receive a basis increase in their investment equal to 10% of the original deferred gain. The basis increase is enhanced to 30% for investments in “qualified rural opportunity funds.”

The bill also codifies significant reporting obligations for QOFs, including information about stock and partnership interests held by the QOF such as the amount invested, its value, the NAICS code that applies to the underlying business, the number of employees, etc. The bill adds specific penalties for failing to comply with the reporting requirements.

Energy tax credits

The new law is much closer to the Senate’s version of changes to Inflation Reduction Act credits than the House’s version, a minor victory for companies and investors in renewable energy projects. Notably, the transferability of a variety of credits was preserved, though some credits will be phased out sooner than previously scheduled. As with earlier drafts of the legislation, most credits now include restrictions on applicability to specified foreign entities and foreign influenced entities.

Under OBBBA, wind and solar facilities claiming the 45Y clean electricity production credit or 48E clean electricity investment credit will need to be placed into service by Dec. 31, 2027, unless construction begins within 12 months of July 4, 2025. All other types of projects eligible for the credit can continue to claim the credits if they begin construction by Dec. 31, 2032, at which point a phasedown starts. Additionally, the new rule includes the restriction of either credit on property that would have qualified as residential clean energy property under 25D if the taxpayer is the lessor of such property. The 25D credit was also repealed for any expenditures made after Dec 31, 2025.

In a scale back of the 45X advanced manufacturing production credit, wind components produced and sold after Dec 31, 2027, will no longer be eligible. The new law also phases out the credit for applicable critical minerals (which was previously permanent) for those produced after 2030.

The 45V clean hydrogen production credit will sunset for qualified facilities for which construction begins after Jan 1, 2028, five years earlier than previously scheduled. The timeline for credits for nuclear power production (45U) and carbon sequestration (45Q) projects remains unchanged, though both incorporate the new restrictions for specified foreign entities. The 45Z clean fuel production tax credit was extended from a scheduled expiration for fuel sold after Dec. 31, 2027, to fuel sold after Dec. 31, 2029, though fuel produced after Dec. 31, 2025, must be exclusively derived from a feedstock that was produced or grown in the U.S., Mexico or Canada.

The electric vehicle tax credits (25E, 30D, and 45W) for used, new, and commercial vehicles will now sunset for vehicles acquired and placed in service after Sept. 30, 2025, though the alternative fueling vehicle property tax credit (30C), will remain available for EV charging stations placed in service through June 30, 2026.

Overall, the final bill focused on scaling back energy incentives prioritized by the Biden administration but stopped short of cutting credits as deeply as many companies and investors had feared based on statements from the administration and the House-passed version.   

International tax provisions

Perhaps the most significant element of the final bill’s international tax section is the absence of proposed Section 899.  This controversial provision, which would have introduced retaliatory taxes on companies and individuals based in jurisdictions with “unfair foreign taxes” — including digital services taxes (DSTs) and undertaxed profits rules (UTPRs) — was the subject of significant concern for foreign businesses and governments. The provision was dropped from the final bill on June 26, following an announcement by Treasury Secretary Scott Bessent that the U.S. had reached an agreement with G7 peers to exclude U.S. multinational enterprises from Pillar 2 taxes, including the UTPR, under the OECD global minimum tax framework. The agreement aims to allow the U.S. system to coexist with Pillar 2, which has long been a goal for many congressional members who argued that the global intangible low-taxed income regime (GILTI) should be “grandfathered” in. (Read more in our June 10 article on Section 899.)

The final legislation does, however, make substantial changes to core international tax provisions, particularly GILTI, the foreign-derived intangible income deduction (FDII), the foreign tax credit regime, and the base-erosion avoidance tax (BEAT). The GILTI changes appear to be aimed at making the U.S. system become more closely aligned with the OECD’s 15% global minimum tax standard, without formally adopting Pillar Two.

