Tracking Tax Reform: A Closer Look at the Ways and Means Tax Framework

The legislative text approved by the W&M committee included a variety of business provisions, many of which were tax cuts but some revenue-raisers as well.

Business Tax Cut Provisions 

The trio of business provisions that won bipartisan support in the House in the last Congress, but failed to pass the Senate were all included in the W&M proposal, albeit for a limited timeframe. These included:

• Research & Experimental (R&E) Expenditures (Sec. 174): Under the draft legislation, the requirement to capitalize and amortize domestic research or experimental expenditures would be suspended from 2025 through 2029. Taxpayers would have the option of deducting the expenditures in the year incurred, capitalizing the expenditures over the useful life of the research (minimum of 60 months), or capitalizing the expenditures over 10 years. Any remaining amounts capitalized for domestic expenditures would be recovered upon the disposition, retirement or abandonment of the property. Foreign R&E expenditures would continue to be amortized over 15 years, even upon a disposition of the property. Taxpayers would also be required to reduce their domestic R&E expenditures by the amount of the research credit allowed during this period. Taxpayers that wish to adopt a new method of accounting for the treatment of section 174 expenditures must file a Form 3115, Change in Method of Accounting, with the IRS.
• Bonus Depreciation: The TCJA provided taxpayers with 100% additional first-year depreciation (bonus depreciation) through 2022; thereafter, the ability to claim bonus depreciation is reduced by 20% per year. The House tax package would restore 100% expensing for eligible property placed in service from January 20, 2025, through the end of 2029 (or the end of 2030 for longer production period property).
• Business Interest Expense Limitation: The W&M bill would reinstate the calculation of Adjusted Taxable Income (ATI) based on earnings before interest, taxes, depreciation, and amortization (EBITDA) in place of the more restrictive earnings before interest and taxes (EBIT) that is in place today. The change would be effective for tax years 2025 through 2029. 

Other taxpayer-favorable provisions included:

• New Bonus Depreciation for Qualified Production Property: The proposal created a new Sec. 168(n) that would provide for an elective 100% depreciation allowance for qualified production property (QPP). QPP must be (1) subject to depreciation, (2) used by the taxpayer as an integral part of a “qualified production activity”, (3) inside the U.S., (4) original use must begin with the taxpayer (5) have begun construction between January 20, 2025 and the end of 2028, (6) be subject to the taxpayer’s QPP election, and (7) be places in service after enactment and before 2033.
  Qualified production activities include manufacturing, producing or the refining of a qualified product. QPP would be subject to various recapture rules.
• Section 179: Under the proposed legislation, the maximum amount a taxpayer may expense under Sec. 179 is permanently increased to $2.5 million and the phaseout threshold to $4 million. This change would be effective for 2025, and the amounts would be indexed for inflation in subsequent years. 
• Increased Gross Receipts Threshold for Manufacturers: The gross receipts test threshold would increase from a base of $25 million to $80 million for “manufacturing taxpayers” under the W&M plan. This change would be permanent, take effect in 2026, and the $80 million threshold would be indexed for inflation. This change would substantially increase the number of manufacturers eligible for the cash method of accounting. This would also impact the taxpayer’s ability to avoid the 163(j) and UNICAP rules.
• Opportunity Zones: The W&M bill would create two significant opportunities: (1) it would end designation on current opportunity zones through the end of 2026, rather than the end of 2028, and (2) create a designation for a second round of opportunity zones in effect from 2027 through 2033. The new designation is designed to increase focus on rural areas and contains modified investment incentives.
• Low-Income Housing Tax Credit: The State housing credit ceiling would be increased by 12.5% for calendar years, which lowers the bond financing threshold and would allow more projects to qualify for tax exempt bond financing from 2026 through 2029. 

