Section 899: Proposed Legislation Would Increase US Tax Rates on Many Foreign Individuals, Companies, and Governments
Under the proposed Defending American Jobs and Investment Act, introduced in the House of Representatives and approved by the House Ways and Means Committee on May 14, 2025, as part of the Trump administration’s tax package known as “The One, Big, Beautiful Bill,” a new Section 899 would be added to the Internal Revenue Code. This proposed provision—titled “Enforcement of Remedies Against Unfair Foreign Taxes”—represents a significant new international tax enforcement measure.
According to the administration, the proposed Section 899 is intended to serve as a strong legislative response to the growing use of foreign tax regimes that, in its view, unfairly target and burden U.S. businesses and individuals operating abroad. The provision would authorize countermeasures against persons and companies located in jurisdictions that impose what the legislation defines as an “unfair foreign tax.”
The bill is expected to be considered by the full House next week as part of the reconciliation measure. Presuming it passes the House, this portion of the reconciliation measure will then be considered by the Senate Finance Committee, where provisions of the House measure could be changed, and then the full Senate.
Go-To Guide
Proposed Section 899 would significantly increase U.S. federal income tax rates—by 5% to 20%—on certain types of income earned by non-U.S. individuals and entities that are tax residents of, or are established or effectively managed in, “discriminatory foreign countries.” These jurisdictions are defined as those that impose an “unfair foreign tax” under the proposed legislation.
These elevated rates would apply to passive U.S. source income (such as dividends, interest, royalties, and rents), as well as income effectively connected with a U.S. trade or business (ECI).
The legislation defines “unfair foreign taxes” broadly, encompassing digital services taxes and other measures that have been widely adopted by foreign jurisdictions. As a result, a large number of non-U.S. individuals and entities could fall within the scope of the increased tax rates.
These higher rates would apply across a broad spectrum of existing tax provisions and would affect nonresident individuals, foreign corporations, and even sovereign entities.
If enacted, Section 899 would introduce substantial economic and compliance challenges, particularly for foreign governments, multinational enterprises, and investors with connections to jurisdictions that impose taxes perceived to disproportionately impact U.S. interests—such as digital services taxes or global minimum tax regimes.
Taxpayers potentially impacted by this proposal should carefully assess how their U.S. tax exposure could change under the new rules and evaluate possible strategies to mitigate adverse effects.
Click here to continue reading the full GT Alert.
McDermott+ Check-Up: May 16, 2025
THIS WEEK’S DOSE
Key House Health Committees Advance Reconciliation, Bill Held Up in Budget Committee. The Energy and Commerce Committee and Ways and Means Committee passed their recommendations for reconciliation out of committee, but the Budget Committee failed to advance the bill today and is currently scheduled to reconvene at 10pm on Sunday, May 18, 2025.
HHS Secretary Kennedy Testifies in Congress. The House Appropriations Committee and Senate Health, Education, Labor, and Pensions (HELP) Committee held hearings on the US Department of Health and Human Services (HHS) budget.
Senate Judiciary Committee Discusses PBM Reform. Committee members widely agreed on the need for pharmacy benefit manager (PBM) policy change.
House Judiciary Subcommittee on Administrative State, Regulatory Reform, and Antitrust Holds Hearing on Medical Residency. The hearing examined the structure and legal implications of the National Resident Matching Program and evaluated its antitrust exemption.
Senate Finance Committee Advances Trump HHS Nominees. The nominations for deputy secretary of HHS and assistant secretary of legislation of HHS now move to the Senate floor.
Trump Signs EO on Drug Prices. The executive order (EO) seeks to implement most-favored nation pricing.
CMS Releases Proposed Rule on MCO Taxes. The Centers for Medicare & Medicaid Services (CMS) proposal would address state-imposed “provider taxes” on managed care organizations (MCOs).
HHS Agencies Issue RFIs. The requests for information (RFI) focus on possible deregulatory actions and the health technology ecosystem.
HHS Identifies Documents for Recission. The recission was enacted upon publication.
CMS Innovation Center Releases Strategic Framework. The strategy outlines how the center intends to structure current and future value-based care models.
CONGRESS
Key House Health Committees Advance Reconciliation, Bill Held Up in Budget Committee. On May 13, 2025, and into the next afternoon, the House Energy and Commerce Committee held a 26.5 hour markup of its budget reconciliation committee print, which included sweeping policy changes to Medicaid enrollment process, eligibility, and financing, as well as a Medicare physician payment adjustment, PBM reform, and changes to the Medicare prescription drug negotiation program and the Affordable Care Act (ACA). At the same time, the House Ways and Means Committee held a 15.5 hour markup of its budget reconciliation committee print. The Ways and Means package included provisions related to paid leave, CHOICE health plans (now called ICHRAs), health savings accounts, and research, as well as significant changes to ACA Exchange enrollment. Both committees successfully advanced their committee prints along party lines and did not adopt any amendments.
Energy and Commerce Committee: The House budget resolution instructed the House Energy and Commerce committee to find a minimum of $880 billion in savings. On May 11, 2025, Democrats released a memo from the Congressional Budget Office (CBO) estimating that the Energy and Commerce reconciliation recommendations related to Medicaid, the expiration of expanded premium tax credits, finalizing the 2025 Marketplace Integrity and Affordability Proposed Rule, and the Marketplace provisions that extend beyond codifying the proposed rule would increase the number of people without health insurance by at least 13.7 million by 2034. CBO noted on May 12, 2025, that the budget reconciliation text would exceed the savings target and reduce deficits by more than $880 billion over 10 years. On May 13, 2025, CBO released a new set of preliminary scores for certain Medicaid provisions listed in the bill, which in total would save $625 billion over 10 years. The scores also estimate that a total of 7.6 million individuals would become uninsured by 2034, including 1.4 million people without verified citizenship, nationality, or satisfactory immigration status. These are the figures congressional Republicans have cited. CBO has not yet provided final scoring for the package, and particular provisions are still without a score as well. That analysis is expected in the coming days.
During the Energy and Commerce Committee the markup, Democrats offered 246 health-related amendments, many of which were ultimately withdrawn. They largely focused on extending the enhanced advanced premium tax credits (APTCs), preventing the Medicaid policies that would reduce coverage from going into effect, addressing prescription drug prices, and preserving access to home- and community-based services. Republicans did not offer any amendments. The amendments can be found here, and the committee’s section-by-section summary can be found here.
Ways and Means Committee: The budget resolution instructed the House Ways and Means Committee to produce policies that would not raise the federal deficit by more than $4 trillion if the spending cuts in the overall bill totaled less than $1.5 trillion, or by more than $4.5 trillion if the bill achieved $2 trillion in savings. The Joint Committee on Taxation found that the Ways and Means Committee’s proposed tax provisions would increase the deficit by $3.18 trillion, meeting the goals stated in the resolution.
Throughout the markup, Democrats spoke out against the Medicaid provisions being considered in the House Energy and Commerce Committee and encouraged the Ways and Means Committee to extend the enhanced APTCs. Democrats argued that if the bill was supposed to help working Americans, healthcare improvements needed to be a key part of the legislation and tax breaks for the wealthy shouldn’t be financed by taking healthcare away from lower- and middle-class working Americans. Republicans offered no amendments. Their talking points focused on how the tax package was designed to limit tax liability of working Americans and restrict provision of government benefits to US citizens only, not individuals in the country illegally.
