One Big Beautiful Bill Act Tax Highlights

Currently in Congress as part of the budget reconciliation process, Congress is working on President Trump’s One Big Beautiful Bill Act (OBBBA) which the Senate hopes to have on the President’s desk by July 4th.  This is the bill that Elon Musk has recently come out against.  So what does this mean to you?

Here are the highlights of the OBBBA.  Remember, all of this is subject to change before it goes to President Trump for his signature to become law.

TCJA Extensions – Individuals:

  • Individual tax rates: (10%, 12%, 22%, 24%, 32%, 35% & 37%) will become permanent beginning in 2026
  • Personal exemptions: permanent repeal of personal exemptions
  • Child tax credit:
    • Permanent extension of increased $2,000 per child credit
    • Temporary increase to $2,500 per child for 2025-2028
  • Standard deduction:
    • Permanent extension of TCJA’s doubling of standard deduction ($15,000 single, $30,000 Married-Filing-Joint (MFJ), $22,500 Head of Household (HOH))
    • Additional increase ($1,000 single, $2,000 MFJ, $1,500 HOH) (2025-2028)
  • Mortgage interest deduction: permanent extension of lower mortgage caps
  • State and local tax (SALT) deduction:
    • Increased to $40,000 for all taxpayers except Married-Filing-Separate (MFS), who are entitled to $20,000
    • For taxpayers whose Modified Adjusted Gross Income (MAGI) is greater than $500,000, the SALT deduction remains capped at $10,000
    • SALT cap and income phaseouts increase 1% each year from 2026-2033, then remain at 2033 levels
  • Casualty and theft loss deductions: permanent extension of casualty or theft loss suspension, except for those in federally declared disaster areas
  • Estate and gift tax:
    • Permanent extension of increased exemption amounts
    • Increase in unified estate & gift tax exemption to $15 million per person starting in 2026

TCJA Extension – Business:

  • Restores 100% bonus depreciation:
    • 100% depreciation deduction for property placed in service 1/20/25 – 12/31/29
    • Currently stands at 40% expensing for 2025, 20% for 2026, and none for 2027 and thereafter
  • Section 163(j) interest deduction:
    • Reinstates the Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) limitation under section 163(j) 1/1/25 – 12/31/29
    • Adjusted taxable income is computed without regard to the deduction for depreciation, amortization, or depletion
  • Section 174 Research & Experimental (R&E) expenditures:
    • Allows expensing of domestic R&E expenses for amounts paid or incurred 1/1/25 – 12/31/29
    • Taxpayers have 3 options:
      1. Immediately deduct domestic R&E;
      2. Elect to capitalize and amortize over useful life of research (minimum recovery period is 60 months); or
      3. Elect to capitalize and amortize over 10 years

TCJA Extension – Pass-Through Entities (PTE):

  • Section 199A pass-through deduction:
    • Permanent extension of deduction
    • Increase in deduction from 20% to 23%
      • Changes to deduction phase-in limitation for Specified Service Trades or Businesses (SSTB) Click on the “Specified Service Trade or Business (SSTB) List” under “Recent Posts” for more a list of businesses considered SSTBs.
  • State and local tax deduction for PTEs:
    • If non-SSTB PTE and 75% of gross receipts derived from qualifying trade or business, then unlimited PTET SALT deduction
    • If SSTB, no unlimited PTET SALT deduction allowed
  • Section 461(I) excess business loss deduction:
    • Permanent limitation on excess business losses
    • Modifies limitation on carryforwards

Proposed PTET SALT deduction limitation:

Current Situation:

    • Individual SALT deduction, on Schedule A for itemized deductions, capped at $10,000
    • 36 states and 1 locality implemented an unlimited pass-through entity tax SALT deduction that is approved by the IRS

Proposed Legislation Details:

    • Individual SALT deduction $40,000 for most filers
    • PTET SALT deduction tied to the section 199A deduction (Qualified Business Income Deduction (QBID))
    • Eliminates unlimited PTET SALT deduction for SSTBs
    • SSTBs now subject to individual SALT deduction limits

Consequences:

    • Increases tax on some CPA firms
    • No limitation on federal deductibility for corporations
    • Increases disparity in treatment between corporations and certain pass-throughs
    • SSTBs are in a worse position than immediately after TCJA implementation

Call to Action:

    • Contact your Senators and urge them to oppose this part of the OBBBA. Click on the “KSCPA Call to Action” under “Recent Posts” for more information from the KSCPA.
    • Urge Congress to retain the unlimited PTET SALT deduction for all pass-throughs

House Version of OBBBA PTET SALT Deduction: Fact or Fiction?

  • FACT:
    • The OBBBA makes the section 199A deduction permanent and expands it to 23%, helping millions of small businesses
    • It seems that the disallowance of SSTBs from taking the PTET SALT deduction is being used to pay for other proposals in the bill, while corporations remain untouched
    • The PTET SALT deduction helps those entities structured as partnerships or S-Corporation.  It does not help the small businesses that are sole proprietors who file a Schedule C with their personal Form 1040 tax return
  • Fiction:
    • Overall, the OBBBA is a pro-business growth package that will help pass-through entities
    • The OBBBA allows all pass-through entities that qualify for the QBI deduction to take an uncapped amount of SALT deduction
    • It seems that the PTET SALT deduction only benefits the high-income owners, so it doesn’t matter if SSTBs are restricted from taking the SALT deduction
    • The current PTET SALT deduction calculation is complicated, to the point where it wouldn’t be terrible if PTET SALT deductions are eliminated
    • I live in a state that does not have a state income tax so the PTET SALT deduction limitation does not impact me

 

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