The reconciliation bill passed by the House on May 22 is currently being considered by the Senate and will likely undergo changes before approval by the upper chamber. To what extent the changes will create stumbling blocks before a final bill is produced and voted on is uncertain, with the increased SALT deduction, Medicaid reforms and repeal of certain Inflation Reduction Act credits on the line.
While much can change between now and the final version of the bill, the following is a quick overview of some of the provisions:
- Bonus depreciation. First-year bonus depreciation, currently being phased down 20% per year since 2023, is 40% for 2025, and will drop to 0% in 2027. Under the One Big Beautiful Bill Act (or OBBBA) it will be reset at 100% for eligible property acquired and placed in service after Jan. 19, 2025, and before Jan. 1, 2030.
- Section 199A Qualified Business Income deduction. The QBI deduction, created by the Tax Cuts and Jobs Act, is available through 2025 to owners of pass-through entities, sole proprietors and the self-employed. The OBBBA would make the deduction permanent, and the deduction would increase to 23% for tax years beginning after 2025.
- Domestic research and experimental expenditures. The OBBBA would reinstate the deduction available to businesses that conduct research and experimentation. Expenses incurred after 2024 and before 2030 would be eligible.
- Section 179 expensing. The bill increases the limit to $2.5 million and increases the phaseout threshold to $4 million for property placed in service after 2024. The limit and threshold would be adjusted annually for inflation.
- Excess business loss limitation. The bill makes permanent the excess business loss limitation for pass-through entities.
- Pease limitation. The bill would make permanent the repeal of the Pease limitation on itemized deduction but would introduce a new limitation for taxpayers in the 37% bracket for years after 2025. It would also temporarily increase the standard deduction for tax years 2025 through 2028.
- The Child Tax Credit. The bill makes the CTC permanent and raises it to $2,5000 per child for tax years 2025 through 2028, after which it would return to its present $2,000 with an annual inflation adjustment.
- Federal gift and estate tax exemption. The bill increases the federal gift and estate tax exemption to $15 million, and adjusts it annually for inflation. It is currently set at $13.99 million.
One sector the bill is very positive for is real estate, according to Tyler Davis, president of Saunders Real Estate: "It makes a lot of the TCJA provisions permanent. The estate tax exemption is made permanent and raised to $15 million, and the bonus is back to 100% for the next four years. This allows purchasers to depreciate their investments a lot faster, so it makes deals more attractive for investors and developers. A special provision for industrial manufacturing property under the bill, it is eligible for 100% expensing."
This would allow 100% of a project's cost to be deducted in the first year, making it "hugely attractive," Davis said. "The administration wants to bring investment back to the U.S. This will incentivize that process."
Under the bill, the Section 163(j) business interest deduction would expand and allow more interest to be deducted on qualifying real estate, he said. "And they're redoing some of the Opportunity Zone rules and boundaries, and are lowering reinvestment thresholds for investments. This should drive more investment into rural communities. And, lastly, there are no Section 1031 changes in the bill. That's a really positive thing from a transactions and reinvestment perspective."