Budget Committee: Speaker Johnson (R-LA) aims to pass the reconciliation package on the House floor before Memorial Day. Once all the committees of jurisdiction have completed their work, the House Budget Committee is tasked with pasting together the various committee prints into a single reconciliation package. That is largely a perfunctory role as they have no authority to make any changes. The Budget Committee met today, May 16, 2025, to do that work. Ultimately, a vote was held to decide if the committee should vote on the package, which failed in a 16–21 vote due to a hardline conservative push to enact larger spending cuts. When voting no, Reps. Clyde (R- GA), Roy (R-TX), Brecheen (R-OK), and Norman (R-SC) cited concerns that the federal spending reductions, particularly the Medicaid cuts, do not go far enough. Rep. Smucker (R-PA) also voted no, clarifying that the no vote was so that the committee could procedurally bring the bill back up later. Specifically, conservatives are unhappy about the Medicaid work requirement provisions. As written, the work requirements do not begin until 2029, and conservatives want to shorten that timeline.
The Budget Committee is currently scheduled to reconvene at 10pm on Sunday, May 18, 2025, to vote on the bill, and the Rules Committee is expected to meet on Wednesday, May 21, 2025, to prepare the bill for floor debate. Republican leadership continues to work behind the scenes to resolve remaining differences related to Medicaid and other issues, such as disagreement on the state and local tax deduction (SALT).
HHS Secretary Kennedy Testifies in Congress. In the House Appropriations Committee hearing, Kennedy defended the cuts outlined in President Trump’s skinny budget request and heard concerns from both Republicans and Democrats about some of his policies, such as removing fluoride from drinking water. In the Senate HELP Committee hearing, Kennedy faced questions from a bipartisan group of senators about his previous statements on vaccine safety and efficacy. In both committees, Kennedy defended workforce and program cuts from the Department of Government Efficiency.
Senate Judiciary Committee Discusses PBM Reform. The hearing examined the role of PBMs and how current practices impact drug pricing, access to medication, and local pharmacies. Republican and Democratic senators expressed concerns over low reimbursement rates to local pharmacies, lack of transparency, and the impact of vertical integration on drug affordability. Several witnesses emphasized the need to reform PBMs and recommended that future policies prioritize patients over profit.
House Judiciary Subcommittee on Administrative State, Regulatory Reform, and Antitrust Holds Hearing on Medical Residency. The hearing examined the structure and legal implications of the National Resident Matching Program and evaluated its antitrust exemption. The hearing also explored the role of the Accreditation Council for Graduate Medical Education (ACGME) in shaping residency program standards and access, and how the residency placement and accreditation system affects medical graduates and the broader physician labor market. Republicans portrayed the matching program and ACGME accreditation as monopolistic, opaque, hospital-centric, and contributing to physician shortages, wage suppression, and lack of resident autonomy. Democrats defended the matching program as an imperfect but functional solution to manage medical residency placements. They emphasized the need for increased public investment, particularly in expanding residency slots, supporting international medical graduates, and protecting research funding.
Senate Finance Committee Advances Trump HHS Nominees. The executive session considered the nominations of James O’Neill to be deputy secretary of HHS and Gary Andres to be assistant secretary of legislation of HHS. Both nominees advanced (see vote outcomes below), and their nominations will now move to the Senate floor.
James O’Neill’s nomination to be deputy secretary of HHS advanced by a vote of 14 – 13, along party lines.
Gary Andres’ nomination to be assistant secretary of legislation of HHS advanced by a vote of 19 – 8. Sens. Warner (D-VA), Whitehouse (D-RI), Hassan (D-NH), Warnock (D-GA), and Welch (D-VT) joined Republicans in voting yes.
ADMINISTRATION
Trump Signs EO on Drug Prices. President Trump’s “most-favored nation” EO seeks to equalize drug prices between the United States and other developed countries. It instructs federal agencies to take the following actions:
The US trade representative and the secretary of commerce will ensure foreign countries are not engaged in practices that lead to high drug prices in the United States.
The HHS secretary will facilitate direct-to-consumer purchasing programs for drug manufacturers that sell their products to US consumers at the most-favored nation price.
The HHS secretary, in coordination with other relevant agencies, will have 30 days to bring prices for pharmaceutical drugs in the United States in line with comparable developed nations. If significant progress toward most-favored nation pricing is not delivered at that time, HHS in conjunction with CMS must develop rulemaking to impose most-favored-nation pricing.
HHS and the US Food and Drug Administration (FDA) must consider certifying that the importation of certain prescription drugs from other developed countries is safe, and if such certification is made, FDA must create a waiver process to allow for the importation of prescription drugs.
Several federal agencies, including the Federal Trade Commission, the Office of the Attorney General, and the US Department of Commerce, are instructed to investigate any anticompetitive practices leading to higher prices.
FDA is instructed to review and potentially modify or revoke approvals granted for drugs that maybe be unsafe, ineffective, or improperly marketed.
A fact sheet can be found here. While EOs typically lay out the administration’s policy priorities, effectuating such policies requires additional actions, including potential rulemakings.
CMS Releases Proposed Rule on MCO Taxes. Federal law requires state-imposed “provider taxes,” which include MCO taxes, to be uniform and broad based, meaning it must be applied at the same level and to all MCOs in the state, not just Medicaid MCOs. However, a state can apply to CMS for a waiver from this requirement if the net impact of the tax is generally redistributive and the amount of the tax is not directly correlated to Medicaid payments. With its proposal, CMS aims to close what it considers a loophole to prohibit states from taxing Medicaid MCOs at a higher rate than non-Medicaid MCOs. CMS identified eight taxes in seven states that would be affected by this proposal, if finalized. We understand those states to be California, Illinois, Massachusetts, Michigan, New York, Ohio, and West Virginia.
Key proposals include:
Prohibiting states from explicitly taxing Medicaid units at higher tax rates than units of other payors and better implementing the mandate that a tax be generally redistributive.
Defining terms used in the regulation, including “Medicaid taxable unit” and “non-Medicaid taxable unit” to prohibit states from using overly vague language.
Specifying that noncompliant states that received their most recent waiver approval within two years of the effective date of the final rule would not be eligible for a transition period. Noncompliant states that received waiver approval more than two years prior to the effective date of the final rule would have a transition period of at least one full state fiscal year to adjust the tax to come into compliance.
Read the press release here and the fact sheet here. Comments are due on July 14, 2025.
The House reconciliation bill reported by the Energy and Commerce Committee includes a similar but not identical provision.
HHS Agencies Issue RFIs.
In conjunction with FDA, HHS asked the public to help identify any opportunities to produce cost savings, increase efficiency, and catalyze health and economic innovation through deregulation, with the goal of addressing regulations that are “unnecessary, inconsistent with the law, overly burdensome, outdated, out of alignment with current EOs, or otherwise unsound.” Read the press release here. Comments are due on July 14, 2025.
CMS and the Assistant Secretary for Technology Policy/Office of the National Coordinator for Health IT requested input from the public regarding the digital health products market for Medicare beneficiaries, as well as the current state of data interoperability and the broader health technology infrastructure. Responses may be used to further efforts to cultivate this market, increase beneficiary access to effective digital capabilities, and increase data availability. Read the press release here. Comments are due on June 15, 2025.
HHS Identifies Documents for Recission. In a final rule, HHS rescinded the following four documents, effective immediately:
“Extension of Designation of Scarce Materials or Threatened Materials Subject to COVID-19 Hoarding Prevention Measures; Extension of Effective Date with Modifications” (86 FR 35810, July 7, 2021), which designated health and medical resources in scare supply and necessary to respond to the spread of COVID-19.
