Tax and Spending Bill: What It Is, What It Means for Businesses

On July 3 and one day before the president's self-imposed deadline, the U.S. House of Representatives passed the tax and spending bill, formerly known as the "One, Big, Beautiful Bill Act." Similar to the first go-round in the chamber, as well as to that in the Senate, the bill met with challenges from deficit hawks and those opposed to the cuts in America's health care and food safety nets, Medicaid and SNAP, respectively.

The bill, which passed 218-214 almost entirely along party lines, was signed into law on July 4.

Several weeks ago, the House passed the bill by a single vote, while the Senate bill required the vice president to break a tie with his vote. This vote by the House occurred after the language between the bills was reconciled to match one another.

What Is the Tax and Spending Bill?

The tax and spending bill is tax and domestic policy proposals combined into one bill to utilize the reconciliation process. This process allows the Senate to pass the bill with a simple majority of 51 votes, avoiding a filibuster.

Using one large legislative package also recognizes the current political environment in the United States, including slim majorities in both chambers of Congress that would make individual bills more difficult to pass. Detractors in both parties wanted more cut from a bill that the Congressional Budget Office projects could add $3.3 trillion to the deficit over the next 10 years.

The original name, dubbed the "One, Big, Beautiful Bill Act" by the president, had to be removed after the Parliamentarian decided that it didn't follow the rules.

What Will the Tax Bill Do for Businesses?

The bill extends or makes permanent many of provisions in the Tax Cuts and Jobs Act of 2017, the president’s key legislation from his first term.

This article focuses on six proposals in the Senate bill that could alter the small business landscape:

• Pass-through deduction
• SALT cap
• Bonus depreciation
• Research and development (R&D) expensing
• Green energy tax credits
• No taxes on tips and overtime

What Will Become of the QBI/Pass-Through Deduction?

The qualified business income (QBI) or 199A pass-through deduction allows entities that don’t pay corporate income tax, including but not limited to S corporations, limited liability companies (LLCs), and sole proprietorships to deduct a percentage of their QBI from their personal income taxes.

The rate is currently 20%, and that's the amount the bill makes permanent. The vastly different proposals by the two chambers could not be reconciled, with the House wanting to raise it to 23%, while the Senate proposed including a $400 minimum deduction for those with at least $1,000 in QBI from the trades with no increase to the rate.

Part of the TCJA of 2017, the deduction — a significant one for small- and medium-sized businesses — was scheduled to sunset at the end of 2025.

What Will Change About the SALT Cap?

Ever since the federal government placed a $10,000 cap on the deduction for state and local taxes (SALT), state governments in high-tax states such as California, New Jersey, and New York have enacted workarounds such as pass-through entity taxes. PTETs provide an opportunity for partnerships and S corps to pay state income tax at the entity level, which creates a business deduction and a workaround for the SALT cap.

The final bill calls for a temporary SALT limit of $40,000 starting in 2025, which would begin to phase out after $500,000 of income. Those amounts would increase by 1% annually through 2029, at which time the cap would revert to $10,000 in 2020.

The House and Senate proposals each had a $40,000 cap, but the House wanted it to become permanent and the Senate version offered a five-year window.

Restoring Bonus Depreciation to 100%

The Senate version ultimately was adopted as bonus depreciation was made permanent. The bill restored the 100% bonus depreciation for qualified assets, moving away from the current law that has a phase-down process until the percentage hit zero in 2027. The House also proposed to restore bonus depreciation to 100%, but only temporarily until 2029.

The new law will allow full and immediate expensing of new and used equipment with the aim of lowering after-tax cost of capital business expenses. This makes purchasing equipment and machinery more attractive to businesses – even in the current lending environment where loan rates from banks are at 7.5% or higher – and serves to spur the economy.

How Could R&D Expensing Change?

Research and development is a key economic driver, so it has bipartisan support. Plus, technology companies in this AI-forward environment are pushing to maintain a competitive edge in the global market, so reducing the cost of R&D activities leaves more cash on hand to invest in research and development.

The final bill passed on July 3 restores R&D expensing to 100% and includes retroactive relief to 2022 for small businesses. This changes the TCJA of 2017 from the president's first term, which required businesses to amortize R&D costs. This was included in the Senate version of the bill, while the House version proposed restoration for expensing on domestic R&D, but only through 2029.

What Are the Green Energy Tax Credit Rollbacks?

The Inflation Reduction Act (IRA) created or expanded many green energy tax credits, including one for installing solar and wind storage, while another provided credits for investing and producing clean electricity or clean fuel.

The tax and spending bill phases out credits for those wind and solar, with projects potentially requiring to be in service by the end of 2027 to qualify for the full tax credit. There also could be penalties on businesses whose projects use components from countries the administration has labeled "a concern" - an obvious reference to China and its manufacturing of solar panels and more.

The bill also could scale back or eliminate altogether consumer subsidies for electric vehicles and other energy-efficient technology. With the future of clean energy development in the United States thrown into uncertainty, many businesses that invested time and money into its development and implementation based on the long-term incentive structures in place until the signing of the bill into law will be impacted.

How Would No Taxes on Tips and Overtime Work?

The president campaigned on no taxes on tips and overtime, and both chambers of Congress responded by ensuring it was part of their proposed bills. The final bill leaned toward the Senate version, which was far less generous to service and hourly workers. The annual cap will be $25,000 on qualified tips (those received in a traditionally tipped industries — e.g., restaurants) that can be deducted from federal taxable income from 2025 through 2028. There also is a phase-out for individuals making an adjusted gross income of $150,000.

The overtime cap is even lower; $12,500 annually. It also is only available through 2028.

Paychex Can Help Businesses Navigate Change

The implications of this legislation would impact businesses of all sizes, affecting their processes involving payroll, taxes, and compliance requirements. Working with a trusted leader such as Paychex helps businesses make the required necessary adjustments to their workplace processes.