The US House of Representatives on May 22, 2025 passed the One Big Beautiful Bill Act (the Act), which includes a tax package that would extend certain provisions of the 2017 Tax Cuts and Jobs Act set to expire at the end of 2025 and introduces additional significant changes to current US federal tax law. In its current form, the Act would have meaningful economic consequences for a broad range of US market participants, including, in particular, those in the energy industry, the investment funds industry, the tax-exempt organization sector, and the sports industry. The Act is now under consideration by the US Senate. At this time, it is unclear what changes the US Senate may seek to make to the Act.
This LawFlash highlights, in summary form, select key provisions of the Act that are of interest to US market participants and discusses potential implications of certain of those provisions.
The current version of the Act would significantly curtail both residential and commercial clean technology tax benefits enacted or enhanced by the Inflation Reduction Act of 2022 (the IRA).
For IRA consumer tax benefits, the Act would cause credits available for renewable energy and energy-efficient consumer goods to rapidly expire. Currently available for goods generally purchased or placed in service prior to 2033, the Act would cause most consumer tax credits to expire at the end of 2025. An additional year would be allowed for tax credits for new electric vehicles and new-build energy-efficient homes, sunsetting at the end of 2026, subject to certain limitations. The Act would also allow an exception for commercial electric vehicles that are placed in service before 2033 if acquired pursuant to a binding written contract that was entered into before May 12, 2025.
For IRA commercial tax benefits, the Act would limit both clean technology deployment and manufacturing tax credits through accelerated sunsetting of the credits, as well as through new credit eligibility restrictions relating to the involvement of “prohibited foreign entities.” The Act would also, in certain cases, eliminate or sunset the ability to monetize credits through transferability (i.e., selling credits for cash).
For clean electrical generation facilities (e.g., wind, solar, geothermal, or hydroelectric) and energy storage facilities, the current potentially permanent production- and investment-based tax credits would rapidly expire under the Act, including as a result of a requirement to have “begun construction” within 60 days of the Act’s enactment. Nuclear facility credits would receive extended sunsetting schedules, although even these extended eligibility standards would be challenging to meet for new advanced nuclear reactors under current technological, industry, and market conditions.
For clean fuel production, the clean hydrogen credits would terminate for facilities that have not “begun construction” before 2026 (as compared to the current law’s 2033 standard). The more general clean fuel production credits’ expiration would be extended from December 31, 2027 to December 31, 2031.
The Act would terminate the advanced manufacturing credit for the production of clean technology equipment one year earlier than under current law (expiration after 2031 instead of 2032). The Act would subject the credit for the production of critical minerals to this sunset provision instead of the current permanent credit.
The Act would also establish a new, separate sunset schedule for the ability to transfer clean fuel production credits, advanced manufacturing credits, certain nuclear credits for preexisting facilities, and carbon capture, utilization, and storage credits.
Finally, the Act would establish novel credit eligibility restrictions based on ownership, financing, construction, and operational type involvement of a “prohibited foreign entity.” These rules would impose a significantly expanded version of the current “foreign entity of concern” restrictions applying to CHIPS Act semiconductor production facility tax credits and electric vehicle tax credits. As little as 10% direct or indirect ownership by a “prohibited foreign entity,” including an entity organized under the laws of North Korea, China, Russia, or Iran, can invalidate a tax credit.
Additionally, under a “material assistance” limitation, certain types of credits can be invalidated if equipment or a project includes any component, subcomponent, or critical minerals extracted, processed, recycled, manufactured, or assembled by a “prohibited foreign entity.” Certain credits can also be invalidated or even recaptured (over an extended 10-year recapture period) if a facility owner makes payments of dividends, interest, compensation for services, rentals, or royalties and guarantees to “prohibited foreign entities” exceeding prescribed thresholds.
From a market perspective, while the clean technology industry had been expecting forthcoming legislation to limit IRA tax benefits, the magnitude of the Act’s accelerated wholesale explicit or implicit repeal of many of these benefits was unexpected by the industry. For renewable energy and storage developers in particular, the focus on implementing procurement- or construction-based “begun construction” strategies for their in-development pipeline has redoubled in order to obtain “safe harbor” treatment vis-à-vis the Act’s potential credit eligibility sunset requirements.