“Opioid Drugs in Maintenance and Detoxification Treatment of Opiate Addiction; Repeal of Current Regulations and Issuance of New Regulations: Delay of Effective Date and Resultant Amendments to the Final Rule” (66 FR 15347, March 19, 2001).
“Practice Guidelines for the Administration of Buprenorphine for Treating Opioid Use Disorder” (86 FR 22439, April 28, 2021), which provided eligible physicians, physician assistants, nurse practitioners, clinical nurse specialists, certified registered nurse anesthetists, and certified nurse midwives, who are state-licensed and registered by the DEA to prescribe controlled substances, an exemption from certain statutory certification requirements related to training, counseling, and other ancillary services.
“Notification of Interpretation and Enforcement of Section 1557 of the Affordable Care Act and Title IX of the Education Amendments of 1972” (86 FR 27984, May 25, 2021), which clarified that ACA Section 1557’s prohibition on discrimination included discrimination based on sexual orientation and gender identity.
CMS Innovation Center Releases Strategic Framework. The strategy outlines how the Innovation Center intends to structure current and future value-based care models, with an emphasis on prevention, individual engagement, and market-based mechanisms. The framework highlights the center’s plans related to:
Promoting evidence-based prevention.
Increasing model activity in Medicare Advantage, Medicaid, and prescription drug pricing.
Focusing on cost savings and financial accountability.
Expanding access to consumer-facing tools and data.
Increasing the role of independent and rural providers.
Emphasizing choice and competition.
QUICK HITS
CMS Releases Draft Guidance for Third Medicare Drug Price Negotiation Cycle. The guidance seeks to improve program transparency, further prioritize selection of prescription drugs with high costs to Medicare, and minimize any negative impacts of the negotiated maximum fair price on pharmaceutical innovation. Read the press release here and the fact sheet here. Comments are due on June 26, 2025.
FDA Begins Process of Removing Ingestible Fluoride Prescription Drug Products for Children. The agency has set a goal date of October 31, 2025, for completing a safety review and public comment period.
GAO Releases Reports on Caregiving, TRICARE. The first US Government Accountability Office (GAO) report recommends that HHS clarify when youth may qualify for support services. The second report provides information on the US Department of Defense’s processing of TRICARE claims from behavioral health providers.
NEXT WEEK’S DIAGNOSIS
Both chambers will be in session next week, as the House works to pass its budget reconciliation package before the Memorial Day recess. Budget hearings will continue, with HHS Secretary Kennedy testifying in front of the Senate Appropriations Labor-HHS Subcommittee. The House Oversight and Government Reform Economic Growth, Energy Policy, and Regulatory Affairs Subcommittee and Health Care and Financial Services Subcommittee will hold a joint hearing on the Inflation Reduction Act. Meanwhile, we await the president’s full budget request for FY 2026.
Feeling the Heat: Renewable Energy Under the Microscope
This article is based on a May 5th Womble Bond Dickinson webinar featuring Kristina Moore and Veronica Renzi.
The temperature is rising for the Renewable Energy Sector as well as related funding sources, such as green banks. The heat is coming from several sources, including:
An expansive fight over obligated federal funding.
Congressional investigations into companies receiving federal financial support.
The potential elimination of tax incentives augmented under the Inflation Reduction Act (IRA).
Rising tariffs.
All these issues are significant factors impacting the renewable energy sector. The IRA, passed under the Biden Administration, remains a particular target for Republican lawmakers, who seek to reclaim as much funding as they can.
Congressional Investigations Ramping Up the Temperature
Comparing it to “Gold bars sliding off the side of the Titanic,” Congressional Republicans have voiced strong objections to the rapid pace that IRA renewable energy funds were allocated.
On Jan. 27, the White House ordered the EPA to halt the spending of IRA obligated funds. Then, a little over a month later, the EPA formally referred the alleged financial mismanagement, conflicts of interests, and oversight failures regarding the Greenhouse Gas Reduction Funds to the Office of Inspector General.
In response, several IRA funding recipients have sued the EPA, seeking the release of already allocated funds. A federal judge issued a temporary restraining order barring the EPA from freezing Greenhouse Gas Reduction Fund allocations, at least until a court can consider the dispute.
However, the D.C. Court of Appeals reversed that decision, restoring the freeze to $20 billion in Greenhouse Gas Reduction Fund allocations. Arguments will be heard May 19 about the future of these funds.
On March 20, the House Oversight Committee sent a letter to the EPA indicating its intention to investigation the policies and IRA funding allocation during the Biden Administration. The letter requested a briefing with committee staff.
Various grant recipients have also received letters from Congressional committees requestion answers to questions about the Greenhouse Gas Reduction Fund.
Many have compared the current Congressional oversight climate to the Solyndra investigations in 2011. The Solyndra investigation focused on a $535 million loan guarantee issued by the U.S. Department of Energy to Solyndra, Inc. Led by the House Oversight and Energy and Commerce Committees, the inquiry sought to assess whether the government’s decision to approve the loan was warranted and to investigate whether Solyndra’s executives had misrepresented the company’s financial stability. No one wants to be that next household name because of a Congressional investigation.
Budget Reconciliation Could Change IRA Support for Sustainable Energy
Based on a budget resolution passed by both houses of Congress, Budget Reconciliation is a process by which lawmakers can avoid a Senate filibuster and pass spending measures with just 51 votes—a key tactic in this closely divided Congress.
Such a bill would include President Trump’s top priorities. These include extending the Tax Cuts and Jobs Act, which passed during his first administration and is set to expire this year.
For Congress to move forward with tax cuts, they also must find cost savings. Such offsets could target IRA sustainable energy-related production tax credit (45Y and 48E) and manufacturing tax credits (45X).
However, industries in that sector are pushing back, making their case for keeping these incentives to bolster domestic energy production to meet the rapidly growing needs of AI data centers. They also point to the need for a predictable investment climate. Companies brought jobs and investments to the U.S. based in part on these IRA tax incentives.
Even if these tax credits survive, they are likely to be modified by Congress moving forward. In terms of timeline, President Trump has requested that the Budget Reconciliation bill be on his desk by July 4. That would require the House to finish their work around Memorial Day and for the Senate to complete its steps by the end of June.
What’s Next: Challenges and Opportunities
In light of these developments, the future of renewable energy funding and the associated legislative landscape remains uncertain. The intense scrutiny from Congressional investigations, coupled with potential policy changes through budget reconciliation, has created a precarious environment for green energy stakeholders.
What happens in the coming months could determine the trajectory of renewable energy in the United States for years to come.
Holland & Knight Adds Tax Partner Jennifer Karpchuk in Philadelphia
Holland & Knight Adds Tax Partner Jennifer Karpchuk in Philadelphia. Holland & Knight has welcomed tax attorney Jennifer Karpchuk as a partner in its Philadelphia office, where she will co-chair the firm’s State and Local Tax (SALT) Team. Ms. Karpchuk’s arrival marks a significant step in the firm’s ongoing effort to deepen its national tax […]
Payroll Brass Tax: Understanding PTO Donation Programs—A Guide for Employers [Podcast]
Ogletree Deakins’ new podcast series, Payroll Brass Tax, offers insights into frequently asked questions about employment and payroll tax. In the inaugural episode, Mike Mahoney (shareholder, Morristown/New York) and Stephen Kenney (associate, Dallas) discuss paid time off (PTO) donation programs, which allow employees to support each other during challenging times, such as natural disasters or prolonged illnesses. Stephen and Mike explain the three types of PTO donation programs—general, medical emergency, and natural disaster—and highlight the tax implications and administrative considerations associated with each type. The speakers emphasize the importance of carefully structuring PTO donation programs to avoid potential tax issues, particularly those related to the assignment of income doctrine, which provides that income is taxed to the individual who earns it, even if the right to that income is transferred to someone else.
