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.”
High-Level Overview of Certain Provisions Impacting Renewable Energy Incentives in “The One, Big, Beautiful Bill” Draft Legislation
Yesterday, the House Ways and Means Committee released a package of tax provisions (the “Bill”) (which may be found here) that includes claw backs of certain provisions of the Inflation Reduction Act. Note that this Bill is a draft only, has not been passed by the House or the Senate (or any committee thereof), or signed by the President, all of which would need to occur before the Bill becomes law. The provisions described below are therefore subject to change and may not become law at all. However, the Bill provides some insight on how House Republicans are thinking about amending current energy-related tax credits.
The Bill includes accelerated phaseouts for the clean electricity investment credit under Section 48E, the clean electricity production credit under Section 45Y, and the advanced manufacturing production tax credit under Section 45X. For the credits available under Sections 48E and 45Y (which this year replaced the old ITC and PTC, respectively), the phaseout would begin for otherwise eligible projects that are placed in service starting in 2029, which is at least a few years before these credits are set to phase out under current law. In the Bill, these credits would phase down to 80% of the current credit level for projects placed in service in 2029, 60% for those placed in service in 2030, 40% for those placed in service in 2031, and 0% for those placed in service in 2032 and beyond. For the Section 45X advanced manufacturing production tax credit, the phaseout in the draft Bill would begin one year earlier than under current law, except that the Bill would make ineligible any wind energy components sold after December 31, 2027. Separately, the Bill would terminate the Section 45V clean hydrogen production tax credit for facilities on which construction does not begin by December 31, 2025.
The Bill would also repeal transferability for the clean electricity investment credit under Section 48E, the clean electricity production credit under Section 45Y, and the advanced manufacturing production tax credit under Section 45X under Section 6418, as well as other credits, but that repeal would not take effect for several years.
Finally, the Bill contains new restrictions on energy tax credits apparently aimed at limiting certain foreign entities from taking advantage of the value of these credits.
Compelling Rationale for Producing Proprietary Products in U.S. Found in USTR’s Special 301 Report on IP Protection and Enforcement Abroad (Part I)
While the current Trump Administration has based its global trade war on trade imbalances stemming from unfair trade practices of foreign countries, its weapon of choice—increased tariffs—is designed to encourage businesses to relocate manufacturing operations to the U.S., thereby boosting American employment and industrial capacity. The U.S. Trade Representative’s 2025 Special 301 Report, issued on April 29, provides an independent justification for onshoring or reshoring manufacturing, namely the failure of certain trading partners to adequately protect and enforce intellectual property (IP) rights of U.S. IP holders within their borders.
The Special 301 Report is an annual report that evaluates the adequacy and effectiveness of IP protection and enforcement among U.S. trading partners. USTR requested written submissions from the public through a notice published in the Federal Register on December 6, 2024. USTR later conducted a public hearing that provided the opportunity for interested persons to testify before the interagency Special 301 Subcommittee of the Trade Policy Staff Committee (TPSC) about issues relevant to the review. The hearing featured testimony from many witnesses, including representatives of foreign governments, industry, and non-governmental organizations.
USTR reviewed more than 100 trading partners for this year’s Special 301 Report and placed 26 of them on the Priority Watch List or Watch List. The countries on these watch lists are the “countries that have the most onerous or egregious acts, policies, or practices and whose acts, policies, or practices have the greatest adverse impact (actual or potential) on relevant U.S. products.” In this year’s report, trading partners on the Priority Watch List present the most significant concerns regarding insufficient IP protection or enforcement or actions that otherwise limited market access for persons relying on intellectual property protection. Eight countries are on the Priority Watch List: Argentina, Chile, China, India, Indonesia, Mexico, Russia, and Venezuela. According to the report, these countries will be the subject of “particularly intense bilateral engagement during the coming year.” For those failing to address U.S. concerns, the report warns, “USTR will take appropriate actions, which may include enforcement actions under Section 301 of the Trade Act or pursuant to World Trade Organization (WTO) or other trade agreement dispute settlement procedures.”
The 2025 Special 301 report further notes that an important part of the mission of USTR is to support and implement the Administration’s commitment to protect American jobs and workers and to advance the economic interests of the United States. “Fostering innovation and creativity is essential to U.S. economic growth, competitiveness, and the estimated 63 million American jobs that directly or indirectly rely on intellectual property (IP)-intensive industries.” These include manufacturers, technology developers, apparel makers, software publishers, agricultural producers, and producers of creative and cultural works. “Together, these industries generate 41% of the U.S. gross domestic product (GDP). The 47.2 million workers that are directly employed in IP-intensive industries also enjoy pay that is, on average, 60% higher than workers in non-IP-intensive industries.”
According to the report, a common problem with those countries on the Priority Watch List is IP infringement:
IP infringement, including patent infringement, trademark counterfeiting, copyright piracy, and trade secret theft, causes significant financial losses for right holders and legitimate businesses. IP infringement can undermine U.S. competitive advantages in innovation and creativity, to the detriment of American workers and businesses. In its most pernicious forms, IP infringement endangers the public, including through exposure to health and safety risks from counterfeit products, such as semiconductors, automobile parts, apparel, footwear, toys, and medicines. In addition, trade in counterfeit and pirated products often fuels cross-border organized criminal networks, increases the vulnerability of workers to exploitative labor practices, and hinders sustainable economic development in many countries.