Business Revenue Raisers

Some of the provisions included are intended to raise funds:

• Limitation on Amortization for Sports Franchises: Owners of certain sports franchises (i.e., professional football, basketball, baseball, hockey, soccer or other professional sports) would only be able to amortize 50% of the Sec. 197 intangible assets.
• One Percent Floor on Corporate Charitable Contributions: Generally, corporations can deduct charitable contributions of up to 10% of taxable income, with any amounts not utilized carried forward. Under the W&M legislative text, corporations would only be able to claim a deduction to the extent the contributions exceed 1% of taxable income (the 1% floor) and do not exceed 10% of taxable income. Disallowed amounts under the 1% floor may be carried forward only in years in which the corporation’s contributions exceed the 10% limit.
• Employee Retention Credit (ERC): The proposal would retroactively invalidate any ERC claims filed after January 31, 2024. It also increases the statute of limitations for the Internal Revenue Service (IRS), disallowing the claim to six years from the date the claim was filed, coordinating the disallowance of the compensation deduction with this period for assessments made after enactment. Finally, it increases potential penalties for ERC promoters who did not undertake appropriate due diligence when filing claims.
• Compensation in Excess of $1 million: Sec. 162(m) limits the deduction for compensation payments in excess of $1 million to certain employees of publicly traded companies. The proposal would expand the limitations to include employees of related party entities that are not public companies. 

Pass-Through Entity Proposals

For months, policymakers had stated their intention to make the expiring Sec. 199A Qualified Business Income (QBI deduction) permanent. However, the tax package went further, proposing an increase in the deduction percentage from 20% to 23%. 

The proposal would also expand access to the deduction by making significant changes to the phaseout of the deduction for taxpayers engaged in a specified service trade or business (SSTB) and indexing the threshold amounts for inflation beginning in 2026. The proposal would also change the formula for phasing out a portion of the QBI deduction for taxpayers with a taxable income above the threshold amount.

The proposed text also included two revenue-raising provisions that will impact pass-through entities:

• Pass-Through Entity Tax (PTET): Included in the individual SALT cap provision (more on that provision below) is a significant change to the PTET regime. PTET payments made by pass-through entities (PTEs), with respect to qualified (non-SSTB) businesses, are “excepted taxes” that can continue to be deducted as trade or business expenses. However, PTEs would be required to separately state PTET payments with respect to SSTBs (i.e. specified taxes) and could no longer deduct them as an entity-level expense (invalidating Notice 2020-75). SALT taxes paid on behalf of pass-through owners would be subject to the SALT cap unless they are an "excepted tax.”
  • There is also a provision that would impose an addition to federal taxable income to any pass-through owner in the case of a “state and local tax allocation mismatch.”  The owner who receives a tax benefit greater than their distributive share would be subject to the top rate of tax on the aggregate mismatch
• Excess Business Loss (EBL) Limitation: The proposal would make the Sec. 461(l) EBL limitation, currently set to expire at the end of 2028, permanent. It would also modify the limitation, subjecting previously disallowed excess business losses to retesting in the subsequent year; however, disallowed losses would retain their character as net operating losses (NOLs).
  

The W&M tax package proposes a permanent extension of the current preferential rates for global intangible low-taxed income (GILTI), foreign-derived intangible income (FDII), and the base erosion and anti-abuse tax (BEAT). 

The bill also proposes a new Sec. 899, levying higher tax rates on U.S. income of individuals and companies based in foreign countries deemed to impose any “unfair foreign tax.” The definition of unfair foreign tax includes an undertaxed profits rule (UTPR), digital service tax (DST), diverted profits tax and other types of unfair taxes. Rates for affected taxpayers would increase 5% each year, up to a total of 20%, until the jurisdiction in question repeals the tax.

The centerpiece, and most expensive, portion of this tax legislation is the permanent extension of the expiring TCJA provisions, many of which impact individual taxpayers. The following provisions would be permanently extended under the current proposal, some of which contain temporary taxpayer-favorable changes or other enhancements:

*In addition, there are several other provisions that have impacted individuals but are discussed elsewhere: See Pass-through Entity Proposals and Inflation Reduction Act Proposals for more information.

Individuals would see additional benefits and limitations under the W&M committee’s tax proposal, including:

• Tax Free Tip Income: The proposal would create an above-the-line deduction for qualified tips that an individual receives “in an occupation which traditionally and customarily receive[s] tips” for tax years 2025 through 2028. Taxpayers considered highly compensated employees ($160,000 threshold for 2025) would not qualify.
• Tax Free Overtime: The proposal would create an above-the-line deduction for qualified overtime compensation for tax years 2025 through 2028. Taxpayers considered highly compensated employees would not qualify.
• Enhanced Deduction for Seniors: From 2025 through 2028, taxpayers aged 65 or older would be eligible to receive a deduction of $4,000 per individual. Taxpayers with a modified adjusted gross income (MAGI) above $75,000 ($150,000 for married filing jointly) would be subject to a phaseout with a reduction rate of 4% of the amount by which their MAGI exceeds the threshold.
• Car Loan Interest: Taxpayers who purchase a vehicle assembled in the U.S. would be eligible for an above-the-line interest deduction of up to $10,000 per year for tax years 2025 through 2028. The deduction is subject to income phaseouts once a taxpayer’s MAGI exceeds $100,000 ($200,000 married filing jointly).
• Charitable Contribution Deduction for Non-Itemizers: Taxpayers would be able to deduct up to $150 ($300 for married filing jointly) of cash donations to qualified charities for the 2025 through 2028 tax years.
• Limitation on Itemized Deductions: In place of the Pease limitation, which was in effect prior to TCJA, the bill proposes reducing the amount of itemized deductions a taxpayer may claim by 2/37ths of the lesser of itemized deductions or taxable income (determined before itemized deductions) to the extent it exceeds the 37% rate breakpoint.
• Money Accounts for Growth and Advancement (MAGA Accounts):The proposal establishes tax exempt accounts for children between the ages of eight and 18. Annual contribution limits would be $5,000, indexed for inflation, with funds required to be invested in certain types of assets. There are limitations on distributions, but those used for qualifying expenses would be taxed at capital gains rates. The program would begin in 2026 and include a pilot program to provide $1,000 contributions from the federal government through a tax credit for individuals who do not otherwise have an account.
• Employer-Provided Educational Assistance: The $5,250 limit for employer-provided educational assistance programs would be indexed for inflation after 2026.
• Other Provisions: The proposal includes numerous other provisions that impact individuals, including an enhancement to the ABLE accounts, an expansion of the definition of qualified higher education expenses for 529 accounts, significant expansion of Health Savings Account (HSA) provisions, and changes to the adoption credit to include a refundability component, among others.

The Outstanding SALT Issue

The proposal would also make changes to the current state and local tax (SALT) cap of $10,000 per taxpayer ($5,000 for married filing separately). The legislative package W&M passed on Wednesday morning included an increase in the SALT cap to $30,000 per taxpayer ($15,000 for married filing separately), subject to phaseout once taxpayers hit income thresholds of $400,000 ($200,000 for married filing separately), though not below the original $10,000 amount. 

This proposal has already been rejected by Republican members of the House SALT caucus. Without changes, the full reconciliation package is at risk of failing on the House floor. Speaker Mike Johnson (R-LA) has been engaged in ongoing negotiations with blue-state Republicans in recent weeks, aiming to reach a compromise before the package comes to a vote. Discussions are expected to continue over the coming days.

Trust & Estate Proposals

The proposed legislation would permanently increase the estate and gift tax exemption amount to an inflation-indexed $15 million, effective in 2026.  Currently, the 2025 exemption amount is $13.99 million, so this would be an adjustment of just over $1 million. The base year for indexing would be 2025.

Tax brackets for estates and trusts would also be permanently extended.

The W&M plan includes multiple provisions that would impact tax exempt organizations, including: 

• Expansion of Excise Tax on Investment Income of Private College and University Endowments: The proposal would institute a new rate structure for the excise tax on net investment income of certain private college and university endowments and amend definitions of some key terms. Beginning in 2026, rather than a flat rate of 1.4%, each institution’s excise tax rate (applicable percentage) would depend on its student adjusted endowment.

Certain schools associated with religious organizations may not be impacted by the new rates.

• Increase of Excise Tax on Net Investment Income of Private Foundations: The current 1.39% excise tax rate on the net investment income would be replaced with a tiered structure. Beginning in 2026, the tax rate for affected private foundations would depend on the aggregate fair market value of all assets at the end of the year.

• Other Tax Exempt Organization Items: Proposals include expanding the application of the excise tax on excess compensation to cover related parties and broadening unrelated business income to include certain nondeductible fringe benefits, name and logo royalty income and income from research that is not available to the general public.

The W&M proposal would make considerable changes to the Inflation Reduction Act (IRA) provisions, primarily through advancing expiration dates and implementing phaseouts.

