Senate releases its tax bill, teeing up House negotiations

Energy tax credits

The Senate draft takes a more targeted approach to rolling back IRA energy credits than the House bill’s broad cuts. Most notably, the Senate draft does not repeal transferability of the credits, which was repealed after 2027 in the House bill.

Credits for the purchase of electric vehicles (EVs), EV chargers, and residential clean energy and energy-efficient home improvements would be terminated under the Senate draft, but the effective dates vary and are based on date of enactment. In contrast, the House bill repealed most of these credits after Dec. 31, 2025.  For example, under the Senate proposal the credit for EV chargers is repealed for property placed in service 12 months after the date of enactment, which will stretch past Dec. 31, 2025, but the credit for commercial EVs is repealed for property placed in service after 180 days post enactment, which may or may not stretch past Dec. 31, 2025.

The Senate draft would generally preserve the Section 45Y clean electricity production tax credit (PTC) and Section 48E clean electricity investment tax credit (ITC) for property which begins construction before Dec. 31, 2032.  However, it would accelerate the phase-out for solar and wind facilities that begin construction in 2026, fully phasing out for such a facility that begins construction after 2027. The House bill would repeal these credits for all types of facilities that begin construction more than 60 days after enactment and require property to be placed in service by the end of 2028, while also removing the ability to transfer the credits for any facilities placed in service in 2028.

The Section 45X advanced manufacturing credit would retain current law phase-out for all components other than critical minerals under the Senate draft. The phase-out for critical minerals would begin in 2031 and fully phase out for any minerals produced after Dec. 31, 2033.  As in the House bill, the credit would be terminated for wind energy components produced and sold after Dec. 31, 2027.

Other notable provisions in the Senate draft are the repeal of the Section 179D deduction for energy efficient commercial buildings beginning construction more than 12 months after enactment and the Section 45L new energy efficient home credit for homes acquired more than 12 months after enactment. The Section 45U nuclear production credit would generally not change, but no credit would be allowed after 2027 for the use of nuclear fuel that was produced in a covered nation or by a covered entity. The Section 45Z clean fuel production credit would be extended through 2031 (similar to the House bill) but would be reduced for the use of foreign feedstocks after 2025.

International tax provisions

The Senate Finance Committee draft includes significant revisions to the House’s proposed retaliatory tax provisions under Section 899. These modifications notably refine and clarify the scope and applicability of the provisions compared to the original House-passed bill.

Key updates in the Senate version include:

• Delayed implementation date: The Senate bill pushes the effective date of Section 899 provisions back by one year following enactment. This contrasts with the House bill’s tighter timeframe of just 90 days after enactment, providing taxpayers additional time to evaluate the implications and undertake necessary restructuring or adjustments. For calendar-year taxpayers, the rules will take effect from Jan. 1, 2027.
• Reduced cap on increased withholding taxes: The maximum withholding tax increase would be lowered from 20% in the House bill to 15% under the Senate version. Importantly, the cap serves at 15% above existing treaty rates, contrasted with the House bill where the cap served at 20% above the U.S. statutory rate. The additional five percentage point increase each year is retained.
• Modifications to Super BEAT: The Senate has reintroduced a base erosion payment threshold set at 0.5% for Super BEAT applicability. The Super BEAT aligns its rate of 14% to be consistent with the general BEAT provisions but notably still lacks a gross receipts threshold, meaning a broader range of entities would be impacted.
• Refined scope and definitions: The Senate proposal distinguishes clearly between “extraterritorial taxes” (including UTPRs) and “discriminatory taxes” (including DSTs). In the Senate version, the increased withholding tax provisions would specifically target “extraterritorial” taxing jurisdictions, while the Super BEAT would continue to broadly apply to both extraterritorial and discriminatory taxing jurisdictions.
  The Senate draft would also include explicit carve-outs protecting portfolio interest and other domestic withholding exemptions from increased withholding rates. Notably, this version also includes references and amendments to Section 891, potentially paving the way for its future use in retaliatory negotiations.

In contrast with token changes the House proposed to the deductions for foreign-derived intangible income (FDII) and global intangible low-taxed income (GILTI) taxes — raising the effective rates slightly — the Senate draft includes more significant changes that would bring the U.S. tax regime more in line with the 15% global minimum tax negotiated through the Organisation for Economic Cooperation and Development (OECD).

The effective rate for GILTI and FDII in the Senate proposal would be 14%. This version would also eliminate the deemed tangible income return provisions that excluded certain returns associated with tangible asset investment from GILTI and FDII. As a result, GILTI would be renamed “Net CFC Tested Income” and FDII would be renamed “FDDEI.” The bill would achieve the new 14% effective rate by changing the amount of the Section 250 deduction and associated foreign tax credits allowed. 

