Senate Republicans appear to be making progress in resolving differences over the so-called One Big Beautiful Bill Act with House Republicans, especially when it comes to the state and local tax deduction.
House Republicans had wanted to raise the so-called SALT cap from $10,000 to $40,000 with a phase-out for taxpayers earning over $500,000, but Senate Republicans opted to keep it at $10,000, although they have proposed alternatives such as raising it for five years. On Friday, they reportedly reached a deal to raise it to $40,000 for a five-year period.
“I think the bigger impact for our clients will depend on where the pass-through entity tax limitations land at the end of the day,” said Pamela Huelsman, a partner at Armanino Advisory, a Top 25 Firm based in San Ramon, California. “To me, that has more of an impact than the straight $40,000 or $10,000 limit.”
The American Institute of CPAs has been pressing Congress to change the pass-through entity tax provision, arguing it could harm accountants, lawyers and other professional service providers.
“Basically, the current Senate version takes the cap from the original $10,000 up to $40,000 for business owners, and then the greater of $40,000 or 50% of the pass-through entity tax, plus the remainder of the $10,000 base to expand it for all businesses without affecting lawyers, accountants and dentists like the original bill,” said Steve Kralik, managing director of the tax national office at Armanino.
Lobbying by the AICPA and other professional groups appears to have helped sway the Senate.
“Something must have worked, because the Senate version is very different than the House version,” said Simcha David, partner-in-charge of EisnerAmper’s financial services tax practice. “Under the House version, they tied who can use the pass-through entity tax to what’s called a specified services trade or business and you will not get a deduction, so to speak, for the pass-through. Everybody was up in arms saying it’s discriminatory, it’s not fair. What are they doing differently? Services businesses should have the same right to take advantage of the pass-through entity tax workaround that anybody else did. That was the House version. They raised the cap to $40,000 instead of $10,000 and then they put this out. The Senate version started by keeping the cap at $10,000, but for the pass-through entity tax, they created a new rule, and they said you’re entitled to the greater of $40,000 or 50% of the pass-through entity tax paid.”
He has also been keeping an eye on the changing rules under Section 461(l) for limitations on claiming excess business losses by noncorporate taxpayers.
“Basically what it said was you can only offset investment income by $500,000 of business losses,” said David. “Now the question is, what do I do with the extra losses? So if I had a million dollars in losses and a million dollars of investment income in a particular year, I would offset $500,000 of that investment income with $500,000 of business losses, and then I pay tax on $500,000 of investment income, and the extra $500,000 of business loss gets pushed to next year. The rule was that $500,000 which you push to next year now becomes what’s called an NOL, a net operating loss. What they’ve done now to 461(l) is they basically said, if you have excess losses in year one, they get pushed to year two. And again, you’re limited to $500,000 in year two. It doesn’t turn into an NOL.”
Now under 461(l), taxpayers are limited to $500,000 to offset business loss against investment income on an annual basis. “It’s like a one-year deferral,” said David. “That’s how it was originally. Now it’s every year you’re limited to $500,000.”
On the international side, the Treasury announced Thursday that it would be dropping the so-called revenge tax on other countries that levy taxes on U.S. goods through mechanisms such as Pillar Two of the Organization of Economic Cooperation and Development’s base erosion and profit shifting action plan after negotiations with G7 countries.
“It’s trying to convince countries to either repeal these so-called unfair foreign taxes, or at a minimum not apply them to U.S. companies and, importantly, also the foreign subsidiaries of U.S. companies,” said Jose Murillo, EY Americas international tax and transaction services leader. “That scope is consistent with what the White House has said, and congressional Republicans have said that they object to Pillar Two taxes applying to U.S. groups. Their position is U.S. groups and their foreign subs should be exempt entirely from Pillar Two.”
Not only the OECD rules are being targeted by the administration, but also digital services taxes. On Friday, President Trump announced that he was calling off trade discussions with Canada because its DST is scheduled to take effect on Monday.
Many other parts of the TCJA related to international taxes have been preserved in the bill.
“I think the positive things in this bill, on the international side, are it confirms that the basic structure, like the architecture of the international tax system as it was created by the TCJA, is here to stay,” said Murillo. “GILTI is here to stay. FDII is here to stay. The foreign tax credit regime is very, very complicated, but it’s here to stay, which provides certainty to a lot of companies.”
Other changes are being made in response to decisions by Senate Parliamentarian Elizabeth McDonough. On Friday, Senate Democrats announced additional provisions related to tax policy in the Senate Republican reconciliation bill violate the Senate’s Byrd Rule and would be subject to a 60-vote point of order threshold if included in the bill on the floor. These include additional requirements for taxpayers who claim the Earned Income Tax Credit to prove their child is eligible before parents could claim the credit; a new tax credit for contributions to “scholarship granting organizations” to establish a federal school voucher program; and a section exempting a small number of religious schools from an income tax on college endowments.
Senate Finance Committee ranking member Ron Wyden, D-Oregon, noted Republicans may drop additional provisions, including a proposal to scrap the IRS Direct File program, in the face of parliamentary challenges by Senate Democrats. Other issues have yet to be decided, including Republicans’ use of a “current policy baseline” to minimize the cost of the legislation.
