One Big Beautiful Bill Act Introduces Significant Domestic and International Tax Changes
On July 4, 2025, the “One Big Beautiful Bill Act” (OBBBA) became law. The OBBBA makes significant changes to domestic and international tax provisions, including provisions addressing bonus depreciation, research and experimental (R&E) expenditures, the limitation on interest deductibility under Section 163(j), state and local tax (SALT) deductions, expansion of the qualified small business stock (QSBS) benefits, as well as changes to the global intangible low-taxed income (GILTI), foreign-derived intangible income (FDII), base erosion anti-abuse tax (BEAT) and controlled foreign corporation (CFC) rules. We highlight the key domestic and international tax changes below.
Select Domestic and General Tax Changes
1. First-year Bonus Depreciation
The OBBBA makes permanent the first-year bonus depreciation deduction under Section 168(k) for most tangible personal property with a recovery period of 20 years or less and other qualified property. For qualified property acquired and placed into service on or after January 19, 2025, a 100% bonus depreciation deduction will be allowed.
2. Bonus Depreciation for Qualified Production Property
The OBBBA allows taxpayers a first-year depreciation deduction of 100% of the adjusted basis of Qualified Production Property (QPP). QPP is the portion of nonresidential real property that is used as an integral part of manufacturing, production, or refining of tangible personal property (with the exception of certain food and beverage products) and that meets the following requirements:
- The original use of the property commences with the taxpayer;
- Construction of the property begins after January 19, 2025, and before January 1, 2029;
- An election is made designating such property as QPP; and
- The property is placed into service before January 1, 2031.
This bonus depreciation deduction for QPP does not apply to property being leased or property acquired through related party transactions.
3. Expensing of Domestic R&E Expenditures
The OBBBA allows taxpayers to immediately deduct all domestic R&E expenditures paid or incurred beginning January 1, 2025. Under prior law, these expenditures for domestic R&E were required to be capitalized and amortized over five years. Taxpayers can also elect to accelerate deductions for remaining unamortized amounts of previously capitalized domestic R&E expenditures from January 1, 2022, to January 1, 2025, over a one- or two-year period. Small business taxpayers with average annual gross receipts of $31 million or less will generally be allowed to implement the immediate deduction retroactively to tax years beginning on or after January 1, 2022.
There is no change in the treatment of expenditures for research conducted outside the United States. Such expenditures will still need to be capitalized and amortized over a 15-year period under Section 174.
4. Deduction for Qualified Business Income
The OBBBA makes permanent the existing Qualified Business Income (QBI) deduction of 20% under Section 199A. Absent this change, the QBI deduction would have expired at the end of 2025.
5. Changes to Interest Deduction Limitation Under Section 163(j)
The Tax Cuts and Jobs Act (TCJA) of 2017 introduced a limitation on the amount of net business interest expense a taxpayer can deduct. The deduction for net business interest expense is limited under Section 163(j) to 30% of adjusted taxable income (ATI). When the TCJA was originally enacted ATI was calculated in a manner similar to earnings before interest, taxes, depreciation, and amortization (EBITDA). However, for years beginning after December 31, 2021, ATI was calculated after taking into account depreciation and amortization deductions (EBIT). The OBBBA restores the original ATI calculation, effective for tax years beginning on or after January 1, 2025. This change will provide many taxpayers with a greater capacity to deduct their business interest expense by increasing ATI.
In other changes to the Section 163(j) limitation, the OBBBA excludes from the definition of ATI Subpart F income, GILTI inclusions, and Section 78 gross-up amounts, effective for tax years beginning after December 31, 2025. This may adversely affect US taxpayers that make a CFC group election to increase their ATI with their CFCs’ Subpart F income and GILTI inclusions.
The OBBBA also provides that certain capitalized interest will now be treated as a business interest expense subject to the Section 163(j) limitation.
6. SALT Deduction Limitations
For tax years beginning after December 31, 2024, the OBBBA increases the cap on itemized SALT deductions for individuals to $40,000, subject to a phaseout for taxpayers with modified adjusted gross income over $500,000. The revised SALT cap and the phaseout threshold will increase annually by 1% over the next five years. The cap will revert back to $10,000 in 2030.
Importantly, departing from the House bill and the Senate Finance Committee bill, the OBBBA does not change the current law treatment of so-called “pass-through entity tax regimes,” where pass-through entities pay state and local taxes on behalf of their owners, effectively creating a full deduction of such taxes for federal income tax purposes.