For FDDEI, deduction-eligible income would no longer include any income or gain from the sale or disposition of property that gives rise to rents or royalties. This modification would apply to sales or dispositions occurring after June 16, 2025. DEI calculations would also not include income described in 904(d)(2)(B)(i) or (ii) (i.e., foreign personal holding company income or Section 1293 inclusions from qualified electing funds) and would be reduced by deductions directly related to such income as opposed to deductions properly allocable to such income.  

The base-erosion avoidance tax (BEAT) rate would grow to 14%, from the current 10% (and scheduled 2026 rate of 12.5%). The $500 million revenue threshold would be maintained but the base erosion payment threshold would be reduced from 3% to 2%. Companies would see relief for base erosion payments (BEPs) to jurisdictions with effective tax rates of 18.9% or more under a new exclusion for high-taxed payments.

Unlike the House, the Senate proposal would permanently extend the look-through rule for related controlled foreign corporations (CFCs) under 954(c)(6), which is scheduled to expire at the end of 2025. The look-through rule provides that dividends, interest, rents and royalties one CFC receives from a related CFC are not treated as foreign personal holding company income (thus permitting the deferral of tax on such income). The Senate also would restore the downward attribution limitation under 958(b)(4), while introducing a new Section 951B to apply downward attribution to foreign controlled foreign corporations. In addition, Subpart F and GILTI inclusions apply to foreign controlled U.S. shareholder in such foreign controlled foreign corporations.

The last-day ownership requirement for Subpart F and GILTI inclusions would be eliminated under the Senate proposal, so a U.S. shareholder would be required to include its pro rata share of such inclusion if it owns stock on any day during the CFC year. Additionally, the pro rata rules would be revised such that the inclusions would be determined based on both the shareholder’s ownership period and the relevant CFC and U.S. shareholder status period.  

State and local taxes (SALT)

The Senate Finance proposal starkly contrasts with the House-passed bill in its treatment of the cap on individuals’ SALT deductions. The House bill provides for a $40,000 cap in 2025 ($20,000 for married filing separately) that would increase 1% annually to a cap of more than $43,000 (more than $21,500 for married filing separately) in 2033 and beyond. This cap would begin to phase down for those with modified adjusted gross income (MAGI) of $500,000 or more, with the cap quickly hitting a floor of $10,000 when the MAGI reaches $600,000. For married filing separately, the floor for the SALT cap would be $5,000, and the MAGI beginning and ending phasedown thresholds $250,000 and $300,000, respectively. Similar to the increase in the maximum amount of the cap until 2033, the MAGI amounts that trigger reductions in the cap also would increase annually until 2033.

In contrast, the Senate Finance proposal would permanently keep the SALT cap at the current $10,000 ($5,000 for married filing separately), regardless of MAGI level. However, this proposal is being characterized as the subject of continuing negotiations, given that House Republicans in high-tax districts have been strident in their opposition to a low cap that adversely impacts their constituents.

While Congressional wrangling over the cap on individuals’ SALT deduction has garnered most of the headlines, the final bill also could have an impact on pass-throughs. In particular, both the House-passed bill and the Senate Finance proposal would disallow the use of state-enacted pass-through entity (PTE) taxes except in limited circumstances. Again, however, there are some differences between the House and Senate approaches.

The House-passed bill would prevent taxpayers from deducting disallowed foreign real property taxes, and subjects specified taxes, payments that are considered to be substitutes for specified taxes, and PTE taxes, to the SALT cap. Importantly, specified taxes include income and other similar taxes paid by a PTE other than in carrying on a qualified trade or business (i.e., certain specified service trades or businesses (SSTBs)). Excepted taxes are not subject to the SALT cap. In addition, PTEs would be required to separately state, and not deduct, specified taxes, which would effectively repeal guidance previously provided in IRS Notice 2020-75. Specified taxes from SSTBs, in contrast to taxes incurred by other trades or businesses, would be subject to the $20,000/$40,000 SALT cap. Finally, specified taxes could not be capitalized.

Individual, trust and estate taxpayers would be required to include an addition to tax in certain cases where a taxpayer receives a credit on their state income tax return that exceeds their share of the deduction for entity-level taxes. This provision in the Senate Finance proposal is similar.

While the Senate Finance proposal would maintain the specified tax, substitute tax and excepted tax concepts, along with provisions designed to prevent taxpayers from avoiding the SALT cap, there are some differences. The proposal would clarify that the definition of an excepted tax includes taxes described in IRC Section 164(a)(1) and (2) that are paid or accrued in the carrying on of a trade or business. Accordingly, state and local real and personal property taxes paid by a PTE would not be subject to the SALT cap. In addition, the Senate proposal would create a new individual-level limitation for a PTE owner’s separately stated share of PTE taxes that dispenses with the differential treatment of SSTBs and non-SSTBs. Instead, the limitation would consist of any unused portion of the PTE owner’s SALT cap, plus the greater of $40,000 of their PTE tax allocation, or 50% of their PTE tax allocation.

