2025 Tax Reform Proposal: Salt Cap, R&D Expensing, Bonus Depreciation, and More

Update: On May 18, after original publication of this article, the tax proposal secured approval from the House Budget Committee. This positions the bill for potential consideration and passage by the House of Representatives later this week.

After issuing a partial draft last week, the U.S. House of Representatives Ways and Means Committee released its full proposed tax legislation reform package this week. The proposal is far-reaching, addressing — and in some cases, amplifying — several tax-cutting provisions that are set to expire at the end of 2025 or 2026, while making changes to several other areas of tax law.  

Committee members debated the 389-page draft legislation in a process known as a markup on Tuesday and Wednesday, making no further changes. The package now moves to the House Budget Committee and will eventually become part of the House reconciliation process, which would allow these provisions to be passed by Congress and signed into law. These provisions are not yet final and may continue to change as they move through the House and the Senate.  

Here are the major items in the 2025 tax reform proposal.  

100% Bonus Depreciation Would Return Through 2029  

First-year additional depreciation, also known as bonus depreciation, would be reinstated to 100% for property placed in service after January 19, 2025, and before January 1, 2030.  

We haven’t had 100% bonus depreciation since 2022. Under current law, the bonus depreciation percentage is supposed to drop by 20 percentage points each year from 2023 through 2026, until it reaches 0% in 2027. Absent legislative change, bonus depreciation is 40% in 2025.  

The proposal also makes sound recording production eligible for bonus depreciation.  

Domestic R&D Could Be Expensed Through 2029  

The bill also specifies that domestic research and development (R&D) expenditures incurred after December 30, 2024, and before January 1, 2030, could be expensed in the year incurred rather than capitalized and amortized over a five-year period.  

Before 2022, businesses always deducted R&D expenses in the year incurred. The Tax Cuts and Jobs Act of 2017 (TCJA) changed that, requiring domestic R&D expenses to be treated as an asset, or capitalized, and deducted over a five-year period. The legislation doesn’t affect foreign R&D expenditures, which would still be capitalized and amortized over a 15-year period.  

A return to immediate expensing for domestic R&D costs can lead to significant tax savings for research-intensive companies, such as those in manufacturing.  

Business Interest Limitation Would Return to EBITDA Baseline  

Currently, taxpayers may only deduct business interest expenses up to 30% of the business’s earnings before interest and tax (EBIT), generally. The draft would change the EBIT baseline to the more generous earnings before interest, tax, depreciation, and amortization (EBITDA).  

If passed into law, the EBITDA-based limitation would be a return to pre-2022 law. The TCJA changed the limitation to the more-restrictive EBIT baseline to help offset some of the legislation’s tax-cutting measures.  

PTET Would Not Be Deductible for Most Service Businesses  

The planned legislation would bar some pass-through entities from claiming federal tax deductions for pass-through entity taxes (PTETs), which are entity-level state income taxes. The legislation specifically bans the deduction for specified service trades or businesses (SSTBs), which are businesses in sectors of health, law, accounting, consulting, investing, and more.  

PTETs became popular after the $10,000 federal deduction cap on state and local taxes (SALT, discussed later) went into effect. With more than 30 states offering a PTET, they provide a way for owners of S corporations and partnerships to claim more than $10,000 in SALT on their federal returns.  

QBI Deduction Would Be Made Permanent, Increase to 23%  

The proposal would make permanent the qualified business income (QBI) deduction, which provides pass-through businesses with a deduction of up to 20% of qualifying income. The proposal also increases the rate to 23%.  

Introduced by TJCA, the QBI deduction is scheduled to expire at the end of 2025. The proposal to make the QBI deduction permanent would help owners of partnerships, S corporations, and sole proprietorships keep their tax liabilities on par with C corporations, which have paid a flat 21% since 2018.  

In a somewhat complicated maneuver, the proposal adds a QBI deduction limitation for high-income taxpayers and modifies the existing limitation for owners of most types of services businesses.  

