UPDATE: On 5/21 the OBBB passed the House. It now moves on to the Senate for consideration.
House Republicans have released a sweeping tax proposal—nicknamed the “One Big Beautiful Bill” (OBBB) —that aims to extend key provisions of the 2017 Tax Cuts and Jobs Act (TCJA) and introduce new tax measures for individuals and businesses. This proposal is a central piece of the House’s budget reconciliation package and reflects several priorities laid out in campaign platforms. While it remains subject to change, the bill’s core provisions offer a preview of where tax policy may be headed. Here is a breakdown of the key income tax elements under consideration.
Individual Tax Provisions
TCJA Extensions
The bill would make permanent many TCJA provisions originally set to expire at the end of 2025. This includes:
- Individual Tax Rates and Brackets: The current seven-bracket system—with a top rate of 37%—would be preserved beyond 2025. Inflation adjustments would be recalibrated starting in 2026, which could lead to slightly higher income thresholds over time.
- Standard Deduction and Personal Exemptions: The doubled standard deduction would remain in place. In addition, there would be a temporary boost from 2026 through 2028: $2,000 for married joint filers, $1,500 for heads of household, and $1,000 for single filers. Personal exemptions would continue to be repealed.
- Itemized Deductions: The overall cap on itemized deductions (Pease limitation) would return but modified, limiting the benefit of deductions for higher earners.
- Child Tax Credit: The current $2,000 per-child credit would be made permanent, with a temporary increase to $2,500 through 2028. The refundable portion remains capped at $1,400, and the credit would continue to require a valid Social Security number for each child.
- Excess Business Loss Limitation: The cap on using business losses to offset other income would be made permanent.
- Estate and Gift Tax Exemption: The exemption would be locked in at $15 million per individual starting in 2026, adjusted for inflation going forward.
- Other TCJA items made permanent — Many other changes made by TCJA would also be made permanent without significant modifications, including:
- Alternative minimum tax (AMT) — The increased AMT exemption and phase-out thresholds
- Mortgage interest deduction — The cap on mortgage interest to loans of up to $750,000 of acquisition indebtedness
- Home equity loans — Repeal of deductions for interest on home equity loans
- Casualty loss deductions — Limitations on personal casualty losses attributable to federally declared disasters
- Miscellaneous itemized deductions — Repeal of miscellaneous itemized deductions
- Wagering losses — Losses from wagering, defined broadly, would continue to be limited to the extent of wagering gains
New Deductions and Credits for Individuals
In addition to preserving TCJA provisions, the bill introduces several new deductions and credits, most of which would apply for the 2025 through 2028 tax years:
- Tip and Overtime Deduction: Workers could deduct tip income and overtime pay, even if they do not itemize.
- Auto Loan Interest Deduction: Up to $10,000 of interest on personal vehicle loans could be deducted annually, though restrictions apply based on income and vehicle origin.
- Increased Deduction for Seniors: Taxpayers aged 65 and older would be eligible for an additional standard deduction of up to $4,000, phased out at higher income levels.
- Charitable Deduction for Non-Itemizers: A limited above-the-line deduction would return—$300 for joint filers and $150 for others.
- New Education Credit: A credit would be available for contributions to scholarship-granting organizations, with aggregate limits. Applies to the 2026 through 2029 tax years.
State and Local Tax (SALT) Deduction Cap
The $10,000 limit on deducting state and local taxes would be lifted to $30,000 for most taxpayers starting in 2026, subject to income thresholds and phaseouts. The changes made by the OBBB would eliminate the pass-through entity tax. Since TCJA, most states have adopted a pass-through entity tax (PTE) tax regimes that shifted the burden and deductibility of state taxes from individuals to pass-through entities.
Business Tax Provisions
Qualified Business Income (QBI) Deduction
- The 20% deduction for qualified business income under Section 199A would be made permanent and increased to 23% starting in 2026. The proposal also includes adjustments to the existing wage and property limits and phaseouts.
Depreciation
- Bonus Depreciation: 100% bonus depreciation would be restored for property placed in service beginning after January 19, 2025, and through December 31, 2029. This means businesses could immediately expense the full cost of qualifying assets.
- Section 179 Expensing: The maximum deduction would increase to $2.5 million, indexed for inflation. This would also increase the acquisition limitation threshold to $4 million.
R&D Expenses
- Businesses would once again be allowed to fully expense domestic research and development costs, reversing the current requirement under Section 174 to amortize them over five years. This would apply for the tax years 2026 through 2029.
Interest Expense Limitation
- The formula for limiting business interest deductions under Section 163(j) would revert to its pre-2022 version, which is more favorable because it allows depreciation and amortization to be added back to income when calculating the deduction limit.
Small Manufacturer Business Expensing and Accounting
- Gross Receipts Test: For manufacturers, the threshold to qualify as a small business for accounting purposes would rise from $25 million to $80 million. This modified definition of a small business taxpayer would also apply to the business interest expense limitation under Section 163(j), the uniform capitalization rules of Section 263A, and Section 471 inventory accounting. The changes made by the OBBB would be applicable to tax years beginning after December 31, 2025.
ERC and Fraud Enforcement
- The Employee Retention Credit (ERC) program would be closed to new claims after January 31, 2024. The bill also extends the statute of limitations for audits and increases penalties for fraudulent or abusive claims.
Reporting Thresholds for Form 1099
- The threshold for issuing Form 1099-MISC or 1099-NEC would rise from $600 to $2,000, with inflation adjustments going forward. Such changes would begin in 2026.
International Tax Changes
The bill would make technical adjustments to provisions affecting multinational corporations:
- GILTI (Global Intangible Low-Taxed Income): The effective tax rate would be lowered by increasing the allowable deduction.
- FDII (Foreign-Derived Intangible Income): The deduction for this income stream would also be increased, providing more favorable treatment for U.S.-based exporters of services and intellectual property.
Energy and Climate Incentives
To offset the cost of extending TCJA provisions, the bill proposes to reduce or eliminate several tax credits enacted under the Inflation Reduction Act:
- Clean Vehicle Credits: These would sunset after the 2026 model year.
- Home Energy and Residential Clean Energy Credits: These would be eliminated after 2025.
- Production and Investment Tax Credits: These key renewable-energy incentives would begin phasing out after 2026, with full elimination by 2031. Additional restrictions would apply to foreign-owned projects and credit transfers.
Qualified Opportunity Zones
The proposal would extend the Opportunity Zone program by allowing new zones to be designated through 2033. It would also modify some eligibility criteria to expand access.
Looking Ahead
The bill cleared the House Ways and Means Committee in mid-May after a lengthy and highly partisan debate. Next, it will move to the full House, then to the Senate, where changes are expected. If both chambers approve differing versions, a conference committee would reconcile them before sending a final version to the President. With so many provisions up for debate, and potential changes still ahead, it is important to stay informed and begin evaluating how these proposals could affect your individual or business tax planning. Talk with your tax advisor to model different scenarios and identify any opportunities or risks tied to the evolving legislation.
John Hadwen is a Principal at ARB. He specializes in providing individuals and businesses with comprehensive
tax compliance and consulting services related to closely-held business, manufacturing, construction & real estate, and professional services firm taxation. Prior to joining ARB, John was a Tax Principal at a large, regional CPA firm.