Across technologies and credits, the potential breadth of the “prohibited foreign entity” restrictions has caused concern that they would operate as an effective immediate or further accelerated repeal of IRA tax benefits from the Act’s stated credit eligibility sunset dates. As proposed, these rules can eliminate or cause recapture of credits even for companies that have no “prohibited foreign entity” direct or indirect equity ownership. For example, the proportion of a company’s debt owned by “prohibited foreign entities” can trigger the Act’s credit-nullifying restrictions.
Also, subject to a particularly limited exception, credits can be invalidated if any material included in creditable property was produced by a “prohibited foreign entity,” tested down to the extraction of critical minerals. The Act is accordingly causing manufacturers and developers to reassess and make plans to reconfigure their entire supply chain, operational, and financing structures to navigate potential “prohibited foreign entity” constraints to obtaining their expected credits.
Summary
Detailed Description of Section 899
Section 899 imposes an increased rate of US tax on targeted income paid to “applicable persons” in “discriminatory foreign countries.”
“Applicable persons” include the following:
“Discriminatory foreign countries” include any foreign country that has one or more “unfair foreign taxes,” such as an undertaxed profits rule (UTPR) of the sort to be enacted under the Organisation for Economic Co-operation and Development’s (OECD’s) Pillar Two proposal, a digital services tax (DST), a diverted profits tax, and, to the extent provided by Treasury, an extraterritorial tax (as defined in the statute), discriminatory tax (as defined in the statute), or any other tax enacted with a public or stated purpose indicating the tax will be economically borne by US persons. The statute requires Treasury to publish a list of the jurisdictions that impose such taxes. Based on the statutory definitions, this list could include most European countries (including the United Kingdom), many countries in the Asia Pacific region, Canada, as well as additional jurisdictions. The accompanying Joint Committee on Taxation Report (JCT Report) cites the United Kingdom and Austria as examples of countries with DSTs. [2]
Section 899 provides an exception to “unfair foreign taxes” for a tax that does not apply to a US person or to any foreign corporation if the foreign corporation is a controlled foreign corporation and majority-owned by US persons.
Funds that are treated as corporations for US tax purposes and directly or indirectly majority-owned by non-US persons located in discriminatory foreign countries will be the most heavily impacted funds, even if the funds include entities in their structures that are not in discriminatory foreign countries. For example, a “blocker” entity organized in the Cayman Islands that facilitates investment into the US by investors who wish to be blocked from ECI and that is owned predominantly by ECI-sensitive foreign investors in discriminatory foreign countries could be subject to these rate increases on target income, even though the Cayman Islands would not be expected to be a discriminatory foreign country. Investors in such entities would in turn bear a reduction in their distributable proceeds commensurate with these higher taxes.
The potential application of Section 899 to funds organized as foreign partnerships for US tax purposes is subject to the issuance of guidance by Treasury as to the extent such partnerships would be viewed as applicable persons. One possibility, although this is not set forth in the statutory language or discussed in the guidance provided so far, is that rules similar to those that apply currently with respect to FDAP and other US source income would apply with respect to a foreign partnership, requiring looking through the partnership to the partners allocated such income to determine whether such partners are applicable persons subject to additional tax under Section 899.
Under Section 899, the otherwise applicable rate of tax increases for applicable persons in discriminatory foreign countries by a defined percentage depending on the targeted income. The increases are staggered over a period of years, generally beginning with a 5% increase in the first year and increasing by an additional 5% per year for a total capped increase of 20% above the statutory rate.
Targeted income includes the following:
To the extent tax is collected through withholding, commensurate increases would apply to withholding tax rates. For example, FIRPTA withholding is subject to a statutory rate of 15%, which rate could increase to 35%.
These rate increases apparently are meant to apply to reduced and exempted tax treaty rates as well as the statutory rates. Although the statute does not directly address treaty overrides, both the JCT and House Reports suggest that reduced treaty rates are still subject to the Section 899 tax increases. [3] In the case of income subject to a reduced treaty rate, the maximum increase in tax rate of 20% is based on the statutory rate rather than the reduced treaty rate. For example, if a FDAP dividend (subject to a 30% tax rate without regard to a treaty rate reduction) is subject to a 15% rate under a treaty, the rate could increase to 50% (rather than to 35%).
While the House Report indicates that portfolio interest remains excluded from the increased tax, [4] Section 899 itself does not explicitly state this, meaning the protection is not legally guaranteed under the current formulation of Section 899 contained in the Act.