Provisions for tax-exempt organizations

The Senate bill does not include the House proposed changes to create graduated excise tax rates on net investment income taxation for private foundations. Further, the Senate draft does not include the House’s proposed new tax on the net investment income of private colleges and universities. Additionally for higher education institutions, the endowment tax rates under the Senate bill are lower (a maximum rate of 8% compared to the House’s maximum rate of 21%). 

Section 512(a)(7), requiring tax-exempt organizations to pay tax at a 21% rate on the total expenses for providing parking and transit benefits to their employees, was created as part of the TCJA but retroactively repealed two years later, largely as a result of the burden lawmakers believed it had on houses of worship. This year’s House bill would revive the tax but with an exemption for church-affiliated organizations. However, Senate tax writers did not include this provision in their initial draft.

The House bill would allow a partial deduction for charitable contributions made by individuals who do not itemize, for the years 2025 through 2028. The maximum deduction amount, $150 for individuals and $300 for joint filers, would be half that allowed the last time Congress enacted such a provision. In contrast, the Senate’s proposal would enact a permanent allowance for non-itemizers, with a deduction cap of $1k for individuals and $2k for joint filers. Limitations on deductibility are also present in the Senate bill for itemizing taxpayers, who would be subject to a 0.5% floor on itemized charitable deductions.

Unchanged from the House bill, the Senate proposes an expansion of the application of the employer tax on excess compensation for tax-exempt organizations, making the tax applicable to all employees instead of only the five highest-compensated employees of the organization for the taxable year (and any employee deemed to be a covered employee in a preceding tax year). This change would take effect for tax years beginning after Dec. 31, 2025.

It is worth noting that one provision included in the House tax writers’ version of the bill but not in the one the House ultimately passed May 22 or in the Senate draft was the elimination of the exclusion from UBTI for certain royalties paid for the license of a name or logo.

Individual tax provisions

As in the House-passed bill, the Senate draft would make the TCJA individual tax brackets permanent, with adjustments for inflation. A difference is that the Senate proposal includes an extra boost for inflation only for the 10%, 12% and 22% income tax brackets, while the House would allow it for all but the top (37%) bracket. However, both chambers’ proposals avoid a tax increase on these taxpayers and do not include Trump’s proposal to impose a 39.6% rate for individuals earning $2.5 million or more and joint filers earning $5 million or more.

Similarly, both the House and Senate Finance versions provide for the TCJA’s temporary increase in the standard deduction to be made permanent and adjusted for inflation. Personal exemptions would be permanently eliminated. 

The Senate version would permanently repeal the “Pease” limitation on itemized deductions and insert a new formula applicable only to taxpayers in the highest tax bracket, capping the value of each dollar of otherwise allowable itemized deductions at 35 cents in most cases.

The Senate draft would make permanent the TCJA’s doubled child tax credit of $2,000 per child and refundable credit of $1,400, adjusted for inflation, and it would adopt the increased phase-out threshold amounts of $200,000 (or $400,000 for a joint return), as well as the $500 nonrefundable credit for each dependent other than a qualifying child. The nonrefundable credit would be $2,200 per child beginning in 2025, permanently indexed for inflation going forward. Each child’s Social Security Number (SSN) and a work-eligible SSN of at least one parent would be required to claim the credit. This Senate proposal differs some from the House-passed provision, which would increase the maximum credit to $2,500 through 2028, then drop it to $2,000.

The Senate draft also addresses several presidential priorities but differs some from the approach taken by the House. 

• Senate tax writers propose a deduction in tax years 2025-2028 of up to $25,000 for “qualified” tip income received by an individual in an occupation that “customarily and regularly” receives tips during the tax year. The deduction would be phased out starting at MAGI of $150,000 for individuals and $300,000 for married couples filing jointly. Likewise, the Senate draft would provide a deduction for overtime pay in those same four years, capped at $12,500 for individuals and $25,000 for joint filers, and including a phasedown beginning with income of $150,000 and $300,000, respectively. The House-passed bill does not include deduction caps or income phase-out for these provisions.
• The Senate draft also would provide a deduction of up to $10,000 for car loan interest in tax years 2025-2028, with a phase-out starting at MAGI of $100,000 ($200,000 for a joint return). Both the House and Senate proposals would require a vehicle to have undergone final assembly in the U.S. to qualify, but the Senate draft would limit the provision to new cars only and would not allow it for all-terrain vehicles, trailers or campers.
• Because of the budget rules Republicans must follow to sidestep a Senate filibuster for this legislation, they are not able to directly exempt seniors’ Social Security income from taxation, so both chambers have instead provided an increased standard deduction for seniors for tax years 2025-2028. In both cases the deduction would phase down for those with MAGI greater than $75,000 ($150,000 for joint filers), but the Senate draft would provide a $6,000 bonus annually versus the House’s $4,000.   
• The Senate Finance draft matches the House bill in providing a permanent exemption for estate and gift taxes at $15 million per individual or $30 million for a married couple in 2026. Moving forward, the exemptions would be indexed for inflation.