7. Expansion of QSBS Gain Exclusion
Prior to the OBBBA, a 100% exclusion for gain on the sale of QSBS was capped to $10 million or 10 times the investor’s basis in the stock, whichever was greater. The OBBBA increases the cap to the greater of $15 million or 10 times the investor’s stock basis for stock acquired after July 4, 2025.
Investors must hold the stock for five years for the full exclusion to apply, but the OBBBA adds a phase-in exclusion of 50% after the stock has been held for three years, and 75% after the stock has been held for four years. Notably, any gain from the sale of QSBS that is not excluded is still taxed at a rate of 28% under Section 1(h)(4).
Additionally, the OBBBA increased the limit on the gross assets of the issuing C-corporation. Previously, stock would only qualify as QSBS if the stock issuer did not hold more than $50 million in assets immediately after the stock was issued. Under the OBBBA, stock issued after July 4, 2025, may qualify as QSBS provided the issuer does not hold more than $75 million in gross assets immediately after the stock is issued.
8. Real Estate Investment Trust Subsidiary Asset Test
A taxable Real Estate Investment Trust (REIT) subsidiary (TRS) is a taxable corporation that is permitted to engage in activities that its parent REIT cannot. There is a cap on how much of a REIT’s assets can be held in securities of TRSs. The OBBBA increased the allowable asset percentage cap from 20% to 25%.
9. Qualified Opportunity Zone Program
The Qualified Opportunity Zone (QOZ) program was created by the TCJA to support economic growth in low-income communities through investment in Qualified Opportunity Funds (QOFs). The OBBBA makes the QOZ program permanent, with certain changes. Governors will designate new QOZs on July 1, 2026, which will go into effect on January 1, 2027. This designation will be effective for ten years, and new designations will be made on each ten-year anniversary following January 1, 2027.
Under the OBBBA, taxpayers may benefit from the new rules with respect to capital gains invested in QOF starting January 1, 2027. Investors in QOFs can defer their capital gains until the disposition of their investment or five years from the date of investment, whichever is earlier. In addition, after holding the investment for five years, an investor in a QOF obtains a 10% increase in basis and an investor in a qualified rural opportunity fund (QROF) obtains a 30% increase in basis. Finally, taxpayers would be able to exclude gains upon sale of a QOF investments held for at least 10 years (including gain that would otherwise be recognized as depreciation recapture).
The OBBBA changed one of the key qualifying criteria by lowering the maximum median household income threshold in a census tract from 80% of the area median income. The OBBBA also imposes reporting requirements with a new tax return that must be submitted to the Internal Revenue Service with respect to investments in QOFs and QROFs.
10. Interest Discount on Rural or Agricultural Real Estate Loans
The OBBBA allows “qualified lenders” a partial exclusion of interest on “qualified real estate loans,” which are loans secured by rural or agricultural real estate made after July 4, 2025. A qualified lender will be allowed to exclude 25% of interest received on such loans. Qualified lenders include certain federally regulated banks and insurance companies, companies wholly owned by bank holding companies and insurance holding companies, and government-sponsored enterprises. The determination of whether the loan qualifies is made at the time the interest on such loan is accrued. A refinancing will not qualify if the original loan was made before July 4, 2025.
11. Removal of Proposed Tax on Litigation Funding Recoveries
The House and original Senate bills had included a proposed new tax on proceeds received under litigation funding arrangements. This proposal was removed from the final bill and was not included in the OBBBA as enacted due to an objection from the Senate Parliamentarian that the provision did not comply with the rules for the budget reconciliation process.
12. Clean Energy Credits
Please refer to our discussion in “United States Senate Finance Committee Makes Changes to Clean Energy Provisions of the Proposed One Big Beautiful Bill,” regarding the phaseout for clean energy credits included in the OBBBA.
International Tax Changes
1. Removal of Proposed Section 899 Retaliatory Taxes
As we previously reported, the House and the Senate versions of the bill had included what would have been a new Section 899 of the Internal Revenue Code to impose retaliatory tax measures against residents of countries that imposed on US corporations a Pillar Two undertaxed profits rule (UTPR), a digital service tax (DST) or certain other putatively discriminatory or unfair taxes.