Credits To Be Eliminated

The following credit sections would be eliminated for new projects beginning after December 31, 2025:

• Business Credits: Commercial clean vehicles (45W), EV Charging stations (30C), Clean Hydrogen (45V), and New Energy Efficient Homes (45L)
• Individual Credits: New and Used EV vehicles (30D and 25E), Residential Clean Energy (25D), and Energy Efficient Home Improvement (25C)

Credit Phaseouts

The following credits would be subject to an accelerated phaseout timeline:

• Clean Electricity Investment Credit (48E)
• Clean Energy Production Credit (45Y)
• Zero-Emission Nuclear Power Production Credit (45U)

Proposed timeline:

It is important to note these proposed phaseouts are tied to the year a project is placed in service; the phaseouts contained in the original IRA bill are tied to the year in which construction began. The placed-in-service threshold is a more significant threshold to meet.

In addition, the Advanced Manufacturing Production Credit (45X) would be amended and wind energy components would only be eligible for the credit through 2027, while other eligible components and critical minerals would be eligible through 2031. Geothermal heat pump property would also see an accelerated phaseout, beginning in 2030, rather than 2033.

Changes to Transferability

Ways and Means has also proposed limiting transferability on the following energy credits:

• Transferability expires for electricity, components, and fuel produced after 2027 for the following credits: Zero-emission Nuclear Power Production Credit (45U), Advanced Manufacturing Production Credit (45X), and Clean Fuel Production Credit (45Z)
• Transferability expires for facilities that commence construction 2 years after enactment: Clean Energy Production Credit (45Y), Clean Electricity Investment Credit (48E), Carbon Sequestration (45Q)

Other Provisions

The bill would extend the Clean Fuel Production Credit (45Z) through 2031, adding four years (though without transferability for fuel produced after 2027). 

New rules would expand the definition of foreign entities and impose restrictions on their credit eligibility.

• Debt Limit: The House bill would increase the debt limit by $4 trillion, which aligns with the House reconciliation instructions but falls short of the Senate’s $5 trillion target.
• IRS Direct File Program: The proposal would terminate the direct file program within 30 days of enactment
• Forms 1099-K & 1099-MISC/NEC: The de minimis reporting exemption for third-party settlement organizations (reported on Form 1099-K) would revert from $600 back to $20,000, effective as of 2025. The reporting threshold for payments to persons engaged in a trade or business (reported on Form 1099-MISC), or for payments for services from an individual (reported on Form 1099-NEC), would rise from $600 to $2,000 as of 2026 and indexed for inflation thereafter. Both provisions have conforming amendments for backup withholding.

The provisions noted in the sections above do not constitute a comprehensive list; rather, they focus on the items that would have the greatest impact on Cherry Bekaert’s clients.

Some of the tax provisions discussed in the months leading up to the release of the Ways and Means proposal did not make it into the final bill, including:

• A corporate SALT limitation
• Repeal of the treatment of carried interest
• An increase to the top individual rate
• An increase in the stock buyback excise tax
• A reduced 15% corporate rate for domestic manufacturers
• Ending the double taxation of American living abroad
• A repeal of the estate tax
• An extension of the New Markets Tax Credit

Several other House committees advanced bills with relevant non-tax provisions:

• The House Education & Workforce Committee advanced a measure that would make significant changes to higher education funding and slash federal spending by approximately $350 billion. Notable proposed reforms include changes to the Pell Grant funding and eligibility requirements, limitations on federal loans for students and parents, a new “risk-sharing” plan that aims to hold schools accountable for a portion of students’ unpaid loan balances, and a consolidation of student loan repayment plan options.
• The House Transportation Committee approved a bill that would implement an annual $250 fee for electric vehicles and a $100 fee for hybrid vehicles.
• The House Financial Services Committee advanced legislation that would transfer the responsibilities of the Public Company Accounting Oversight Board (PCAOB) to the Securities and Exchange Commission (SEC). The PCAOB, which was created in 2002, in part as a response to the collapse of Enron, oversees the audits of public companies. 
• The House Judiciary Committee approved legislative text that brings some clarity to, and strengthens the protections provided by, the Interstate Income Act of 1959 (often referred to as P.L. 86-272), which prohibits states from imposing net income tax on businesses when their only activity performed is the solicitation of orders of tangible property.  Judiciary’s measure would require Congress to affirmatively approve certain major rules that increase revenue, including those currently in effect; however, there are questions as to whether this provision would violate the Senate’s Byrd rule.