  
Planned Changes to International Tax Rates Would Be Reversed  

Under current law, several tax regimes affecting multinational businesses with a U.S. presence are set to change at the end of 2025, and they’d all lead to higher effective tax rates for these businesses. The House proposal would keep these rates from increasing. Here’s a quick rundown:  

• The base erosion and anti-abuse tax rate is scheduled to increase from 10% to 12.5% of modified taxable income. The proposal would keep the rate at 10%.  

• The effective tax rate for foreign-derived intangible income is scheduled to increase from 13.1% to 16.4%. The proposal would keep the rate steady at 13.1%.  

• The effective tax rate for global intangible low-taxed income is scheduled to increase from 10.5% to 13.125%. The proposal would retain the 10.5% rate.  

Opportunity Zones Would Be Extended Through 2033  

Slated to go away after 2026, opportunity zones would be revived under the draft legislation. The next iteration of these tax-advantaged real estate investments to improve economic activity would be effective from 2027 to 2033.  

New Production Facility Construction Costs Could Be Fully Expensed  

Under the proposed legislation, companies in the manufacturing, extraction, and agriculture sectors could take a current-year deduction for the costs of building a nonresidential real estate facility for manufacturing, producing, or refining tangible goods.  

The rule would apply to facilities that begin construction between January 19, 2025, and December 31, 2028, and placed into service before January 1, 2033.  

Some Clean Energy Credits Would Be Terminated After 2025  

The proposal would end many clean energy tax credits introduced or enhanced by the Inflation Reduction Act of 2021. On the chopping block are:  

• Commercial clean vehicle credit  

• Energy-efficient home credit  

• Clean hydrogen production credit  

The credits would still be available until the end of 2025. Some other clean energy credits, such as the clean electricity production credit, would be restricted and phased out over a period of several years.  

SALT Cap Would Be Raised to $30,000 with a Phase-Down for High-Income Taxpayers  

The proposal would raise the federal cap on deductions for state and local taxes (SALT) from $10,000 ($5,000 for those married filing separately) to $30,000 ($15,000 for those married filing separately), with a 20% phase-down for those earning more than $400,000 ($200,000 for those married filing separately).  

Perhaps the most hotly contested provision in the tax package, the final SALT cap likely won’t look exactly as proposed. The limit may be raised even further or rejiggered to allow married couples to claim up to double the amount permitted for single filers.  

Income Tax on Tips and Overtime Would Be Limited Through 2028  

The proposal would eliminate income taxes on tips or overtime pay, starting in 2025 until the end of 2028. The draft legislation would create two new above-the-line deductions, which allow taxpayers — including those who don’t itemize their deductions —  to deduct any tip or overtime income from their gross income.  

The draft legislation includes safeguards to prevent businesses and individuals from avoiding taxation by recharacterizing regular income as tips . Presumably, tip and overtime income would continue to be subject to payroll taxes, such as Social Security and Medicare taxes.  

Income Tax Brackets Would Be Made Permanent With an Inflation Bump for Most  

The current income tax rates for ordinary income, ranging from 0% to 37%, would become permanent under the committee’s proposal. The draft legislation also widens the thresholds for all brackets, except the top two (35% and 37%), effectively lowering federal income taxes for low- and middle-income taxpayers.  

Under current law, ordinary income tax rates are scheduled to revert to their pre-2018 levels, which would translate to higher taxes for most taxpayers.  

Standard Deduction Levels Would Be Made Permanent With a Temporary Bump  

Under the proposed legislation, the current standard deduction levels would be made permanent, continuing to adjust for inflation each year. In addition, there’d be a temporary increase for tax years 2025–2029: $2,000 for joint filers and surviving spouses, $1,500 for heads of households, and $1,000 for all other filers.  