On June 28, 2025, the G7 released a statement announcing an agreement that US parented groups would be exempt from the OECD Pillar Two income inclusion rule (IIR) and UTPR, in recognition of the existing GILTI and corporate alternative minimum tax rules in the Internal Revenue Code. The G7 statement provides that these US minimum tax rules and Pillar Two can work on a “side-by-side” basis, such that US-parented groups would be exempt from a country’s UTPR and IIR. As a result of this agreement with the G7, proposed Section 899 was removed from the bill and no retaliatory tax measures were included in the OBBBA.
Statutory changes may be required in many countries in order to implement this agreement and exempt US groups from the IIR and the UTPR. The European Union (EU) has indicated that EU members states may implement this agreement using existing safe harbor provisions. In addition, the implementation of this “side-by-side” approach raises a number of questions that would need to be clarified (e.g., treatment of US subsidiaries of non-US groups, including non-US––US––non-US “sandwich” structures).
It is also worth noting that the G7 announcement does not address the DSTs implemented by many countries. Based on precedent from the first Trump Administration, it is possible that the US Trade Representative may pursue trade investigations against foreign countries that impose DSTs on US companies so as to impose US tariffs or other sanctions if it is found that the DSTs constitute unfair trade practices.
2. Changes to GILTI (now NCTI)
a. Renamed Net CFC Tested Income
The OBBBA renames what used to be “global intangible low-taxed income” (GILTI) as “net CFC tested income” (NCTI). This change in nomenclature was likely prompted by the elimination of the QBAI return exclusion, as discussed below in 2.d, such that the rules are no longer designed to capture only “intangible” income.
b. Increased Rate
US corporations are currently taxed on their GILTI at an effective rate of 10.5% due to a deduction under Section 250 equal to 50% of their GILTI. Under the law in effect prior to the OBBBA, this effective rate was scheduled to increase to 13.125% for tax years beginning after December 31, 2025, as a result of a decrease in the Section 250 deduction to 37.5%.
However, the OBBBA provides that, for tax years of foreign corporations beginning after December 31, 2025, the Section 250 deduction is set at 40%, thus resulting in an effective rate on NCTI for US corporations of 12.6%.
c. Reduction of foreign tax credit haircut
US corporations are currently entitled to a foreign tax credit for up to 80% of the foreign income taxes paid or accrued by a CFC that are attributable to the CFC’s tested income (i.e., a 20% foreign tax credit haircut). The OBBBA would reduce the haircut from 20% to 10% for tax years beginning after December 31, 2025. The OBBBA would also apply the 10% haircut to any foreign income taxes paid or accrued with respect to a distribution of GILTI/NCTI previously taxed earnings and profits.
As such, at least conceptually, the expectation is that no residual US tax be owed under the NCTI rules in respect of tested income of a CFC that is subject to at least a 14% effective foreign tax rate (14% * 90% = 12.6%).
d. Elimination of QBAI exempt return
The GILTI regime currently provides for an exclusion for a deemed return on the CFC’s tangible assets, known as Qualified Business Asset Investment (QBAI). Generally, QBAI is the average adjusted basis in a CFC’s depreciable tangible property used in a trade or business and US shareholders of a CFC are not taxed on an assumed 10% return on the CFC’s QBAI, referred to as the Net Deemed Tangible Income Return (NDTIR). Only the CFC’s net tested income in excess of such NDTIR is subject to taxation under the GILTI rules.
For tax years of foreign corporations beginning after December 31, 2025, the OBBBA eliminates the NDTIR exclusion on QBAI such that US shareholders would be taxed on their pro rata share of their net CFC tested income. For taxpayers holding material fixed assets in their CFCs, this change could considerably increase the amount of offshore income that would now become subject to US taxation as NCTI.
e. Expense apportionment to GILTI for foreign tax credit limitation
Prior to the OBBBA, interest, stewardship and R&E expenses were apportioned to GILTI, which often significantly lowered the foreign tax credit limitation in the GILTI basket. In a taxpayer-favorable change, the OBBBA provides that only the Section 250 deduction and deductions that are directly allocable to the net CFC tested income will be allocated and apportioned to the NCTI foreign tax credit basket. Importantly, expenses of the US shareholder such as interest expense and R&E expenditures will not be apportioned to the NCTI basket. Any amount of interest expense, R&E expenditures or other deduction which would have been allocated or apportioned to NCTI absent this provision shall only be allocated or apportioned to US source income.