GILTI reforms

The bill increases the effective corporate tax rate on GILTI from 10.5% to approximately 12.6% for tax years beginning after Dec. 31, 2025, by reducing the Section 250 deduction from 50% to 40% and the foreign tax credit haircut from 20% to 10%. After factoring in the disallowance of a portion of the foreign tax credit, the combined effective rate to eliminate U.S. residual tax rises to 14% (compared with 13.125% under current law). The legislation also eliminates the net deemed tangible income return (NDTIR), which had allowed for a 10% return on qualified business asset investment (QBAI) to be excluded. With the removal of this exclusion, GILTI now captures all returns, including those from tangible assets, and is renamed “net CFC tested income” to reflect the broader base. Finally, the bill expands the disallowance of 10% of foreign tax credits for taxes paid, accrued, or deemed paid with respect to distributions of previously taxed net CFC tested income excluded from gross income under Section 959(a) by reason of a prior GILTI inclusion under Section 951A(a), effective for amounts included after June 28, 2025.

In connection with this change, the rules for determining the net CFC tested income foreign tax credit limitation were also revised. Under the updated approach, the Section 250 deduction and certain taxes are allocated to foreign source net CFC tested income, while no interest or R&E expenses are allocable. Other deductions are allocable only if they are “directly allocable” to such income.

FDII reforms

The bill makes similar changes to the FDII regime to align it with the GILTI reforms. The effective tax rate increases to approximately 14% for tax years beginning after Dec. 31, 2025, by reducing the Section 250 deduction from 37.5% to 33.34%. The calculation of deduction eligible income (DEI) now excludes gains from the sale or disposition of intangible property and any other depreciable property. It also updates the allocation rules so that DEI is reduced by expenses and deductions, including taxes, that are properly allocable to the gross income, but does not reduce DEI for interest expense or research and experimental expenditures.

As with GILTI, the 10% return on qualified business asset investment is eliminated. With this change, FDII now includes returns from tangible assets and is renamed “foreign-derived deduction eligible income,” reflecting both the broader base and the shift away from intangible returns.

BEAT reforms

The final bill moderated the Senate’s proposed larger changes to the BEAT, raising the rate from 10% to 10.5%, rather than the proposed 14%, permanently exclude the research credit and a portion of applicable Section 38 credits from reducing regular tax liability for purposes of computing a BEAT liability, and dropping a proposed exclusion for base erosion payments to high-tax jurisdictions.

Permanent CFC look-through

The bill makes permanent the long-standing look-through rule under Section 954(c)(6), which was originally enacted as a temporary provision and most recently extended through Dec. 31, 2025. The rule excludes from foreign personal holding company income certain dividends, interest, rents and royalties received by a controlled foreign corporation from a related CFC, to the extent the payments are attributable to earnings and profits that do not give rise to Subpart F income in the hands of the payor CFC.

Limitation on downward attribution

The legislation also restores Section 958(b)(4), reversing the repeal enacted under the TCJA. The repeal had allowed stock owned by foreign persons to be broadly attributed downward to related U.S. persons which, in turn, caused certain foreign corporations to be treated as CFCs even when no U.S. shareholder had actual control. This led to unintended inclusions under Subpart F and GILTI for indirect U.S. owners and created onerous filing requirements. The bill addresses this by reinstating the pre-TCJA limitation on downward attribution.

In addition, the bill introduces a new Section 951B, which applies Subpart F and GILTI inclusion rules to “foreign controlled United States shareholders” of “foreign controlled foreign corporations.” The provision is intended to narrowly target structures viewed by Congress as abusive, realigning the rules with the original policy objectives of the TCJA.

