Tax News & Views Big Beautiful Bill and Bulb Roundup

The House Ways and Means Committee issued details of the tax portion of the "Big Beautiful Bill" budget reconciliation. If enacted, it will make big changes to the income tax. Departing a bit from our usual roundup format, we will go through some of the key items from the Ways and Means outline of the tax provisions.

Business Tax Benefits

Permanent extension of the rate cuts enacted in 2017. Sec. 110001 of the bill removes the 2026 expiration date from the Tax Cuts and Jobs Act rate cuts. The rumored addition of a "millionaire bracket" to the bill does not appear in this version, so the 37% top rate will remain.

100% Bonus depreciation is restored retroactive to January 20, 2025. The allowance will expire after 2029. (Sec. 111001)

Full expensing of researching costs would be restored for tax years beginning after 2024, but expiring after 2029. (Sec. 111002)

The limitation of business interest deductions would be based on taxable income without regard to depreciation and amortization for 2025-2029 taxable years. Currently the 30% cap is based on taxable income reduced by depreciation and amortization. (Sec. 111003)

Increase in gross receipt limits for preferential accounting methods. The bill would raise the inflation-indexed gross receipts limits for cash-basis accounting, exclusion from the business interest limits, and inventory capitalization rules to $80 million of average gross receipts for the previous three years. The current limit is $31 million. (Sec. 111110)

Full expensing for factory structures is a new provision in the bill. It would apply to structures "manufacturing, production, or refining of tangible personal property" for which construction begins after 2024 and before 2030 and which are placed in service before 2034. (Sec. 111101)

The "pass-through" deduction under Sec. 199A would be made permanent and increased to 23 percent. (Sec. 110005)

Some pay-fors

The tax provisions have to fit under certain budget constraints in the reconciliation process, so there are revenue raising pieces in the bill. A few notable ones:

Employee retention credit claim early cutoff. The bill prevents the payment of employee retention credits claimed after January 31, 2024. (Sec. 112205)

Many IRA tax benefits are terminated early. Credits terminating after 2025 include the used electric vehicle and new clean vehicle credits, the alternative fuel refueling property credit, the energy efficient home improvement and residential clean energy credits, and the new energy efficient credit for contractors. Other provisions sunset energy production credits early and limit transferability of certain credits. (Secs. 112001-112016)

Tightening of excess business loss limit. The annual limit on personal business loss deductions would be made permanent and tightened so that it would not be added to net operating losses, effective starting in 2025.

Name and logos. Universities and other non-profits would be subject to the "Unrelated business income tax" on use of their names and logos. (Sec. 112025)

State and local tax itemized deductions

The bill raises the cap on itemized deductions for state and local taxes to $30,000 for joint filers and $15,000 for other taxpayers. The current cap is $10,000 for single and joint filers. The cap would have a phase-down to $10,000 for taxpayers with incomes over $400,000. The cap would become permanent.

To help pay for this, the bill would subject entity-level SALT cap workarounds to the deduction cap. These workarounds have until now allowed partnerships and S corporations to pay tax on behalf of their owners to bypass the cap.

These changes would be effective starting in 2026. (Sec. 112019)

Media coverage of the bill

Republican Tax Plan Boosts SALT Deduction, Ends Green-Energy Breaks - Richard Rubin, Wall Street Journal:

House Republicans unveiled a tax plan that raises the state-and-local tax deduction, ends some taxes on tipped income and overtime pay and extends President Trump’s expiring 2017 tax cuts, partially paid for by rolling back tax breaks for electric cars and clean-energy production.

The text released by the House Ways and Means Committee on Monday details how Republicans are trying to fulfill Trump’s campaign-trail promises and shows where they want to raise taxes to cover part of the cost. It fires the starting gun on a breakneck two weeks of negotiations in the House, as Republicans split over budget deficits, energy policy, healthcare and taxes try to wrangle a majority for the plan.