Capital gain is not impacted by Section 899 as long as it is not included in the categories above (e.g., the gain is not FDAP, FIRPTA gain, ECI, or investment income of a private foundation). Thus, non-US investors may generally continue to sell investments in US capital assets (other than US real estate) at a gain without incurring US tax (e.g., gain upon selling US public company stock).
Application to Foreign Governments
Under current law, Section 892 exempts from US federal income tax the income of foreign governments derived from US stocks, bonds, and other securities, provided the income is not derived from commercial activities. If enacted in the form set forth in the Act, Section 899 would turn off the exemption provided to foreign governments under Section 892, thereby subjecting foreign governments to generally applicable rates. Thus, foreign government investors of discriminatory foreign countries could see increases in tax rates far greater than 5% on certain categories of income (e.g., dividend and interest income) that under current law are exempt from taxation for those investors.
Application to Foreign Pension Funds
Under current law, Section 897(l) provides an exemption from FIRPTA for qualified foreign pension funds. Section 899, in the form set forth in the Act, does not appear to modify this exemption. However, to the extent a foreign pension fund relies on treaty benefits for purposes of reducing withholding rates on US-sourced interest or dividend income, Section 899 in its current form would likely cause withholding rates on such US-sourced income to increase, as described above, if a pension fund is resident in a discriminatory foreign country.
Additionally, a foreign pension fund may hold investments in the US in branch form and may pay tax on ECI. If the foreign pension fund takes the position that it is a foreign complex trust and, therefore, subject to tax as a nonresident alien for US tax purposes, Section 899 may not result in increased taxation on such a foreign pension fund’s ECI because the application of increased rates on ECI of nonresident aliens is limited to FIRPTA gains, for which a foreign pension fund may be able to rely on the “qualified foreign pension fund” exemption of Section 897(l).
Application to Regulated Investment Companies
In the case of distributions from regulated investment companies, Section 899, if enacted in the form set forth in the Act, would affect the taxation and withholding on distributions made to applicable persons as described above, unless the distributions are otherwise exempt from withholding (e.g., a regulated investment company’s interest-related dividends or short-term capital gain dividends that qualify for the statutory exemption under Section 871(k) of the Code and its capital gain dividends).
Expansion of the BEAT
Section 899 would significantly expand the scope of the existing base erosion anti-abuse tax (BEAT) through the introduction of a new regime referred to as the “Super BEAT.” This enhanced regime would apply to both domestic and foreign corporations that are more than 50% owned (by vote or value) by applicable persons (defined above).
Key changes under Section 899 include an increase in the tax rate from the current 10% rate under BEAT to 12.5% under the Super BEAT, a significant broadening of the tax base of the Super BEAT as compared to the BEAT, amplifying its impact, and the removal of the gross receipts and base erosion percentage thresholds that are used to determine the BEAT’s application.
By eliminating the gross receipts and base erosion percentage thresholds, the Super BEAT could apply to corporations that, under current law, would not be subject to the BEAT. For example, funds often use blocker entities to shield unrelated business taxable income within the meaning of Section 512 (UBTI) and ECI from investors sensitive to such types of income.
Under existing BEAT rules, such entities are not typically subject to the BEAT due to the above-noted thresholds. However, if a blocker is predominantly owned by foreign persons resident of jurisdictions that impose unfair taxes, it could fall under the Super BEAT, which will not consider such thresholds in its application.
Effective Date
If enacted in the form set forth in the Act, Section 899 will be effective during the calendar year beginning on or after the latest of (1) 90 days after the Act’s enactment, (2) 180 days after the enactment of an unfair foreign tax that causes a country to be treated as a discriminatory foreign country, or (3) the first date that an unfair foreign tax of such country begins to apply. Therefore, if Section 899 is enacted on or prior to October 3, 2025, it will become effective on January 1, 2026 for foreign countries that already apply a UTPR, DST or diverted profits tax, or apply other taxes that Treasury determines are unfair foreign taxes.
Tax-exempt organizations are particularly impacted by the following provisions in the Act.
Private Foundations and Public Charities
Executive Compensation Excise Tax
Section 112020 of the Act would expand the coverage of the Section 4960 excise tax on compensation in excess of $1 million paid to employees of an applicable tax-exempt organization (ATEO) by removing the current cap that limits Section 4960’s application to an ATEO’s five highest compensated employees.