As in the House bill, the Senate draft includes a 3.5% tax on remittances abroad by non-U.S. citizens. However, the Senate version would exempt remittances funded from certain U.S. accounts or with U.S.-issued debit or credit cards.

The Senate bill also contains a placeholder in Section 70205 pertaining to the “Tax treatment of certain international entrepreneurs.”

Next steps

This draft will continue to undergo changes, as Senate Republicans hash out details among themselves, as well as with the House, to land on legislation that can pass both chambers.

“This is a proposal; nothing is finalized,” Sen. Markwayne Mullin, R-Okla., said of the Finance Committee’s release. “Everything is on the table. We’re working through every aspect. There isn’t any finalized text yet. … we’re going through everything to make sure we can get 51 votes.”

Fiscal hawks in the Senate continue to balk over the size of the deficit increase the legislation would cause ꟷ approximately $3 trillion over 10 years, when accounting for both increased deficits and debt financing, according to the Congressional Budget Office and Joint Committee on Taxation. And those lawmakers have been vocal about additional changes to the package, which could affect negotiations with the House and White House and push passage past the self-imposed July 4 deadline Republican leaders set. 

“We don’t have time to get this right, by July 4,” said Sen. Ron Johnson, R-Wis., a critic of the bill’s effects on the national debt, during a June 17 interview with CNBC. “We have all of July, and we actually have beyond that, in terms of when the debt ceiling comes due.”

The federal debt ceiling to which Johnson referred is the one true driver of timing for this legislation. In June 2023, lawmakers suspended the debt limit through Jan. 1, 2025, and since January, the Treasury Department has been using so-called extraordinary measures to finance ongoing government operations. The ability for Treasury to continue using these measures is forecast to run out in late summer ꟷ as early as mid-August, when Congress is scheduled to be in recess ꟷ necessitating legislative action before then. Without such an increase, the government would be unable to meet its existing legal obligations, including funding and distributing Social Security, Medicare, military salaries and covering interest on the debt. This could lead to a unprecedented default, potentially causing a financial crisis. Both chamber’s legislative proposals include an increase in the debt ceiling ꟷ by $4 trillion in the House bill and $5 trillion in the Senate draft.

Sen. Rand Paul, R-Ky., has said he will vote against any bill that includes a debt ceiling hike; and Johnson said he and at least two other Republican senators are committed to slowing down the legislation over debt concerns and continuing the debate until at least August.

“What my role has been, and will continue to be, is I’m going to force everyone to look at the actual numbers, the massive deficits that we’re projecting over the next 10 years, and then we’ll let the chips fall as they may,” Johnson said.

Johnson’s words will be music to the ears of House fiscal hawks, most of whom voted in favor of the House bill but aim to use Senate negotiations to demand more spending cuts or, less likely, more revenue raisers.

On the other end of the spectrum, House Republicans from high-tax states ꟷ New York, California, and New Jersey in particular ꟷ are pushing back on any changes to the SALT deduction cap. A cap higher than the current $10,000 would result in less revenue coming in, which makes it a prime target of those looking for savings, but the so-called SALT Caucus threatened to scuttle the House bill until it included a significant increase in the cap, and at least two members have said they will vote against a bill that returns from the Senate with anything less than the $40,000 they fought for.

The various energy tax credits also are a subject of continued negotiation, though the Senate version had fewer changes to the energy portion than in other areas. Several Senate and House Republicans have spoken in favor of taking a lighter touch approach to phasing them out – with extension in future legislation possible for some ꟷ but it’s one of the major areas of savings within the bill, as accelerated repeal saves the federal government revenue, on paper.

President Trump and the administration will also continue to exert their own views within the negotiating process. While the Senate draft maintains several Trump campaign promises aimed at working-class taxpayers, it does add income limits and deduction caps not in the House bill.

Republicans will now engage in sprint negotiations to meet their self-imposed deadline of July 4 ꟷ or perhaps more realistically, the beginning of August recess, in order to smooth out these friction points and refine the bill further.