House Tax Bill Features Business Breaks, Trump Promises, IRA Cuts - Cady Stanton and Doug Sword, Tax Notes ($):

Full domestic research and development expensing and a trio of President Trump’s campaign trail tax proposals are featured in the newly released section of Republicans’ 389-page reconciliation tax bill.

The legislation, scheduled for a May 13 markup in the House Ways and Means Committee, also includes a $30,000 state and local tax deduction limitation and an expansion to 23 percent for the deduction by passthrough businesses of qualified business income.

GOP Floats $30,000 SALT Cap, Renewed R&D Credit - Asha Glover, Law360 Tax Authority ($). "The TCJA's international tax regime, which was scheduled to become harsher after 2025, would remain in its current form under the legislation. The scheduled decreases to the deductions for global intangible low-taxed income and foreign derived intangible income would be repealed under the bill. The legislation would also eliminate scheduled rate increases to the base erosion and anti-abuse tax, scheduled to take effect beginning in 2026."

GOP proposes five-fold increase in tax on college endowments - Danielle Douglas-Gabriel, Washington Post:

The legislation, released Monday, would create a tiered tax on college endowments, a collection of donations and investments that pay for salaries, research, financial aid and other expenses. Instead of the current 1.4 percent tax on the net investment income of private schools with an endowment of more than $500,000 per student, House Republicans want to raise that tax as high as 21 percent.

It is unclear at the moment exactly how many schools would be subject to the new rate. Under current law, 56 colleges and universities paid a total of $381 million in endowment taxes in 2023, according to the latest data from the IRS. The vast majority of college students attend institutions with a fraction of the endowments held by the nation’s wealthiest schools. Still, the proposal targets institutions that do a lot of the heavy lifting in research.

Republican tax cut plan would gut US clean energy - Myles McCormick, Alex Rogers and Martha Muir, Financial Times. "The bill would scrap a $7,500 tax credit for buyers of EVs after 2026 and a $4,000 credit for second-hand EVs from the end of this year. It would wind down tax credits for most renewable energy investment and production by 2031, rather than tying their expiry to emissions goals."

House panel releases sweeping GOP tax bill - Mychael Schnell and Tobias Burns, The Hill. "Beyond increasing the SALT deduction cap, the bill includes several tax-related promises Trump made on the campaign trail, including getting rid of taxes on tips and overtime — provisions set to expire at the end of 2028. The bill also proposes exempting car loan interest payments through 2028, with several exceptions."

Tax cuts cost forecast gives GOP leaders room to maneuver on SALT - Brian Faler, Politico. "House Republicans’ tax package would cost $3.7 trillion, Congress’ nonpartisan budget forecasters said in a new, updated cost estimate, which could give lawmakers some breathing room as they try to stay within the budget parameters they have set for themselves."

IRS News

Democrats Dig Deeper on IRS Pick’s Ties to Tribal Credit Sponsor - Erin Schilling and Chris Cioffi, Bloomberg ($):

Senate Finance Committee Democrats are demanding to know whether IRS commissioner nominee Billy Long or other incoming Trump administration officials have a deal with a company to legitimize tax credits that the Treasury Department and IRS have said don’t exist.

...

The lawmakers, who last month called for a criminal investigation into firms that promoted the credits, are asking White River Chief Financial Officer Jay Puchir to explain his statements—on a recording of a December investor call obtained by investigators—that his contacts in the new administration will make sure the tax credits get the green light. Committee investigators say the call was hosted in response to Bloomberg Tax’s reporting revealing the existence of the credits.

Long has earned money and received donations to his dormant campaign fund from people who listed their employer as from White River and other companies associated with promoting the credit, according to political disclosures.

Mr. Long also marketed Employee Retention Credits. His experience marketing tax credits is virtually all of his tax-specific experience for the IRS job.

DC Judge Declines To Block IRS From Sharing Info With ICE - Kat Lucero, Law360 Tax Authority ($):

A D.C. federal judge rejected Monday a trio of immigration advocacy groups' request to block the Internal Revenue Service from sharing with immigration enforcement agencies the names and addresses of people suspected of being in the country illegally.