This provision will apply for tax years beginning after December 31, 2025.
3. Changes to FDII (Now FDDEI)
a. Renamed Foreign Derived Deduction Eligible Income
Similar to the change in nomenclature from GILTI to NCTI, the OBBBA renames what used to be “foreign derived intangible income” to “foreign derived deduction eligible income” (FDDEI) given that, also for purposes of these rules, the OBBBA eliminates the deemed return on tangible assets.
b. Increased Rate
US corporations currently benefit from a 13.125% effective rate on their FDII due to a deduction under Section 250 equal to 37.5% of their FDII. Under the law in effect prior to the OBBBA, this effective rate was scheduled to increase to 16.4% for tax years beginning after December 31, 2025, as a result of a decrease in the Section 250 deduction to 21.875%.
Effective for tax years of foreign corporations beginning after December 31, 2025, the OBBBA sets the Section 250 deduction at 33.34%, thus resulting in a 14% effective tax rate on FDDEI.
c. Elimination of QBAI
Similar to the elimination of the NDTIR under the revised NCTI rules explained in 2.d above, the OBBBA also eliminates the return on QBAI for purposes of the FDII (now FDDEI) calculation for tax years beginning after December 31, 2025. In this case, the change would benefit taxpayers as it would increase the amount of income eligible for the preferential treatment as FDDEI (under current law, the return on the corporation’s QBAI is subject to the regular 21% corporate tax rate with no Section 250 deduction).
d. Expense apportionment to DEI
The OBBBA provides that interest expense and R&D expense shall not be allocated to gross deduction eligible income for purposes of the FDDEI calculations. This is another taxpayer favorable change that could increase the amount of income that benefits from the FDDEI deduction.
e. Exclusion of gain from sale or disposition of IP and other depreciable or amortizable assets
The OBBBA would exclude from deduction eligible income (effectively denying the preferential FDDEI income) any income and gain from the sale or other disposition of intangible property (including pursuant to a transaction subject to Section 367(d)) as well as from dispositions of other assets subject to depreciation or amortization by the seller. This amendment applies to sales or other dispositions occurring after June 16, 2025, so it does not appear to apply to future inclusions under Section 367(d) with respect to a transfer of IP to a foreign corporation that was completed prior to that date.
Notably, unlike some prior legislative proposals, the OBBBA does not exclude income from the licensing of intangibles to foreign persons for foreign use from FDDEI treatment.
4. Increase to BEAT Rate
For tax years beginning after December 31, 2025, the OBBBA slightly increases the BEAT rate from 10% to 10.5%. This increase actually prevents a planned larger increase in the rate. Prior to the OBBBA, the rate was set to increase to 12.5% in 2026. The OBBBA also makes permanent the favorable treatment of the research credit and a portion of the applicable Section 38 credits (this favorable treatment was scheduled to expire for tax years beginning after December 31, 2025).
It is worth noting that the OBBBA did not include several other changes to the BEAT rules that had been proposed in a Senate version of the bill (including an exemption for high-taxed payments).
5. Restoration of Prohibition on Downward Attribution
The TCJA repealed Section 958(b)(4), which prohibited downward attribution of stock ownership from a foreign person to a US person for purposes of determining whether a US person is a US shareholder and whether a foreign corporation is a CFC. According to the legislative history of the TCJA, this change was intended to prevent an inverted US company from “de-controlling” its CFC subsidiaries (e.g., by having the foreign parent contribute property to such CFCs reducing the ownership by the US company to 50% or less). However, the repeal of Section 958(b)(4) resulted in many foreign corporations becoming CFCs in scenarios unrelated to this policy concern.
In a welcome change, the OBBBA reinstates Section 958(b)(4) for tax years of foreign corporations beginning after December 31, 2025, and tax years of US persons in which or with which such tax years of foreign corporations end.
6. CFC Inclusions for Foreign-Controlled US Shareholders
To address the policy concerns that motivated the repeal of Section 958(b)(4) in the TCJA, the OBBBA takes a more targeted approach by introducing a new Section 951B that extends the CFC inclusion rules to “foreign controlled US shareholders” (FUSSHs) of “foreign controlled CFCs” (FCFCs). While these terms are based on the existing definitions of US shareholder and CFC, they include two key modifications. First, to qualify as an FUSSH, a US person must own more than 50% (by vote or value) of the foreign corporation—an increase from the standard 10% threshold. Second, for purposes of determining FUSSH and FCFC status, constructive ownership rules would apply without the limitation under Section 958(b)(4), meaning that stock owned by foreign persons could be attributed downward to US persons. This change would allow downward attribution from foreign persons in determining whether a US person is an FUSSH and whether a foreign corporation qualifies as an FCFC.