The version of the Act passed in the House omits a provision in the original bill that would have further expanded the scope of Section 4960 to cover employees of certain related organizations to the ATEO without regard to whether they had involvement with the ATEO, as well as employees of certain governmental entities. This provision would apply to taxable years beginning after December 31, 2025.
Private Foundation Net Investment Income Excise Tax
Section 112022 of the Act would increase the excise tax rate on net investment income of certain private foundations under Section 4940. This proposal would replace the current flat excise tax rate of 1.39% with a tiered rate structure on a graduated basis with a rate of 1.39% for foundations with assets below $50 million, 2.78% for foundations with assets between $50 million and $250 million, 5% for foundations with assets between $250 million and $5 billion, and 10% for foundations with assets of $5 billion or more.
For purposes of determining the applicable excise tax rate, the assets and net investment income of certain related organizations would be treated as the assets and net investment income of the foundation. This provision would apply to the taxable years beginning after the date of the enactment of the Act.
Private Foundation Excess Business Holdings Tax
Section 112023 of the Act would provide that repurchases of stock from a retiring employee who participated in the employee stock ownership plan would be treated as outstanding for purposes of the foundation tax on excess business holdings. This provision would apply to the taxable years ending after the date of the enactment of the Act and to purchases by a business enterprise of voting stock in taxable years beginning after December 31, 2019.
Unrelated Business Taxable Income
Transportation Fringe Benefits Tax
Section 112024 of the Act would increase the unrelated business taxable income (UBTI) of a tax-exempt organization by including the amount paid or incurred for any qualified transportation fringe benefit or any parking facility used in connection with qualified parking. This provision would bring back the “parking tax” that was enacted in 2017 and subsequently repealed in 2019. Unlike the prior legislation, this version would create an exception for churches. This provision would apply to amounts paid or incurred after December 31, 2025.
UBTI from Certain Research Income
Section 112025 of the Act would narrow the Section 512(b)(9) research exclusion from UBTI available to fundamental research institutions to income from research that is publicly available. This provision would apply to amounts received or accrued after December 31, 2025.
Colleges and Universities
Endowment Excise Tax on Certain Private Colleges and Universities
Section 112021 of the Act would increase the excise tax on net investment income of certain private colleges and universities under Section 4968 by creating a tiered rate structure based on “student-adjusted endowment” size, which is effectively the institution’s endowment assets per eligible student.
A rate of 1.4% would apply for institutions with a student-adjusted endowment between $500,000 and $750,000, 7% for institutions with a student-adjusted endowment between $750,000 and $1.25 million, 14% for institutions with a student-adjusted endowment between $1.25 million and $2 million, and 21% for institutions with a student-adjusted endowment of more than $2 million. This provision would apply to taxable years beginning after December 31, 2025, and it includes an exemption for religious institutions.
Charitable Giving
Floor on Corporate Charitable Contributions
Section 112027 of the Act would establish a 1% floor for the deductibility of corporate charitable contributions. This provision would modify Section 170(b)(2)(A) to provide that any charitable contribution made by a corporation is deductible only if the contribution exceeds 1% and is not greater than 10% of the corporation’s taxable income. This provision would apply to taxable years beginning after December 31, 2025.
Charitable Deduction for Nonitemizers
Section 110112 of the Act would amend Section 170(p) to provide an above-the-line charitable contribution deduction for individuals who do not elect to itemize deductions (up to $150 for single filers and $300 for married joint filers). This provision would apply to taxable years beginning after December 31, 2024.
The Ways and Means Committee draft of the tax package also contained proposals notable to the tax-exempt organizations sector that were later excluded from the Act, including provisions that would (1) modify Sections 512(b) and 513 to treat royalties from the licensing of an exempt organization’s name and logo as UBTI and (2) amend Section 501(p) to provide for suspension of the tax-exempt status of organizations designated by the Secretary of the Treasury as having provided material support or resources to organizations otherwise designated by the US government as terrorist organizations.
The Act would limit the amortization deduction available for intangible assets acquired in the purchase of a professional sports franchise. Specifically, the Act would cap the amount of intangible asset basis that can be amortized to 50% of the total adjusted basis of those assets. This limit would apply to intangibles like player contracts, team names, logos and trademarks, media rights, franchise rights, and goodwill. This rule would apply to acquisitions occurring on or after the date of enactment of the Act.