Inadequate and ineffective IP protection and enforcement is hardly a new complaint by the U.S. government regarding trading partners such as China—it is a chronic problem. Still, the USTR Special 301 Report should serve as a warning to U.S. IP holders that these IP threats are real and not going away, at least anytime soon. While sourcing innovative products from lower cost countries with less regulatory burdens supports short-term profitability objectives, it can come at a steep long-term cost as many companies have learned. The loss or diminution of IP rights due to substandard IP protection and enforcement regimes abroad can cause significant damage to enterprise value, including enabling competition by infringers to rise up. This constant threat in the new “America First” era in which higher tariffs are the norm, however, may cause IP-intensive businesses to rethink their sourcing strategy and decide to onshore or reshore the production of proprietary products or components. Though the U.S. IP laws are imperfect, they are still considered the gold standard by many, including the U.S. Chamber of Commerce, and thus provide a better support system for long-term protection and enforcement of IP and financial success.
House Proposes Updates to Qualified Opportunity Zones
The House Ways and Means Committee released its version of the proposed reconciliation bill, which will be “marked up” in the Committee on May 13, 2025. Included in this proposal are amendments regarding Qualified Opportunity Zone (QOZ) investments that would:
Extend the QOZ incentive by seven years, permitting investments in QOZs to be made until Dec. 31, 2033.
Provide for designations of new QOZs for investments made on or after Jan. 1, 2027, including a requirement that at least 33% be rural zones.
Add a 10% basis step-up for Opportunity Zone investments made after Dec. 31, 2026, that are held for at least five years through 2033.
Favor designation of rural QOZs over urban QOZs by:
–
Increasing the five-year 10% basis step-up to a 30% basis step-up for qualified rural investments.
–
Reducing the Substantial Improvement Requirement from 100% to 50% for rural projects (including data center projects).
Apply the new rules to QOZ investments made from Jan. 1, 2027, to Dec. 31, 2033. Investments made in 2026 would continue to use the existing rules (including deferral only until Dec. 31, 2026).
Deferral of capital gain taxes for investments made after Dec. 31, 2026, until Dec. 31, 2033.
Allow annual deferral until Dec. 31, 2033, of up to $10,000 of ordinary income invested in a Qualified Opportunity Fund after Dec. 31, 2026.
Add expansive reporting requirements for both Qualified Opportunity Funds and Qualified Opportunity Zone Businesses.
Impose non-reporting penalties on QOFs ($10,000 for smaller QOFs and $50,000 for larger QOFs up to maximum penalty limits).
Increase non-reporting penalties for intentional disregard of reporting requirements.
The tax provisions applicable for “The One, Big, Beautiful Bill” have been released by the Ways and Means Committee for mark-up on May 13 at 2:30 p.m. EDT. The industry may have opportunities to help with substantive suggestions if the bill passes the House and makes its way to the U.S. Senate. In the Senate, the chairs of the Senate Finance Committee and the House Banking Committee are both proponents of the impact of Qualified Opportunity Zones nationwide and support meaningful reform for the incentive.
Income Not Recognized on Jail Funds Invested in Ponzi Scheme
A former Sheriff of Morgan County, Alabama, purchased an 18-wheeler truck full of corn dogs for $500 and fed the corn dogs to inmates at each meal. He did so because in Alabama, the State provided each county sheriff with a monthly food allowance for each of their prisoners. The sheriff could keep any surplus but was responsible for any shortfall in feeding the prisoners.
The inmates filed a class action lawsuit alleging inhumane treatment. In 2008, the Court ordered the county to provide a nutritionally adequate diet to inmates and directed the Sheriff to maintain a separate account for jail food money.
When Ana Franklin was elected Sheriff of Morgan County, Alabama, in November 2011, she gained authority over the jail food money bank account. In 2015, the jail population doubled due to an increase in methamphetamine arrests, changes in Alabama sentencing law and the closure of municipal jails. Sheriff Franklin was concerned that because of the increase in the jail population, she would lack adequate funds to feed the inmates.
Sheriff Franklin’s boyfriend and county police officer, Steve Ziaja, told the her that she could lend $150,000 to Priceville Partners, LLC for 30 days and earn 17% interest. Mr. Ziaja offered to serve as guarantor for the loan. In June 2015, the Sheriff withdrew $155,000 from the jail food money bank account. She delivered $150,000 to Priceville Partners, LLC as a loan and retained $5,000 in the office safe as petty cash.
The loan to Priceville turned out to be part of a Ponzi scheme. Priceville Partners, LLC closed in November 2015 and filed bankruptcy in March 2016. In December 2016, Mr. Ziaja made good on his guarantee and repaid the $150,000 to the Sheriff who then returned the money to the jail food money bank account.
In January 2017, after learning that the Sheriff removed money from the jail food account, the class action members filed a motion for contempt. The Court found the Sheriff to be in civil contempt and sanctioned her $1,000. In December 2018, the Department of Justice filed charges against the Sheriff for willful failure to file her personal income tax return. The Sheriff pleaded guilty and was sentenced to 24 months’ probation. The IRS then issued a Notice of Deficiency asserting that the $155,000 removed from the jail food money bank account constituted taxable income as proceeds from embezzlement.
In Franklin v. Commissioner, T.C. Memo 2025-8, the Court ruled that the $155,000 was not taxable income. The Court reasoned that the withdrawal was an unauthorized loan since there was a consensual recognition of an obligation to repay the funds and not embezzlement. The Court relied on the facts that the loan was actually repaid; that the Sheriff was never charged criminally with embezzlement; that the Sheriff was only held in civil contempt and fined $1,000; and that the Sheriff was motivated to increase the jail food money bank account to properly feed the inmates. The Court declared that the Sheriff received no accession of wealth because she had a corresponding obligation to repay the funds back to the jail food money bank account.