In general, an FUSSH of an FCFC would be subject to the CFC inclusion rules in the same way that a US shareholder is subject to those rules with respect to a “traditional” CFC. As such, under Section 951B, an FUSSH would be subject to Subpart F and NCTI inclusions only to the extent it owns stock in the FCFC directly or indirectly, as defined under Section 958(a).
Foreign-parented groups that have both US and non-US subsidiaries will need to reevaluate their structures to determine if the US subsidiary in the group is an FUSSH that will be subject to the CFC rules due to Section 951B.
7. Permanent Extension of CFC Look-thru Rule
The OBBBA makes permanent the look-through rule of Section 954(c)(6). Under Section 954(c)(6), dividends, interest, rents, and royalties received or accrued from a CFC which is a related person shall not be treated as Subpart F income to the extent attributable or properly allocable to income of the related person which is neither Subpart F income nor income treated as effectively connected with the conduct of a trade or business in the United States.
Section 954(c)(6) was originally enacted in 2006 as a temporary look-through rule and had been extended multiple times through tax extenders legislation but was scheduled to expire for tax years beginning on or after January 1, 2026. The OBBBA makes the provision permanent.
8. Repeal of Election for One-month Deferral in CFC Tax Year
A CFC that is majority owned by a single US shareholder is generally required to adopt the tax year of its majority US shareholder. Prior to the OBBBA, however, an exception existed that allowed such a CFC to elect to use a tax year that begins one month earlier than its majority US shareholder’s tax year. This one-month deferral rule has often allowed taxpayers to delay the application of changes in law to their CFCs and has more generally resulted in unintended consequences in the application of newly enacted rules.
The OBBBA eliminates this one-month deferral election for taxable years of CFCs beginning after November 30, 2025, with a transition rule for a CFC’s first tax year beginning after November 30, 2025.
9. Modification of CFC Pro Rata Share Rules
The OBBBA modifies the “pro rata share” rules that determine the amount of Subpart F income or GILTI (now NCTI) a US shareholder must include with respect to a CFC. Under prior law, a US shareholder included its pro rata share of Subpart F and tested income only to the extent it held stock of the foreign corporation on the last day of the year on which such foreign corporation was a CFC.
Under the OBBBA, a US shareholder that owns stock of a CFC at any time during the tax year may have a Subpart F or NCTI inclusion with respect to such CFC even if they do not own such stock on the last day of the year on which the corporation is a CFC. The pro rata share of the US shareholder will be the portion of the CFC’s income which is attributable to the stock of the CFC directly or indirectly owned by such US shareholder and any period of the CFC year during which such shareholder owned such stock, and such corporation was a CFC. The provisions introduced by the OBBBA, however, do not define a methodology for determining the income “attributable” to each US shareholder when there is mid-year change in ownership of a CFC, so this will likely need to be addressed in regulations. This change applies to tax years of foreign corporations beginning after December 31, 2025.
As a result of this change, the “extraordinary reduction rules” set forth in the Section 245A regulations would appear to have become obsolete.
10. Sourcing of Income from Sale of Inventory Produced in the United States
The OBBBA modifies the foreign tax credit limitation rules under Section 904(b) by introducing a special sourcing rule for certain sales of US-produced inventory through foreign branches. Generally, if a US person sells US produced inventory through a foreign sales branch, and such inventory is for use outside the United States, up to 50% of the sales income may be treated as foreign source income, thus overriding the general rule under Section 863(b) which would otherwise treat all such income as US-source. This new rule applies to taxable years beginning after December 31, 2025.
Looking Ahead
The OBBBA made significant changes to prior law and introduced several new concepts, as discussed above. We will monitor the implementation of the OBBBA’s tax changes which will require the issuance of many new regulations and guidance. This rulemaking process will include opportunities for taxpayers to provide comments and recommendations to the Department of the Treasury and the Internal Revenue Service. Taxpayers may have strong incentives to participate in this process. If you have any questions or concerns about the OBBBA or its potential impact on your business, please contact us.
