Senate Releases Proposed Tax Legislation

The Senate Finance Committee recently released the Senate’s version of a reconciliation tax package in response to the previous tax provisions passed by the House of Representatives. The Senate Finance Committee also released a section-by-section summary and an abbreviated overall summary highlighting key themes.

Large portions of this new Senate proposal mirror the previous House of Representatives’ version (passed as H.R. 1) including extending most of the rate cuts enacted as part of the Tax Cuts and Jobs Act of 2017 (TCJA), as well as new provisions eliminating tax on certain tips, overtime pay, and social security benefits.

There are, however, several material differences introduced by the Senate. Here are some of the key differences:

SALT Cap

The TCJA instituted a temporary $10,000 limit on state and local tax (SALT) deductions, with this limit expiring at the end of 2025. In response, H.R. 1 increases the SALT deduction limit to $40,000, with the limit subject to an income phase out to a base deduction of $10,000.  State level passthrough entity taxes (PTETs) would also be subject to this limit, with additional limitations imposed on service businesses.

The Senate’s proposal sets a base level SALT deduction limit of $10,000 for all taxpayers, with an additional allowance for PTET deductions up to a total SALT deduction of $40,000, without any income phaseouts or limitations on service-based businesses.

The Senate’s proposed modification to the SALT deduction is likely to be the most contentious issue as some House members have pledged not to support any final bill that does not allow for an individual SALT deduction limit of $40,000. Senators have indicated their flat $10,000 cap for individuals is a floating number that could be adjusted.

Permanence for Bonus Depreciation, R&D Expenses, and Interest Expense Limitations

H.R. 1 allows for full bonus depreciation, expensing of section 174 R&D expenditures, and using EBITDA, rather than EBIT, as the limiting factor for interest expense limitations. However, these items, under H.R. 1, are only extended for the next five years.

The Senate’s proposal would make these changes permanent.

Energy Credits

Certain energy credits introduced by the Inflation Reduction Act (IRA) of 2022 would be phased out and eliminated by H.R. 1. Generally, the Senate is proposing a longer phase-out period for many of these energy credits. For example, the proposed legislation would allow for wind and solar projects placed into service through 2027 to qualify for the credits.

QBI Deduction

The Section 199A deduction for Qualified Business Income (QBI) is expanded by H.R. 1, from 20% to 23%, with a QBI deduction modification for taxpayers in certain income phase-out ranges.

The Senate’s proposal fixes the QBI deduction at 20%.

International Tax

Both the House and Senate bills introduce versions of a tax that would apply to foreign individuals and businesses located in jurisdictions that allegedly impose “unfair” taxes on U.S. businesses. The House proposed up to a 20% tax, while the Senate is proposing up to a 15% tax with a delayed implementation date.

Next Steps for the Proposed Legislation

The Senate’s tax package first needs to be considered and passed by the full Senate (expected to happen the week of June 23rd). After passage through the Senate, the legislation returns to the House of Representatives, and the House could choose to make further modifications, including the SALT deduction limit.

Republicans continue to push for a July 4th deadline to sign this tax legislation into law, although this expedited timeline may be problematic to the extent the House enacts changes requiring further Senate consideration.

Our team is here to help you make sense of this evolving tax legislation.