Current legislation would roughly halve the current standard deduction levels after 2025. The Joint Committee on Taxation stated in a report that the Ways and Means proposal would boost the 2025 standard deductions to the following:  

• $32,000 for joint filers and surviving spouses  

• $24,000 for heads of households  

• $16,000 for all other filers  

Individual AMT Modifications Would Be Made Permanent  

The TCJA reduced the power of the alternative minimum tax (AMT), a mechanism designed to prevent high-income taxpayers from paying less than a specified amount in tax.  

While the TCJA’s modifications to the AMT were set to expire at the end of 2025, the proposal would make these changes permanent.   

Home Mortgage Interest Deduction Limitation Would Be Made Permanent  

Currently, homeowners can deduct mortgage interest on their homes for the first $750,000 of indebtedness. Interest paid on home equity lines of credit aren’t deductible. These rules would be made permanent by the proposed legislation.  

Before the TCJA, the $750,000 limitation was $1 million, and interest on up to $100,000 in home equity loans was deductible.  

Itemized Deductions Would Be Limited for High-Income Taxpayers  

The draft legislation would limit itemized deductions for those with income firmly in the 37% bracket. The limitation is tricky; it would reduce the total amount of itemized deductions by 2/37 of the lesser of: 

• The total amount of itemized deductions, or  

• Income, before taking into account the itemized deductions, to the extent that they exceed the 37% bracket.  

Personal Exemption, Miscellaneous Itemized Deductions, Moving Expenses, Personal Casualty Losses Would Be Repealed Permanently  

The proposed legislation permanently repeals several provisions that were only temporarily suspended by the TJCA:  

• Personal exemption: Before 2018, taxpayers could claim a specified deduction amount for themselves and dependents.  

• Miscellaneous itemized deductions: The tax code allowed individuals to claim deductions for a variety of personal expenses — from job hunting to hobby losses to maintaining a home office as an employee — that exceeded 2% of their adjusted gross income.  

• Moving expenses: Individuals used to be able to claim deductions for moving due to a new job when certain conditions were met. Military-related moving costs are currently deductible and would still be deductible under the proposed legislation.  

• Personal casualty losses: Individuals used to be permitted a deduction for the uninsured loss of personal property, including personally held real estate. The TCJA temporarily suspended this deduction for all personal casualty losses unless they were the result of a federally declared disaster approved by the U.S. President. The proposal keeps personal casualty loss rules the way they are today.  

Estate, Gift, Generation-Skipping Transfer Tax Exemption Would Be Made Permanent  

The proposal also raises the tax exemption for estate, gift, and generation-skipping transfers to $15 million starting in 2026, with an annual inflation adjustment starting in 2027. The 2025 exemption amount of $13.99 million would be unchanged.  

Without intervening legislation, the estate tax exemption is slated to halve after 2025, similar to the standard deduction.  

Elevated Child Tax Credit Would Be Extended, Temporarily Increased  

The draft includes a provision to increase the child tax credit to $2,500 per qualifying child from 2025 through 2028. After 2028, the credit amount would drop to $2,000.  

Absent new legislation, the child tax credit will fall from $2,000 per qualifying child in 2025 to $1,000 per qualifying child in future years.  

The proposal retains the current requirement that parents and children must both have valid Social Security numbers to be eligible for the credit.  

Seniors Would Receive an Additional $4,000 Deduction for 2025–2028  

Legislators included an additional $4,000 deduction for seniors, ages 65 and older, for 2025 through 2028. The $4,000 amount is reduced by 4% of the amount that the taxpayer’s modified adjusted gross income (MAGI) exceeds $75,000 ($150,000 if filing jointly).  

In other words, a single senior with MAGI of $80,000 would get an $3,800 additional deduction (4% of $5,000 over $75,000 is $200).  

Smith + Howard: On the Pulse of Tax Change  

Good tax planning starts with studying the current tax landscape, but it doesn’t stop there. It also requires an understanding of how tax laws might change in the near- and medium term (because nobody can predict how they’ll change in the long term).  

Smith + Howard advisors are keeping a close eye on proposed changes to help their clients prepare for tax change in 2025 and beyond. If you’d like to discuss tax planning opportunities in the face of looming tax change, contact an advisor.