While the headline items focus on GILTI, FDII, Section 899, and BEAT, the final legislation includes a range of additional technical changes and clarifications. Other international tax provisions include:

• Modifying the sourcing rule for inventory produced in the U.S. by treating income from sales conducted through a foreign office or fixed place of business as foreign-source solely for foreign tax credit limitation purposes, limited to 50% of the total taxable income from the sale
• Revising the definition of adjusted taxable income (ATI) for purposes of the business interest limitation by excluding Subpart F and GILTI inclusions, Section 78 gross-up amounts and amounts included under Section 956
• Repealing the one-month deferral election for specified foreign corporations, requiring a conforming year end with the majority U.S. shareholder’s taxable year beginning after Nov. 30, 2025, with a transition rule and Treasury authority to allocate foreign taxes across affected years
• Modifying the pro rata share rules to require U.S. shareholders to include their share of Subpart F income if the U.S. shareholders own stock on any day during the CFC year (i.e., the year during which the foreign corporation is a CFC at any time), based on stock ownership during periods when both the shareholder and the corporation satisfy certain requirements; similar modifications apply to Net CFC Tested Income

State and local taxes (SALT)

Wrangling over the cap on the individual SALT deduction, which is $10,000 under the TCJA, was a major storyline throughout this bill’s evolution, but a lesser-discussed issue was the treatment of state-enacted pass-through entity (PTE) tax regimes. While both the original House-passed bill and the initial Senate proposal substantially limited the utility of these regimes by subjecting the SALT cap rules to these regimes in broad and incredibly complicated ways), the final bill dropped all such provisions (including one that would have restricted the SALT deduction for certain SSTBs) and made no changes to the use of state workarounds.

In an ongoing debate that divided both Republicans and Democrats since 2017, GOP House members from districts with the highest taxes (generally in California, New Jersey and New York) pushed for elimination of the SALT cap — or for a significant increase at the least. In the House bill, they settled for a cap of $40,000 in 2025, increasing 1% annually through 2033, then holding steady. That version also added a rapid income phasedown beginning at a modified adjusted gross income (MAGI) of $500,000 and ending at $600,000 (with 1% annual increases in the MAGI amounts). Once the maximum MAGI was reached, SALT deductions would have been limited to $10,000. (These figures were all cut in half for married couples filing separately.) With no Republican champions of the SALT cap in the Senate, however, the final provision was scaled back. Under the new law, the cap will increase to $40,000 in 2025, increase 1% annually through 2029, and then revert to $10,000. The rapid income limitation phasedown remains, beginning at $500,000 and ending at $600,000 (with 1% annual increases in the MAGI amounts) for most filers. Once the income limitation is exceeded, SALT deductions are limited to $10,000. (The cap, income threshold and floor are all cut in half for married couples filing separately.)

Provisions for tax-exempt organizations

The most notable change in the law for most tax-exempt organizations is the expanded application of excessive compensation restrictions, with the definition of “covered employees” changed starting in 2026 to include all employees or former employees, rather than only the five highest-paid employees in a year (plus anyone previously deemed to be covered). This aligns the restrictions for not-for-profit entities with those for taxable entities.

In a year when they have been under great scrutiny by Republicans, private colleges and universities were spared an increase on their net investment income to as much as 21%, a provision which was included in the original House-passed version. The final bill took the Senate’s proposal, increasing the tax from 1.4% to 4% for schools with per-student endowments of more than $750,000 but not more than $2 million, and to 8% for those greater than $2 million. Smaller schools are excluded from the excise tax as the floor on student population for application of the tax increased from 500 to 3,000 students.

Not included in the final bill was an increase in the current 1.39% tax on the net investment income of private foundations with assets of $50 million or more (to as much as 10%), which was in the bill originally passed by the House. 

Individual tax provisions

As the driving force behind this year’s reconciliation effort, making permanent many of the individual tax changes from the TCJA constituted the largest cost of the massive bill. Lower rates, higher standard deductions, an increased child tax credit, increased estate and lifetime gift tax exemptions, an increased alternative minimum tax (AMT) exemption, a modified mortgage interest deduction and an end to miscellaneous itemized deductions are all made permanent in the new law.  

Given the beneficial changes associated with the SALT deduction, the Section 199A deduction and the Section 1202 exclusion, individuals may be more inclined to consider the use of non-grantor trusts as part of their individual income tax planning.  The use of non-grantor trusts should consider corresponding transfer tax consequences, state responses to certain types of non-grantor trusts, as well as anti-avoidance laws.