Proposed Tax Legislation: Implications for Tax-Exempt Organizations
This week, the US House Ways and Means Committee released tax legislation that includes several provisions relevant to tax-exempt organizations.
The Committee’s proposed legislation is part of the highly anticipated legislative package intended to extend expiring provisions of the 2017 Tax Cuts and Jobs Act (TCJA) and to implement other priorities of President Trump and the Republican Majority in US Congress.
The provisions summarized below from the House Ways and Means Committee text could impact tax-exempt organizations.
The Ways and Means Committee is one of 11 House Committees that developed and reported legislation as part of the budget reconciliation process being used to advance tax reform and other key legislative priorities. The US House Budget Committee will hold a markup of the compiled legislation from the 11 Committees on May 16. The Budget Committee has announced it will accept written statements on the legislation between now and close of business on May 19. House leadership has announced plans for a floor vote on the compiled reconciliation legislation before Memorial Day.
Excise Tax on Net Investment Income of Private Foundations
Under current law, private foundations (other than exempt operating foundations) are subject to a 1.39% excise tax on their net investment income.[1] The Ways and Means Committee legislative text (proposal) replaces the flat 1.39% excise tax rate with a four-tiered structure based on the foundation’s total assets:
Foundations with assets below $50 million: 1.39%.
Foundations with assets between $50 million and $250 million: 2.78%.
Foundations with assets between $250 million and $5 billion: 5%.
Foundations with assets above $5 billion: 10%.
Under the proposal, assets of a private foundation are determined based on the fair market value of a foundation’s total assets, without reducing any liabilities. The total assets of a private foundation for this purpose also include the assets of a private foundation’s “related organizations.”[2] A related organization is any organization that controls or is controlled by the private foundation or is controlled by one or more persons that also control the private foundation. As drafted, this provision would include any related organization regardless of its tax status. It excludes, however, assets from related organizations that are not controlled by the private foundation if the assets are not intended or available for the use or benefit of the private foundation. When assets are “not intended or available for the use or benefit of the private foundation” is not defined. This could be particularly relevant for company sponsored foundations that control and provide ongoing support to the foundation.
Excess Business Holdings of Private Foundations
Under current law, Section 4943(c) of the Internal Revenue Code generally limits the holdings of a private foundation to 20% (and in some cases 35%) of the voting stock in a business enterprise that is treated as a corporation reduced by the amount of voting stock held by its disqualified persons.[3]
The proposal amends Section 4943(c)(4)(A) of the Code to allow a business enterprise to repurchase voting stock under certain conditions from a retiring employee who participated in the corporation’s Employee Stock Ownership Plan and for that stock to be considered as still outstanding stock when calculating a private foundation’s permitted holdings under the excess business holdings rules, up to a certain amount.[4] The proposal would not apply to stock buybacks within the first 10 years from when the plan is established.
Unrelated Business Taxable Income
The proposal includes three provisions that impact the determination of unrelated business taxable income (UBTI):
Name and Logo Royalties: Under current law, royalty income is excluded from UBTI unless derived from debt-financed property or certain controlled subsidiaries.[5] The proposal would modify the royalty exception for UBTI by excluding income derived from any sale or licensing of an exempt organization’s name and logo.[6] The proposal would increase the UBTI of an exempt organization that receives royalty income from the sale or licensing of its name or logo. Similar provisions were proposed in 2014 and 2017.
Parking Tax: Under current law, the amount paid or incurred for any qualified transportation fringe benefit (i.e., employee parking) is exempt from UBTI. The proposal would include in UBTI the cost of qualified transportation fringe benefits and parking facilities used in connection with qualified parking, with a carve-out for religious organizations.[7] This tax on the cost of providing parking to employees was initially enacted by the TCJA without the carve-out for religious organizations but was later repealed retroactively.[8]
Research Income: Under current law, all income from any research conducted by an exempt organization whose primary purpose is to carry out fundamental research the results of which are freely available to the general public is exempt from UBTI on all income generated from all research activities.[9] The proposal would revise this exemption provision to exclude only income derived “from such research” and not income from research in general.[10]
Executive Compensation Excise Tax
Under current law, Section 4960 imposes an excise tax on exempt organizations who pay over $1 million in remuneration or who make an excess parachute payment to any “covered employee.” A “covered employee” generally includes any employee (or former employee) of an “applicable tax-exempt organization” if the employee is one of the five highest compensated employees for the current taxable year or was a covered employee in a prior year beginning after December 31, 2016.[11]
Under the proposal, the employees covered by the excise tax would be expanded to include any employee or former employee of the organization or any related person or governmental entity regardless of whether they are (or were) one of the five highest compensated employees and regardless of whether they are (or were) an employee of an “applicable tax-exempt organization.”[12]
Termination of Tax-Exempt Status for Terrorist Supporting Organizations
Under current law, Section 501(p) generally provides for the suspension of tax-exempt status for an organization designated as a “terrorist organization” or as “supporting or engaging in terrorist activity” pursuant to certain executive orders and federal laws. For example, Executive Order 13224 authorizes the US Secretary of the Treasury, “in consultation with the Secretary of State and the Attorney General,” to designate organizations as terrorist organizations.[13]
The proposal adds a definition of “terrorist supporting organizations” to Section 501(p) and defines a “terrorist supporting organization” as any organization designated by the Secretary of Treasury as having provided material support or resources to a terrorist organization.[14] The proposal provides the Secretary of the Treasury with the authority to designate an organization as a terrorist supporting organization without consulting with the Secretary of State and the Attorney General.
The proposal also requires the Secretary of the Treasury to provide notice to the organization prior to designating them as a terrorist supporting organization and provides for a 90-day cure period. During the 90-day cure period, the organization can demonstrate to the Secretary’s satisfaction that they did not provide material support or resources to a terrorist organization or, alternatively, made efforts to recoup the funds. The designation as a terrorist supporting organization can be appealed to the Internal Revenue Service’s Independent Office of Appeals, and the designation can also be legally challenged in US district court following exhaustion of the administrative process. The proposal exempts certain humanitarian aid provided with the approval of the Office of Foreign Assets Control.
College and University Endowment Tax
Under current law, Section 4968 imposes a flat 1.4% excise tax of the net investment income of certain private colleges and universities. Under the proposal, the flat 1.4% excise tax rate would be replaced with a four-tiered structure based on the institution’s student adjusted endowment:
Institution’s student adjusted endowment between $500,000 and $750,000: 1.4%.
Institution’s student adjusted endowment between $750,000 and $1,250,000: 7%.
Institution’s student adjusted endowment between $1,250,000 and $2,000,000: 14%.
Institution’s student adjusted endowment above $2,000,000: 21%.
The institution’s “student adjusted endowment” is determined based on the total fair market value of the institution’s assets (other than assets used directly in carrying out the institution’s exempt purposes) per “eligible student.”[15] For purposes of determining the institution’s total assets, the assets and net investment income of any related organization of the institution will be treated as assets of the institution. A related organization is any organization that controls or is controlled by the institution, is controlled by one or more persons that also control the institution or is a supported or supporting organization with respect to the institution.
An “eligible student” for this purpose means a student who is a “citizen or national of the United States, a permanent resident of the United States, or able to provide evidence from the Immigration and Naturalization Service that he or she is in the United States for other than a temporary purpose with the intention of becoming a citizen or permanent resident.”[16] Based on the definition of eligible student, institutions with more international students on temporary visas and undocumented students are more likely to become subject to the endowment excise tax or a higher excise tax rate.
