Key Business Tax Provisions in the Senate’s Draft Bill

Tax experts unpacked the Senate Finance Committee’s June 16 version of the One Big Beautiful Bill Act — including key provisions for domestic businesses — and how those differ from the House-passed bill.

199A pass-through deduction.

The House bill (H.R. 1) would make the deduction for qualified business income under Code Sec. 199A permanent. It also would increase the deduction from 20% to 23%. Other House changes include indexing threshold amounts to inflation after 2025 and adjusting phase-in calculations and treatment of REIT dividends, per the Joint Committee on Taxation’s analysis.

For tax experts, what really stuck out as the major difference between the House bill and Senate draft is the Senate’s choice to maintain the current 20% rate.

With the Section 199A pass-through deduction set to expire at the end of this year under the 2017 Tax Cuts and Jobs Act, there has been a strong push from the business community for extension. But the Senate’s lower rate was not a surprise to experts.

“I have yet to meet or speak to anybody that was asking for 23%,” PwC’s Rohit Kumar told Checkpoint. “All of the advocacy and desire was just to hold fast at 20% but to make it permanent — to not let it expire at the end of the calendar year, as it would have otherwise done, absent congressional intervention.”

EY’s Ray Beeman, too, said “I don’t think anybody was really surprised that they ended up at 20%. I think people were still not sure why the House did 23%.”

“Frankly, I think there was some anxiety about going to 23%,” Beeman told Checkpoint. “It just adds to the pressure from the people who oppose 199A” and “aggravates them more.”

And going to 23% was “expensive,” said Kumar. To him, the Senate’s choice to go with a 20% rate “was an entirely predictable change.”

TCJA orphans.

PwC’s Scott McCandless said the Senate’s lower rate may be an attempt “to save some revenue, which can be used for some other things.” Speaking on a June 17 episode of PwC’s Policy on Demand, McCandless suggested those other priorities include the “TCJA orphans” — bonus depreciation, the interest deduction limitation, and the research expense provision.

“Those three have become worsened over time because of the TCJA,” McCandless explained. And while the House bill would make them more “robust” for a five-year period, the Senate would make the changes permanent.

Business interest deduction. Both the House bill and Senate draft would revise the business interest deduction limitation under Code Sec. 163(j). The TCJA changed the calculation, from 2022, to include earnings before interest and taxes (EBIT), rather than the more business-friendly earnings before interest, taxes, depreciation, and amortization (EBITDA).

While the House bill would revert to EBITDA temporarily, the Senate draft would “make that EBITDA calculation permanent,” said Grant Thornton’s Ellen Martin, speaking on the firm’s June 17 webinar. She noted, however, that the Senate does include “a restriction for capitalized interest.”

Beeman pointed out one other “concerning” provision in the Senate draft that he described as “a kind of a coordination with 163(j) and GILTI” or global intangible low-taxed income. The Senate draft basically provides that “you don’t have your GILTI inclusion counted towards your income limitation,” Beeman explained.

“By excluding GILTI, you’re sort of driving down the cap on what you can deduct on interest,” Beeman said. He’s already heard from a few companies about this change and expects we’ll hear more about it soon.

R&E. The House bill would reinstate expensing of domestic research or experimental expenditures under Code Sec. 174 for five years. But the Senate draft would make that “five-year reprieve” permanent, Martin explained.

And the Senate bill goes even farther, said Martin, by allowing businesses to elect to “retroactively, essentially, deduct or recoup” the unamortized balance of expenditures from 2022 through 2024. “So, anything you haven’t already amortized related to your domestic already, you have the option to electively deduct that under the Senate draft,” Martin explained.

But neither the Senate nor the House, for the next five years, propose “completely going back” to the “pre-TCJA world” as far as domestic R&E expensing, Martin added.

The House bill and Senate draft retain from TCJA “some of the restrictions around recovering basis when you dispose of R&E,” she explained. And both would deem software development costs to be R&E, “so there’s no flexibility around that anymore.”

Bonus depreciation. The House bill would provide 100% bonus depreciation through 2029 for qualified business property acquired and placed into service after January 19, 2025. Meanwhile the Senate draft expands on the House bill by making full expensing permanent.

“That’s a big shift,” said Martin, adding “we’ve not had ‘permanent’ in the past.”

And both versions would temporarily allow 100% bonus depreciation for certain real property, which Martin explained as “non-residential real property that’s used as part of production of agricultural or chemical products.” That too is a shift, said Martin, noting that real property “has, in most cases, generally never been allowed 100% bonus depreciation deduction.”

But the House and Senate differ on the time frame for this treatment of real property, said Martin. The House bill would allow real property to get 100% bonus depreciation if it’s placed in service by 2033. But under the Senate draft, real property would need to be placed into service prior to January 1, 2031, Martin explained.