Changes to the State and Local Tax Deduction Cap and Pass-Through Workaround
The Act raises the federal cap on the state and local tax (SALT) deduction to $40,000 for joint filers (and $20,000 for single filers) starting in 2025, an increase from the current $10,000 cap. The deduction would be gradually reduced for single taxpayers with modified adjusted gross income (MAGI) of over $250,000 and for married taxpayers with MAGI of $500,000, with a floor of $5,000 and $10,000, respectively. For tax years between 2026 and 2033, the limits would be increased by 1% per year, and the cap would remain at the 2033 amount for subsequent tax years.
At the same time, the Act eliminates the pass-through entity tax (PTET) workaround for businesses that are ineligible for the Section 199A deduction, which permitted owners of pass-through businesses (e.g., partnerships and S corporations) to bypass the SALT cap by paying state income tax at the entity level and claiming a federal deduction. That workaround, created by Notice 2020-75, would not be available to any pass-through business that performs services in any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees (e.g., health, law, accounting, consulting, financial services, etc.).
New Penalty for SALT Mismatch in Partnership Reporting
The Act adds new Section 6659, which creates a new penalty for individuals who receive a mismatched SALT benefit from pass-through entities—including partnerships—that pay state and local taxes. This rule targets mismatches between the state or local tax claimed at the entity level and the allocation of income or loss to partners for state tax purposes.
A SALT allocation mismatch occurs when the state tax benefit claimed (e.g., a credit or deduction at the partner level) exceeds the individual’s share of the partnership's SALT payment reported as income (or adjustment). The penalty equals the highest individual income tax rate multiplied by the amount of the mismatch. As an example, if a partnership pays $1 million in state taxes and a partner gets a $400,000 deduction (due to allocations) but only picks up $100,000 of SALT-related pass-through income, the mismatch is $300,000. If the top rate is 39.6%, the penalty would be $118,800.
Expansion of Public Law 86-272 Protection
Public Law 86-272 has protected out-of-state sellers of tangible personal property from state income tax if their only activity in that state is the “solicitation of orders” for tangible personal property. The Act expands the protection by amending Public Law 86-272 to define “solicitation or orders,” which is currently not defined, to include “any business activity that facilitates the solicitation of orders even if that activity may also serve some independently valuable business function apart from solicitation.” The resulting expansion of protections could invalidate decades of state guidance and rulings on this issue.
In addition to the features discussed above, the Act would make other specific changes that would have a broad impact across industry sectors.
In addition to extending the reduced individual and corporate tax rates from the 2017 Tax Cuts and Jobs Act, the Act would make the following notable changes:
There are a number of important tax provisions that are not included in the Act, which warrant further monitoring as the US Senate takes up the bill, including the following:
As the legislative process continues, we will be monitoring changes to the Act. Our team is available to discuss the implications of the Act with market participants in greater detail, based on market participants’ unique situations.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following:
*A solicitor of Morgan Lewis Stamford LLC, a Singapore law corporation affiliated with Morgan, Lewis & Bockius LLP
[1] Unless otherwise noted, “Section” references are to sections of the Internal Revenue Code of 1986, as amended.
[2] Joint Committee on Taxation, Description of the Tax Provisions of the Chairman’s Amendment in the Nature of a Substitute to the Budget Reconciliation Legislation Recommendations Related to Tax (JCX-21-25) (“For example, the United Kingdom’s DST imposes a two-percent tax on the revenue from online marketplaces, search engines, and social media platforms which derive value from United Kingdom users. Austria’s DST imposes a five percent tax on revenues from digital advertisement services.”) (May 12, 2025).
[3] US House of Representatives, Report of the Committee on the Budget House of Representatives (To Accompany H.R. 1) together with Minority Views Book 2 of 2 (119-106), (the House Report), footnote 1533 states that “certain categories of income that are subject to a reduced or zero rate of tax in lieu of the statutory rate, such as amounts that are exempted or subject to a reduced or zero rate of tax under a treaty obligation” would be subject to the increases (May 20, 2025).
[4] The House Report states that “[b]ecause the provision only increases the specified rates of tax, it does not apply to income that is explicitly excluded from the application of the specified tax. Thus, for example, the provision does not apply to portfolio interest, to the extent that portfolio interest [under Section 871(h)] is excluded from the tax imposed on FDAP income.”