The proposal excludes certain religious colleges or universities that have continuously maintained an affiliation with a church and have a mission that includes religious tenets, beliefs, or teachings.[17]
Charitable Deductions
Individual Taxpayers: Under current law, only taxpayers who itemize are able to deduct their charitable contributions.[18] The proposal would temporarily reinstate a charitable contribution deduction for non-itemizing taxpayers, capped at $150 ($300 for joint returns) for cash contributions to certain qualifying charities for tax years 2025 through 2028.[19]
Corporate Taxpayers: Under current law, corporate taxpayers are generally allowed a charitable contribution deduction up to 10% of taxable income, and charitable contributions exceeding the 10% limit can be carried forward and deducted in the following five tax years, subject to the same 10% limitation in each year.[20] The proposal would establish a new floor on charitable deductions for corporations equal to 1% of taxable income and impose new restrictions on the ability of corporations to carry forward disallowed charitable deductions to future years.[21] A corporate taxpayer with charitable contributions exceeding the 10% limitation can only add the amount disallowed under the 1% floor to the amount carried over to the subsequent year.
[1] Code Section 4940(a).
[2] The One, Big, Beautiful Bill, Proposed Section 112022.
[3] Code Section 4943.
[4] Proposed Section 112023.
[5] Code Section 512(b)(2).
[6] Proposed Section 112025.
[7] Proposed Section 112024.
[8] Public Law No. 116-94, Section 302 (repealing Code Section 512(a)(7)).
[9] Code Section 512(b)(9).
[10] Proposed Section 112026.
[11] Code Section 4960.
[12] Proposed Section 112020.
[13] Executive Order 13224.
[14] Proposed Section 112209.
[15] Proposed Section 112021.
[16] Proposed Section 112021; Section 484(a)(5) of the Higher Education Act of 1965.
[17] Proposed Section 112021.
[18] Code Section 170(p).
[19] Proposed Section 110112.
[20] Code Section 170(b)(2).
[21] Proposed Section 112028.
No Tax on Tips Provision Included in the House Ways and Means Committee’s 2025 Tax Bill
On May 14, the House Ways and Means Committee approved the Make American Families and Workers Thrive Again Act, which contains a no tax on tips provision. This Ways and Means Committee bill is the starting point in what may be an arduous journey through Capitol Hill, so the final version of no tax on tips may look different than this committee bill. Some no tax on tips highlights include:
Eligible employees would be able to deduct “qualified tips” to determine taxable income.
Qualified tips are cash tips (whether paid by cash, credit card, or debit card) in an occupation that traditionally and customarily received tips.
The secretary of the Treasury would be required to publish a list of traditional tip-receiving occupations within 90 days of the president signing the Act.
Qualified tips must be paid voluntarily without any consequence in the event of nonpayment, may not be subject to negotiation, and must be determined by the payor.
The recipient of the tips must not be a “highly compensated employee,” which for 2025 is an employee who earns $160,000 or more.
The deduction for qualified tips would be allowed for non-itemizers.
Because no tax on tips would be structured as an employee deduction, tips would continue to be included in the base for FICA taxes (Social Security or Medicare tax).
The employer would still be required to report the qualified tips on the W-2 provided to the employees.
This deduction for qualified tips would be allowed for the 2025 through 2028 tax years (four years only).
While the bill does not limit the amount of tips that may be deducted (i.e., subject to tax-free treatment), as bills previously introduced, it does eliminate the deduction for highly compensated employees as discussed above.
The bill has other details, including a limitation provision on persons who engage in a trade or business who also receive tips – for example, a chef who cooks the food for a dinner party at a private residence. In such a case, such person’s deduction for tips would be limited to the amount that their gross receipts exceed the cost of providing the service, such as food and beverage cost.
Once again, this is subject to change as Congress may look to reduce the cost of this and the other tax cuts in the bill. But, if the current no tax on tips bill is passed and signed into law without material changes, there may be a scramble during the 90 days after it is signed for the Treasury Department to determine which occupations traditionally receive tips and would be allowed the benefit of no tax on tips.
State Tax Issues
Considering the potential revenue implications of the Act, states would have to decide whether to conform (or decouple) from any change in the federal policy. Depending on the revenue implications, not all states may choose to conform, creating additional compliance and administration issues as state and federal taxing authorities would use divergent definitions of income.
Despite the revenue and compliance challenges a no tax on tips policy may create, almost a dozen states have introduced proposed bills at the state level for consideration during the 2025 legislative session (Arizona,1 Kentucky,2 Kansas,3 Maryland,4 Nebraska,5 New Jersey,6 New York,7 North Carolina,8 Oregon,9 South Carolina,10 and Virginia11). To date, none of these proposals have passed.
Other Issues and Industry-Specific Considerations
Regardless of how any no tax on tips initiative(s) takes shape, any change in tip taxation would impact reporting. The IRS estimates that tips are underreported to the tune of tens of billions of dollars every year. Enacting such a policy may create an incentive to broaden the understanding of a gratuity as much as possible. This may lead to reporting inconsistencies regarding the proper wage/tip classifications.
The no tax on tips promise might also lead to friction among the different classifications of employees in a very industry-specific manner. In the restaurant industry, for example, highly tipped employees, such as front of house restaurant, bar workers, or employees participating in a tip pool in a restaurant with significant tips would seem to be the most significant beneficiaries of the legislation. “Lightly tipped” employees, such as tipped quick service and fast casual restaurant workers, may receive modest or no benefits. In addition, non-tipped employees and restaurant managers, who may be legally precluded from receiving tips due to laws and regulations prohibiting tip sharing with management-level personnel, would receive no benefits from the legislation. Restaurant employers may be faced with requests for compensation increases from these employees, or a declining interest from restaurant workers in working their way up into management-level roles, if the compensation and income boost from tax-free tips is more attractive than the management compensation.
The change of a no tax on tips policy—either at the federal or state level—should be of interest for restaurant employers of tipped employees. Although the policy may benefit some restaurant workers, the legislation may present challenges to restaurant owners/operators who have experienced significant price and wage inflation, including historic increases in wages and benefits in many parts of the country over the past several years, while operating expenses and pressures have increased considerably. In addition, “tip credits,” which permit an employer to pay tipped employees a reduced hourly wage based upon the tips received by such employees in most U.S. states, have been challenged in parts of the country.
While the no tax on tips policy may provide significant tax savings to select tipped workers, the legislation may create challenges for restaurant owners and other businesses with workers designated by the Treasury Secretary to be a traditional tip-receiving occupation. As this policy begins to unfold, restaurant owners should be aware of and engage—at both the federal and state level—to try and shape these policies to address these issues.
1 See HB 2081, which would exempt tips for state income tax purposes.
2 See HB 26, which would exempt tips and overtime compensation for state income tax purposes through 2029.
3 See HB 277, which would exempt up to $25,000 of tips for state income tax purposes starting in 2026.
4 See HB 1400/SB 0823, which would have exempted tips for state income tax purposes.
5 See LB 28, which would have created a deduction for tips from taxable income for state income tax purposes starting in 2025.
