Senate Passes One Big Beautiful Bill Including Pass Through Entity Relief

Forbes

01-07-2025

The Senate passed their amended version of the One Big Beautiful Bill today, in a vote of 50-50 with Vice President Vance casting the tie-breaking vote. Republican Senators Rand Paul, Susan Collins, and Thom Tills voted no. The bill must now be passed by the House of Representatives, where only three Republican votes can be lost.
WASHINGTON, DC - JULY 1: (EDITOR'S NOTE: Alternative Crop) Senate Majority Leader John Thune (R-SD) ... More (C), accompanied by Sen. John Barrasso (R-WY) (L) and Sen. Mike Crapo (R-ID) (R), speaks to reporters off the Senate floor after the Senate passes President Donald Trump's so-called "One, Big, Beautiful Bill," Act at the U.S. Capitol Building on July 1, 2025 in Washington, DC. U.S. Vice President J.D. Vance was the tie-breaking vote as President Donald Trump's so-called "One, Big, Beautiful Bill," Act passes in the Senate. (Photo by)
House leadership has indicated that they will vote on the bill tomorrow. If the House passes the Senate version, it will go to the President for his signature. If the House makes any changes to the bill, it will have to go back to the Senate for approval.
While both the House and Senate bills proposed language that was extremely harmful to the pass-through entity community, the final Senate bill passed made significant modifications that will encourage continued investments via pass through entities.
Pass Through Entity Tax (PTET) Payments: While both the House and the original Senate bill limited PTET deductions, no such language was included in the final bill passed by the Senate. In the original bill, the Senate has limited PTET payments to the greater of $40,000 or 50% of the PTET payment made. The removal of the language in the final Senate bill is a welcome relief, confirming that entity type should not dictate whether state and local taxes are deductible.
The Senate bill, similar to the House bill, increases the individual state and local tax (SALT) cap from $10,000 to $40,000 staring in 2025. However, the SALT cap would be reduced for taxpayers with modified AGI over $500,000, but the overall SALT deduction cannot go below $10,000 ($5,000 for MFS). If a married filing joint taxpayers modified AGI exceeds $600,000, the SALT cap would be $10,000. Under the Senate bill passed, PTET deductions do not fall under the SALT cap, and would be fully deductible.
Excess Business Loss (EBL) Provision: Both the House and the original Senate bill required that any EBL limitations be carried forward to the following year, and again included in the excess business loss limitation calculation. This is different from the current law, that allows for any excess business loss to be considered a net operating loss, and carried forward for use in future years. The original proposals essentially limited individual taxpayers and only allowed EBL carryforwards to be utilized on trade or business income.
The bill passed by the Senate makes the EBL provisions permanent, but does not require the EBL to be carried forward in the EBL calculation for the following year. Instead, the bill would allow for the current law to remain and an EBL to be characterized as a net operating loss. The net operating losses can offset future year up to 80% of total taxable income in future years.
Section 199A: The final Senate bill makes permanent the 199A deduction, and provides for a 20% deduction for taxable years beginning after December 31, 2025. The House bill provided for an increase in the 199A deduction to 23%.
The 199A deduction is eventually phased out for specified service trades or businesses (SSTBs) when an owner's taxable income exceeds a certain threshold amount. Trades or businesses that are subject to this phase-out include businesses involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics or financial services.
Current law starts to phase-out a SSTB's 199A deduction when taxable income exceeds $100,000 for married filing joint taxpayers ($50,000 for all others). The Senate bill would increase the threshold amount to $150,000 for married filing joint taxpayers ($75,000 for all others).
In addition, the Senate bill provides for a $400 minimum 199A deduction if a taxpayer materially participates in a qualified trade or business and has income of at least $1,000. The Senate bill would enact these changes for taxable year beginning after December 31, 2025.