Trump’s top priorities for the bill were all included for the years of his term in office, with new above-the-line deductions for taxes on tip income, overtime pay and interest on loans for new U.S.-made vehicles in tax years 2025-2028. Caps proposed by the Senate on tips and overtime did prevail in the final bill, at $25,000 for tips and $12,500 for individuals/$25,000 for joint filers for overtime. Vehicle loan interest is capped at $10,000, and all the provisions are subject to income thresholds. While Congress could not exempt Social Security income from taxes — the president’s other campaign promise and priority — under budget reconciliation rules, seniors will receive a $6,000 addition to their standard deduction during the four-year period, subject to income thresholds.

For those taxpayers who itemize, a new floor has been imposed on charitable deductions of 0.5% of AGI. However, the cash contribution limit has been permanently increased from 50% of AGI to 60%. For non-itemizers, an above-the-line deduction for charitable giving has been revived, now allowing up to $1,000 for individuals and $2,000 for joint filers.

The bill creates a new tax-preferred savings vehicle for children — a new type of individual retirement account (IRA) dubbed a “Trump account” that can be established for children with a Social Security Number. The accounts will be allowed contributions of up to $5,000 annually (with no tax write-off for the donor; no limit on contributions from tax-exempt entities; limits on contributions from employers), indexed for inflation beginning in 2027, and must be invested in qualified index tracking funds. Withdrawals can be made after age 18, but unlike in earlier iterations of the bill, there are no rules specifying the use of the funds, such as for education. In a pilot program, the federal government will establish and seed accounts with $1,000 for all U.S. citizens born between Jan. 1, 2026, and Dec. 31, 2028.  

A new tax credit on contributions to scholarship-granting organizations survived opposition meted out by Democrats; the provision was a priority for Republicans who support the school choice movement but opposed by those who say it will help wealthier families moving their children to private schools (or keeping their children at the same private school) at the expense of public schools. The credit was pared back to $1,700 from an earlier proposed maximum of $5,000 or 10% of AGI, but the final bill also removed the funding cap ($5 billion in the House proposal and $4 billion in the Senate’s proposal).

A new tax on remittance transfers also is included in the new law but in a significantly revised form from the original House-passed provision. While the initial version would have imposed a 3.55% tax on all remittance transfers and provided a credit refunding taxes paid by U.S. citizens and nationals, the final version imposes a lower tax of 1.5% only on transfers made using cash, money order, cashier’s check or similar financial instruments. This applies to all senders, regardless of citizenship, but the provision excludes transfers made from U.S. bank accounts or using U.S. credit or debit cards.  

The bill does not address a couple of key areas affecting individual partners in partnerships that have been the subject of significant interest in recent years. First, the legislation does not address the exception for self-employment tax for limited partners, which has been the subject of litigation and an IRS compliance campaign in the last several years. Also, the bill does not add any new provision relating to carried interest, leaving taxpayers with the provision enacted as part of the TCJA that generally recharacterizes gains from assets held for three years or less through an applicable partnership interest as short-term capital gains, which are typically taxed at higher ordinary income rates.

From uncertainty to action

This legislative package is complex and far-reaching, and contains tax provisions for businesses and for individuals impacting nearly all taxapayers in some way, shape or form. There will, of course, be still more clarity to come, with guidance and regulations on the horizon for implementation of the new provisions. However, taxpayers have, in many areas, gained the certainty they have desired to allow for longer term planning. Many elements of uncertainty that have been weighing on businesses in recent years have been eliminated for the foreseeable future: provisions such as full expensing have been made permanent, changes to the GILTI/FDII regime better align it with other countries’ laws, and many pass-through entities can claim a permanent QBI deduction. All these changes allow for a more predictable tax landscape and more insightful planning. Some provisions, like qualified production property expensing, present investment opportunities but have limited lifespans, making planning even more critical.