6 See S 3741/A 5006, which would exempt tips for state income tax purposes starting in 2026.
7 See S 587/A 05856, which would exempt tips for state income tax purposes starting in 2025.
8 See HB 11, which would exempt tips, overtime pay and up to $2500 of an annual bonus for state income tax purposes.
9 See SB 560, which would exempt tips for state income tax purposes from 2026 through 2031.
10 See H 3520/S 0534, which would exempt tips for state income tax purposes.
11 See HB 1965, which would provide a deduction for tips and overtime from state taxable income starting in 2025.
Tax Revolution: Come Together for The One, Big, Beautiful Bill
On May 14, the US House Ways and Means Committee advanced its initial markup version of The One, Big, Beautiful Bill, following 17 hours of a Committee meeting to markup the bill with no changes from the 389-page text that was released on May 12.
The Ways and Means portion is part of a larger budget reconciliation bill that Congressional Republican leadership intends to finalize and send to the President’s desk by July 4. The legislation awaits further consideration in the US House of Representatives, with a Budget Committee markup now scheduled for Friday, and then eventually in the US Senate.
Accordingly, the legislative text of the Bill is likely to change, and the ultimate timing of a final reconciliation bill remains uncertain. For example, if the Senate modifies federal spending cuts elsewhere in the comprehensive budget reconciliation bill, it could impact the net revenue impacts of the legislation. With extremely narrow majorities in the House and Senate, just a few members can bring the process to a halt by withholding their support for provisions outside of the tax title or for the tax package itself. Thus, the tax provisions remain a moving target and may well merit advocacy by stakeholders who so far have not engaged with Congress. This client alert summarizes some of the key tax policy initiatives affecting for-profit, business enterprises that are addressed in the Bill and that could impact many industries, ranging from sports franchises to renewable energy.
Qualified Business Income (QBI) Deduction (Code Section 199A)
An individual may generally deduct 20% of qualified business income (QBI) earned through a disregarded entity, S corporation, or partnership. This QBI deduction is set to expire for taxable years beginning after December 31, 2025. The Bill proposes to make the QBI deduction permanent and increase the rate from 20% to 23% for taxable years beginning after December 31, 2025, among other changes, such as modifying the phase-in of certain limitations.
Permanent Elimination of Miscellaneous Itemized Deductions (Code Section 67(g))
The Bill proposes to completely repeal miscellaneous itemized deductions (making permanent the temporary suspension of these deductions under the 2017 Tax Cuts and Jobs Act).
SALT Cap
The Bill proposes to increase the current $10,000 cap on the deductibility of state and local taxes (set to expire on December 31, 2025) to $30,000 subject to phase-out for married filing jointly taxpayers with modified adjusted gross income (AGI) above $400,000 (with a lower $200,000 threshold for married individuals filing separately). For certain Republican House members, the SALT cap is a pivotal policy issue that will dictate their vote on the Bill. Thus, it is expected that this provision will be heavily negotiated among Republicans.
Bonus Depreciation (Code Section 168(h))
The Bill proposes to allow taxpayers to permanently deduct 100% of the cost of “qualified property” acquired on or after January 20, 2025. Under current law, taxpayers generally may deduct the costs incurred to acquire “qualified property” (i.e., equipment and machinery) used in a trade or business on an accelerated schedule. The accelerated schedule for such deductions is set to fully phase out in 2027.
Increase Expensing Limitations (Code Section 179)
The Bill proposes to expand expensing limitations on qualifying property by increasing (1) the $1,250,000 cap to $2,500,000 and (2) the phase-down threshold to $4,000,000. Under current law, taxpayers may elect to immediately expense 100% of the cost of certain qualifying property (i.e., machinery and equipment), instead of recovering those costs through depreciation. Current law imposes a $1,250,000 cap on such expensing, with a phase-down beginning once the qualifying property costs exceeds $3,130,000.
Research and Experimental Expensing (Code Section 174)
The Bill proposes to allow taxpayers to deduct 100% of expenditures incurred with respect to research and experimental activities conducted in the United States beginning after December 31, 2024, and before January 1, 2030. Under current law, taxpayers are required to amortize expenditures incurred with respect to research and experimental activities conducted in the United States over a five-year period, with expenditures attributed to research conducted outside the United States subject to a longer 15-year amortization schedule.
Interest Deductions (Code Section 163(j))
The Bill proposes to expand a taxpayer’s ability to deduct business interest expense. Under current law, a taxpayer’s business interest expense deduction generally is capped at the sum of (1) business interest income for the taxable year or (2) 30% of adjusted taxable income (i.e., the taxpayer’s earnings before interest and taxes (EBIT)), plus (3) “floor plan financing interest” for the taxable year (generally, interest with respect to debt incurred to finance motor vehicles held in inventory for sale or lease to customers). The Bill proposes to expand the limit on deductible interest expense by revising the definition of adjusted taxable income to equal the taxpayer’s EBITDA (earnings before interest, taxes, depreciation, and amortization), thereby allowing for larger interest deductions. The Bill also would include in the calculation of the cap any floor plan financing interest for certain trailers and campers designed to be towed by or affixed to a motor vehicle.
Special Depreciation for Qualified Production Property
The Bill proposes to allow taxpayers to deduct 100% of the cost of “qualified production property” in the year such property is placed in service. Qualified production property generally would include depreciable property that is used by the taxpayer as an integral part of a “qualified production activity” (the manufacturing, production, or refining of tangible personal property). In effect, the Bill would allow taxpayers to immediately deduct 100% of the cost of certain new factories and improvements to existing factories and certain other structures, a significant change from the current law, under which taxpayers generally are required to deduct the cost of nonresidential real property over a 39-year period.
Qualified Opportunity Zones (QOZ) (Code Section 1400Z-2)
Under current law, taxpayers may invest capital gains into qualified opportunity zones and (1) defer the recognition of those gains until December 31, 2026, and (2) exclude from taxation the gains generated from the sale of certain qualified opportunity zone (QOZ) property that has been held for at least 10 years. Investments made after December 31, 2026, are not eligible for such QOZ tax benefits. The Bill proposes to reopen the QOZ program by extending tax benefits to investments made after January 1, 2027, and before December 31, 2033. The Bill also proposes several modifications to the QOZ program. It would establish a process for re-designating QOZs and would require certain rural areas to be designated as QOZs. Additionally, it would provide a 20% step-up in basis for investments in rural QOZs that meet certain holding-period requirements, allow taxpayers to invest up to $10,000 of after-tax ordinary income into QOZs and reduce the rehabilitation cost requirements for investments in rural QOZ areas.
Exclusion of Interest on Loans Secured by Rural or Agricultural Real Estate
The Bill proposes to create a new 25% exclusion of interest income for certain loans secured by qualifying rural or agricultural real estate.
Limitation on Amortization of Sports-Related Intangibles (Code Section 197)
The Bill proposes to limit the amortization of intangible property (e.g., goodwill) of sports franchise businesses to 50% of the cost basis of such intangible property. Under current law, when a buyer acquires a sports franchise business, the buyer generally is able to amortize 100%of the acquired goodwill of the sports franchise over 15 years.
Termination of Certain Energy Tax Credits
The Bill proposes to terminate the following energy tax credits, effective December 31, 2025: the previously owned clean vehicle credit (Code Section 25E), the clean vehicle credit (Code Section 30D), the qualified commercial clean vehicles credit (Code Section 45W), the alternative fuel vehicle refueling property credit (Code Section 30C), and the clean hydrogen production credit (Code Section 45V), (with respect to the clean hydrogen production credit, for facilities the construction of which begins after December 31, 2025).
