House Ways and Means Approves Markup

On May 12, the House Ways and Means Committee released legislative language to address tax provisions under the budget reconciliation instructions approved by Congress on April 10. The Joint Committee on Taxation released an explanation of the tax provisions and estimated that if enacted, they would cost $3.8 trillion over 10 years.

The committee approved its portion of the reconciliation bill language on May 14. The House hopes to complete its work by Memorial Day.

Crowe observation

While the reconciliation process allows the Republicans, who control both chambers of Congress and the White House, to enact legislation without votes from Democrats, slim margins and differences on priorities mean that even if a tax provision is approved by the Ways and Means Committee, it could be modified or removed or a new proposal could be added to the final package that is signed into law.

Highlights of tax provisions

The Ways and Means tax provisions make changes to numerous parts of the IRC and address a wide variety of taxpayers and issues. Specifically, the language approved by Ways and Means would do the following:

Individual provisions

• Make most expiring individual provisions in the Tax Cuts and Jobs Act of 2017 (TCJA) permanent, including lower individual marginal tax rates, a higher alternative minimum tax exemption and threshold, and limitations on various deductions and losses
• Make permanent the higher standard deduction under the TCJA, temporarily increasing it for 2025 through 2028 and adding a senior bonus amount of $4,000 for 2025 through 2028 that phases out for seniors with income above certain thresholds
• Limit itemized deductions for those with income taxed at the highest marginal tax rate
• Make the Section 199A pass-through tax deduction permanent, raising the rate from 20% to 23% and favorably revising rules for eligibility and computation of the benefit
• Raise to $30,000 the top cap on the amount of state and local taxes that can be deducted (SALT cap), but phase out the deduction generally beginning at adjusted gross income over $400,000 and limit the benefit of SALT cap workarounds created by state pass-through elective tax programs

Crowe observation

While the $30,000 SALT cap with income limits was included in the bill approved by the Ways and Means Committee, specifics on the SALT cap remain uncertain.

• Make the TCJA higher child tax credit permanent, temporarily increasing the maximum credit to $2,500 for 2025-2027, and adding a Social Security number requirement for the child and the taxpayer (and if married, the taxpayer’s spouse) to claim the credit
• Allow a deduction for certain cash tips, overtime, and car loan interest for 2025 through 2028
• Make the increased estate and gift tax exclusion permanent, raising it to $15 million for 2025 and adjusting it for inflation for individuals dying during 2026 and later
• Reinstate the partial deduction for charitable contributions for individuals who do not itemize and create a new tax credit for individuals for contributions to certain scholarship-granting organizations
• Make permanent the 461(l) limitation on excess business loss of a taxpayer other than a corporation, and modify the impact of a carried-forward excess business loss limitation on the limitation for the following year

International tax provisions

• Maintain the current deduction rates for global intangible low-taxed income and foreign-derived intangible income and the current tax rate for base erosion and anti-abuse tax by eliminating the rate adjustments scheduled to take effect after 2025
• Add the new Section 899 to increase U.S. tax rates imposed on applicable persons from countries that impose unfair foreign taxes such as the undertaxed profits rule, digital services taxes, and diverted profits taxes

Business tax provisions

• Temporarily reinstate the deduction under Section 174 for domestic research and experimental expenses incurred for 2025 through 2029, but allow elective capitalization
• Temporarily reinstate the add-back for amortization and depreciation when computing the business interest expense limitation under Section 163(j) for 2025 through 2029
• Temporarily reinstate 100% bonus depreciation for qualified property placed in service before Jan. 1, 2030 (Jan. 1, 2031, for long-production property), excluding qualified property acquired prior to Jan. 20, 2025, and placed in service in after 2026
• Create a new, special 100% depreciation deduction for qualified production property placed in service in the U.S. before 2033 for construction beginning after Jan. 19, 2025, and before Jan. 1, 2029
• Increase the maximum amount that can be expensed under Section 179 to $2.5 million
• Renew an enhanced opportunity zone deduction for 2027 through 2033, including special provisions to benefit rural qualified opportunity zones
• Tighten the aggregation rules for the limitation on the deduction for excess compensation under Section 162(m)
• Reduce the amortizable amount of Section 197 intangible assets for professional sports teams for property acquired after the date the legislation is enacted
• Replace the $600 threshold for Form 1099-K, “Payment Card and Third Party Network Transactions,” reporting with the previous higher threshold retroactive to 2021 and later years
• Restrict employee retention credit (ERC) claims and refunds by creating penalties for ERC promoters, denying claims filed after Jan. 31, 2024, and extending the period of limitations on assessment
• Create a 1% floor for corporate charitable contribution deductions
• Increase the small-business gross receipts threshold under Section 448 to $80 million for tax years beginning after Dec. 31, 2025, for small manufacturing businesses

Energy tax provisions

• Terminate electric vehicle, residential energy efficiency, and hydrogen production tax credits under Sections 25E, 30D, 45W, 30C, 25C, 25D, 45L, and 45V at the end of 2025
• Phase out investment and production tax credits under Sections 45Y, 48E, and 45U beginning in 2029
• Phase out the advanced manufacturing production credit under Section 45X beginning in 2029, but terminate the credit for wind energy components sold after Dec. 31, 2027
• Add foreign ownership restrictions for most energy credits
• Eliminate the transferability provisions under Section 6418 for all energy credits beginning two years after the date of enactment of the legislation

Tax-exempt organization provisions

• Increase the excise tax on net investment income (NII) on certain private college and university endowments under Section 4968
• Increase the rate of Section 4940 excise tax on NII of certain private foundations and require inclusion of assets of certain related organizations in evaluating new graduated rates
• Disregard certain purchases of stock in employee stock ownership plans from the Section 4943 excise tax on excess business holdings of private foundations
• Expand unrelated business taxable income of tax-exempt organizations to include royalties on name and logo, income from certain nonpublicly available research, and certain fringe benefit expenses (transportation and parking) not allowed under Section 274
• Expand application of the excess compensation excise tax rules for tax-exempt organizations to cover all current and former employees

As important as what is included in the released bill language is what is not included, such as:

• Higher individual marginal tax rates for wealthy individuals
• A SALT cap for C corporations
• Elimination of the preference for carried interests
• Change to the excise tax on stock buybacks
• Direct-pay provisions under Section 6417, which remain mostly intact

Looking ahead

After the House committees complete their work, language developed by each committee is combined into a reconciliation bill that will be put to a vote in the full House. During this time, negotiations on language and provisions continue and a lot can change. Therefore, it is too early to know whether the tax provisions approved by the Ways and Means Committee will be included in the final reconciliation bill that passes the House.

After the House passes its bill, the Senate will go through its own process to pass the reconciliation bill through its chamber. Changes made in the Senate could require sending the bill back to the House. While no date is set for sending a final bill to the president for signature, congressional leaders hope to finish their work by late summer.