The groups have not provided enough evidence to show that the IRS sharing confidential taxpayer information with the U.S. Department of Homeland Security's Immigration and Customs Enforcement for criminal investigations would lead to civil immigration enforcement, Judge Dabney L. Friedrich said in a memorandum opinion and order.

Blogs and Bits

IRS has lost 11,000+ employees so far this year under Trump/Musk cuts - Kay Bell, Don't Mess With Taxes. "Additionally, the separations disproportionately impacted employees in certain positions. TIGTA points out, for example, that approximately 31 percent of revenue agents left or were terminated, while 5 percent of Information Technology management separated."

District Court Invalidates Certification Procedure for ACA Minimum Coverage Penalty - Parker Tax Pro Library. "A district court granted summary judgment for an employer in its suit for a refund of the employer shared responsibility payment (ESRP) it paid for failure to offer its employees minimum essential health coverage under the Affordable Care Act (ACA). The court found that under the ACA, the Department of Health and Human Services is required to certify an employer before the ERSP may be assessed and therefore the employer was not properly assessed when the IRS issued it a Letter 226-J proposing the ESRP."

Tax Bill Falls Short of Pro-Growth Reform - Adam Michel, Liberty Tax. "To make the bill better, lawmakers should prioritize making full expensing permanent, eliminate or scale back the flood of new and expanded tax preferences, and go further in repealing costly and distortionary subsidies."

Why Do I Have to Pay U.S. if I Live Abroad? - Kasia Strzelczyk, 1040 Abroad. "The United States’ citizen-based taxation principle mandates that all U.S. citizens and resident aliens report and pay federal income taxes on their worldwide income."

It never works, but I'm a lawyer so maybe it will work for me.

Tax Court Penalizes Attorney for Frivolous Defier Claims - Kristen Parillo, Tax Notes ($). "The Tax Court found a California tax attorney liable for deficiencies and a penalty for advancing frivolous arguments after he asserted that he didn’t pay taxes or file returns for eight years because the IRS has no authority to assess tax."

The Tax Court deals with many taxpayers who assert long-discredited arguments that the income tax doesn't exist. It's unusual for these to come from an attorney certified to practice before the Tax Court. His credentials were noticed by Tax Court Judge Arbeit, but they didn't help. From his opinion (citations omitted for brevity; my emphasis):

Petitioner has built his case around four notorious arguments all reaching the same astonishing conclusion: respondent lacks the authority to assess tax. Petitioner contends that (1) the Sixteenth Amendment was not properly ratified and is therefore invalid, (2) section 1 does not plainly and clearly impose a tax on the income of petitioner, (3) the income tax is an excise tax to which his income is not subject, and (4) petitioner is a citizen of Nevada and therefore not subject to federal income tax. To the extent he asserts other claims (e.g., a purported cost basis in his personal labor), they fit within these general themes. All are frivolous.

This Court generally does not address frivolous arguments such as those petitioner puts forward. As here, frivolous antitax arguments are often used as a time-consuming delay tactic. Consider the more than 1,000 pages petitioner has filed. Addressing every assertion and citation would waste substantial time and resources; by slowing down the Court, answering frivolous arguments harms litigants with legitimate arguments. We see “little advantage to be gained by addressing frivolous arguments, and there are disadvantages that may accrue from doing so. For that reason, litigants who present frivolous arguments should not expect to see them answered in opinions of this Court.”

We address them here (albeit briefly) only because petitioner, a tax lawyer admitted to practice before this Court, is not the typical tax defier. Petitioner insists on the correctness of his positions even as he cites contrary precedent. His great efforts to distinguish his arguments fail utterly.

The moral? Just as being a credentialed engineer doesn't allow you to stop a speeding car with your body, being a credentialed attorney doesn't allow you to stop the income tax with nonsense.

What day is it?

It's Tulip Day! May your bulbs blossom bountifully.

Tax News & Views Big Beautiful Bill and Bulb Roundup

We're Here to Help

Joe B. Kristan, CPA