Phase-Out and Restrictions on the Clean Electricity Production Credit (Code Section 45Y) and the Clean Electricity Investment Credit (Code Section 48E)
The Bill proposes to phase out the clean electricity production credit (i.e., the new Production Tax Credit or PTC) and the clean electricity investment credit (i.e., the new Investment Tax Credit or ITC) as follows: a 20% credit reduction for facilities placed in service in 2029, a 40% reduction for facilities placed in service in 2030, a 60% reduction for facilities placed in service in 2031, and complete phaseout after December 31, 2031.
Repeal of “Transferability” of Certain Clean Energy Tax Credits
The Bill proposes to repeal “transferability” (i.e., a new method of credit monetization created under the Inflation Reduction Act) of various clean energy tax credits generally with effect for facilities placed in service after December 31, 2027, and certain other types of credits generated after 2027. Affected credits include the Clean Electricity Production Credit (Code Section 45Y), the Clean Electricity Investment Credit (Code Section 48E), the Clean Fuel Production Credit (Code Section 45Z), Zero-Emission Nuclear Power Production Credit (Code Section 45U), Carbon Oxide Sequestration Credit (Code Section 45Q), the Advanced Manufacturing Production Credit (Code Section 45X), and the Energy Credit (Code Section 48).
Restrictions on Certain Energy Tax Credits for Taxpayers Connected with Certain Foreign Entities
The Bill also proposes to restrict eligibility for certain energy tax credits for taxpayers connected with certain foreign entities (i.e., “foreign entities of concern” and certain other foreign entities). Affected credits include the Clean Electricity Production Credit (Code Section 45Y), the Clean Electricity Investment Credit (Code Section 48E), the Clean Fuel Production Credit (Code Section 45Z), Zero-Emission Nuclear Power Production Credit (Code Section 45U), Carbon Oxide Sequestration Credit (Code Section 45Q), the Advanced Manufacturing Production Credit (Code Section 45X), and the Energy Credit (Section 48).
Phase-Out of Zero-Emission Nuclear Power Production Credit (Code Section 45U)
The Bill proposes to phase out the zero-emission nuclear power production credit (Code Section 45U) as follows: 20% credit reduction for electricity produced in 2029, a 40% reduction for electricity produced in 2030, a 60% reduction for electricity produced in 2031, and no credit available after December 31, 2031.
Phase-Out of Advanced Manufacturing Production Credit (Code Section 45X)
The Bill proposes to eliminate the advanced manufacturing production credit (Code Section 45X) for wind energy components sold after December 31, 2027, and eliminates the credit for all other components sold after December 31, 2031.
Phase-Out of Credit for Certain Energy Property (Code Section 48)
The Bill proposes to phase out the energy property credit (Code Section 48) with respect to geothermal heat pump property as follows: the base credit for geothermal heat pump property that begins construction after December 31, 2029, and before January 1, 2031 is 5.2%; the base credit for geothermal heat pump property that begins construction after December 31, 2030, and before January 1, 2032 is 4.4%; and complete phaseout for geothermal heat pump property that begins construction on or after January 1, 2032.
The House Ways and Means markup has produced a tax rewrite that better reflects the politics of reconciliation than the ideal of tax policy. Ultimately, the Ways and Means legislation will face a buzz saw of parochial roadblocks, like the SALT dispute, before the Senate offers its perspective. If this reconciliation bill passes, it will likely contain something close to this.
– Phil English, Former Ways and Means Committee member
Rachel Scott , Jivesh Khemlani , William R. Mitchell , and Philip S. English also contributed to this article.
Public Finance Provisions in the House Tax Bill Impacting Municipal Market Participants
The House Committee on Ways and Means advanced a tax bill on May 14, 2025, as part of the budget reconciliation legislation aimed at enacting the Trump administration’s fiscal priorities. Notably, the proposed legislation does not eliminate or limit the exclusion of interest from gross income for federal income tax purposes for any class of municipal bonds. Among the proposed changes to current tax law, the bill includes provisions impacting the municipal market and its participants that would:
i.
enhance the low-income housing tax credit,
ii.
increase the rate of, and the range of institutions subject to, the endowment tax added in 2017,
iii.
make technical amendments to the small issue manufacturing bond provisions, and
iv.
curtail the continued availability of clean energy credits for new projects.
Low-Income Housing
The bill proposes several changes to the low-income housing tax credit program, including:
Temporarily lowering the tax-exempt bond-financing requirement for projects using the “4%” low-income housing tax credit to 25% of the project’s aggregate basis, down from the current 50%. This lower threshold would apply to buildings placed in service after Dec. 31, 2025, where at least 5% of the financing is sourced from bonds issued between Dec. 31, 2025, and Jan. 1, 2030.
Increasing the ceiling on housing tax credits allocable by states by 12.5% for calendar years 2026 through 2029.
Raising the eligible basis for buildings placed in service between Dec. 31, 2025, and Jan. 1, 2030, by up to 30% for projects in rural and Indian areas, as defined under section 4(11) of the Native American Housing Assistance Self Determination Act of 1996.
Endowment Tax
The proposed legislation includes changes to the excise tax imposed on private colleges, universities, and foundations:
Increasing the excise tax rate for private colleges and universities with endowments of more than $750,000 per eligible student from the current flat rate of 1.4% to an annual rate ranging between 7% and 21%, depending on the institution’s student-to-endowment value ratio.
Narrowing the definition of eligible students to those meeting the student eligibility requirements under section 484(a)(5) of the 7 Higher Education Act of 1965, generally limited to U.S. citizens and permanent residents.
Including income derived from student loan interest and royalties from federally subsidized research in the calculation of net investment income subject to the excise tax.
Exempting certain religiously affiliated colleges and universities from the endowment tax.
Raising the excise tax rate on private foundations’ net investment income from the current flat rate of 1.39% to an annual rate of up to 10% for private foundations with assets of at least $5 billion.
Small Issue Bonds
The bill proposes technical changes to Section 144 of the Internal Revenue Code to reflect updates made to the capitalization of certain startup costs.
Clean Energy Tax Credits
The bill aims to accelerate the phase-out and termination of various clean energy tax credit programs:
Gradually phasing out the 48E Investment Tax Credit and 45Y Production Tax Credit starting in 2029, with full elimination by 2032.
Repealing the transferability of credits for projects commencing construction after Dec. 31, 2027, and clean fuel production starting after the same date.
Terminating tax credits for electric vehicles and chargers sold or placed in service after Dec. 31, 2025, with limited exceptions.
Next Steps
The reconciliation bill, including these tax provisions, will be consolidated by the House Budget Committee and subsequently reviewed by the Rules Committee before consideration on the House floor. Once passed, the bill will require approval by both chambers of Congress, with differences resolved before enactment. The legislative process may bring changes to these tax provisions.
Equal Protection Not on the Menu This Time
In North End Chamber of Commerce (“NECC”) v. City of Boston, the NECC and several restaurants in the North End neighborhood of Boston (“Plaintiffs”) filed suit against the City of Boston (“City”), alleging that the City unlawfully curtailed and later banned on-street dining in the North End. The Court granted the City’s motion to dismiss Plaintiffs’ complaint (“Complaint”).
In response to the COVID-19 pandemic in 2020, the City implemented an outdoor-dining program authorizing restaurants in designated areas to offer dining on public streets. In 2022, the City imposed an “impact fee” of $7,500 on participating North End restaurants and a monthly fee of $480 for each parking space used by the restaurants’ outdoor patios. The City did not charge these fees to participating restaurants in any other Boston neighborhood. The City also limited the outdoor-dining season in the North End to five months, compared to the eight-to-nine months outside of the North End. The following year the City completely banned on-street dining in the North End but not elsewhere. Plaintiffs then filed the Complaint.
The City moved to dismiss, claiming the Complaint failed to state a claim upon which relief could be granted and that it violated Rule 8(a)(2) of the Federal Rules of Civil Procedure (“Rule 8”). The Court agreed with the City as to compliance with Rule 8. Rule 8 requires a plaintiff to write “a short and plain statement of the claim showing that the pleader is entitled to relief.” The Court concluded that the Complaint, which was over two hundred pages long and “omitted virtually no detail,” contained excessive assertions that were unnecessary to advance the causes of action. The Court warned that “unnecessary prolixity” is disfavored by the Court because it imposes a significant burden on both the Court and the responding party.
Plaintiffs also claimed that the NECC lacked associational standing to sue either directly or on behalf of its members. The Court disagreed, holding that the NECC had standing to sue for its equitable relief claim, but did not have standing to sue for monetary damages. The NECC was not entitled to compensation for the various injuries suffered by its members, and the member restaurants were necessary parties to assess each of their damages separately.
The Court next concluded that Plaintiffs’ equal protection claims failed. First, the Court reasoned that Plaintiffs failed to allege the sort of discrimination that would trigger strict scrutiny. Strict scrutiny is triggered if the action in question burdens a suspect class, has discriminatory intent with respect to racial or national origin, or impinges upon a fundamental right. The Court disagreed that the Constitution vested Plaintiffs with a fundamental right to on-street-dining. Nor did the City’s policies explicitly differentiate among individuals based on a suspect classification, such as race, ethnicity, or national origin. The Court also disagreed that the City acted with discriminatory intent where Plaintiffs failed to identify a “clear pattern” of conduct historically targeting the North End or “white, Italian Americans.” Nor was there evidence that the regulations had disproportionate impact on persons of Italian heritage. Plaintiffs therefore failed to plausibly allege the sort of discrimination that would trigger strict scrutiny.
The Court proceeded to apply rational-basis review, under which a classification will withstand a constitutional challenge so long as it is rationally related to a legitimate state interest and is neither arbitrary, unreasonable nor irrational. Here, to justify the fees imposed on Plaintiffs, the City considered the “unique impacts of outdoor dining on the quality of residential life,” such as “trash, rodents, traffic, and parking problems.” To justify the ban on on-street dining in the North End, the City cited the North End’s high density of restaurants and foot traffic, narrow streets and sidewalks, resident parking scarcity, and other related considerations. The City also pointed to the scheduled closures of the Sumner Tunnel and continued congestion around the North Washington Street Bridge construction project. The Court concluded that the City’s explanations for the policies sufficiently showed that the reasons underlying the policies were rationally related to legitimate government interests.
The Court also addressed Plaintiffs’ “class-of-one” claim, whereby an equal protection claim may in some circumstances be sustained when a plaintiff alleges that she has been intentionally treated differently from others similarly situated and that there is no rational basis for the difference. The Court reasoned that neither the neighborhood itself nor the restaurants therein were similarly situated to those outside the North End because the North End is exceptionally dense and located adjacent to two major construction projects. The Court also held that Plaintiffs failed to plausibly plead that the City acted with bad faith or had malicious intent to injure them, and therefore concluded that the Complaint failed to plausibly plead a class-of-one claim.
Plaintiffs also asserted violations of procedural and substantive due process. As the Court explained, the former ensures that government will use fair procedures with respect to a constitutionally protected property interest, and the latter functions to protect individuals from particularly offensive actions by officials even when the government employs facially neutral procedures in carrying out those actions. The Court held that both claims failed because Plaintiffs plainly did not have a property interest in on-street-dining licenses.
Finally, Plaintiffs alleged that the impact and parking fees imposed on Plaintiffs for the outdoor-dining program constituted an unlawful tax. The Court disagreed. The fees were not an unlawful tax where: (1) they were charged in exchange for a benefit (a permit to authorize on-street dining that would otherwise be unlawful); (2) Plaintiffs paid the fee by choice, and had the option to avoid the charge by not participating in the program; and (3) the charges were collected to compensate the governmental for its expenses in providing the services rather than to raise revenue. For example, the impact fee paid for services that were related to the program, including rat baiting, power washing of sidewalks, and painting of street lane lines. The parking fees were paid directly to garages to provide parking for residents who lost it as a result of the outdoor-dining program. Plaintiffs therefore failed to show that the fees were unlawful taxes.
For all these reasons, the Court allowed the City’s Motion to Dismiss.
The One Big Beautiful Bill: SALT Deduction Workarounds Under Fire
On May 12, 2025, House Republicans unveiled a comprehensive 389-page package of tax provisions, setting the stage for a significant tax bill to be debated in the coming weeks. Dubbed the “One Big Beautiful Bill,” this proposal aims to extend and modify many key provisions of the Tax Cuts and Jobs Act of 2017 (TCJA). One specific proposal would aim to restrict the use of workarounds that taxpayers have used to bypass the state and local tax (SALT) deduction limits established by the TCJA.
A key provision targets partners in service-related and investment management partnerships, restricting their ability to leverage state laws – specifically pass-through entity tax (PTET) provisions – to deduct state income taxes paid by partnerships. This move is designed to close the gap that allows these entities to sidestep the SALT deduction cap. Additionally, the proposal seems to disallow deductions for state and local taxes generally required to be paid at the entity level (such as the New York City unincorporated business tax), marking a significant departure from the TCJA’s SALT provisions.
The proposal advanced on May 14 through the House Ways and Means Committee without change, although certain key New York State Republicans continued to express their concerns over the SALT-related provisions. Investment manager clients currently benefiting from PTET provisions should be aware that these deductions may become unavailable starting in 2026.
United States and China Announce Temporary 115 Percent Reduction in Tariffs While Trade Discussions Continue
After negotiations over the weekend in Geneva, Switzerland, the United States and China reached a new trade deal on Monday, May 12, 2025, to temporarily slash tariffs on each country’s goods by 115 percent for the next 90 days. President Trump issued an executive order the same day reflecting this modification, reducing the 125% “reciprocal” tariff levied on Chinese imports on April 10, 2025, to ten percent. In turn, China will remove the retaliatory tariffs imposed on U.S. imports since April 4, 2025, but will retain a ten percent tariff. The revision to the “reciprocal” tariff will be effective on or after 12:01 a.m. Eastern Daylight Time on May 14, 2025, as the United States and China continue discussions on economic and trade relations.
All other duties imposed on China by the Trump Administration remain in effect, including:
Tariffs ranging from 7.5 to 25 percent imposed on certain categories of imports from China pursuant to Section 301 of the Tariff Act of 1974 (Section 301);
25 percent tariffs on imports of aluminum, steel and cars and car parts implemented pursuant to Section 232 of the Trade Expansion Act of 1962 (Section 232); and
20 percent tariffs on all imports from China imposed under the International Emergency Economic Powers Act (IEEPA) in response to the fentanyl national emergency.
The U.S. and China trade deal follows on the heels of a recent “Economic Prosperity Deal” reached between the United States and the United Kingdom last Thursday, May 8, 2025, which addressed, amongst other things, removal of barriers to make it easier for American and British businesses to operate, invest and trade in both countries. In particular, the United States agreed to exclude UK steel and aluminum from the Section 232 25% duties on imports of steel and aluminum and cut Section 232 tariffs on UK cars and car parts coming into the United States from 25% to 10% for the first 100,000 UK cars.
These trade deals work to address the Trump Administration’s concern over trade imbalances and to deliver, according to the White House, “real, lasting benefits to American workers, farmers and businesses.”