“One, Big, Beautiful” Tax and Spending Bill: What It Is, What It Means, and Updates

The Senate cleared a significant hurdle to meet the president’s self-imposed deadline to have a tax and spending bill – also referred to as the “One, Big, Beautiful Bill Act” – on his desk by July 4 to sign into law. After passing the House of Representatives on party lines by a single vote, the Senate picked up deliberations but after losing three GOP votes, the vice president cast a tie-breaking vote to pass the bill and send it back to the House of Representatives.

What Is the Big, Beautiful 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.

The Senate bill originally had five Republican detractors, including deficit hawks who 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. Two were swayed to vote for it after four days of deliberations, side meetings, and presidential pressure.

The last hurdle remains, though, before it can go to the president’s desk and be signed into law. The Senate made key changes from the House bill that now require the bill’s language to be reconciled, and this is a bill that only passed the House originally by one vote.

What Could the Tax Bill Do for Businesses?

The bill’s goal is to extend or make 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%, but the House bill proposed raising it to 23%. The Senate’s proposal is more modest in its expansion, 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 — is scheduled to sunset at the end of 2025 unless extended.

What Is the Debate 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. PTETs could impact those in the service trades by limiting their ability to benefit from PTETs, according to the American Institute of CPAs (AICPA).

The House proposed raising the cap to $40,000 with an income-based phase-out, which would give relief to businesses in high-tax states. The Senate bill proposes raising the cap to $40,000 temporarily through 2029 for married couples with incomes up to $500,000 and would increase by 1% annually to adjust for inflation. The cap would then return to $10,000 in 2030.

Restoring Bonus Depreciation to 100%

The Senate took an all-or-nothing approach to bonus depreciation in the hopes of incentivizing immediate business investment. Their proposal would permanently restore the 100% bonus depreciation for qualified assets, moving away from the current law that phases down the percentage — it is 40% in 2025 — until it is done in 2027.

The House also proposed to restore bonus depreciation to 100%, but only temporarily until 2029.

The goal is to 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 Senate proposed a significant change from the TCJA, opting to allow businesses to fully expense domestic R&D costs immediately. The TCJA requires businesses to amortize R&D costs. The Senate proposal also calls for retroactive relief for costs incurred between 2022-24. The House version of the tax and spending bill proposed immediate restoration for expensing on domestic R&D, but only through 2029.

What Are Potential 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 Senate proposes a slower phase-out of credits in the IRA, while the House proposed a clean sweep of phasing out clean energy tax credits much quicker.

Either way, the future of clean energy development in the United States has been thrown into uncertainty, which impacts many businesses that invested time and money into its development and implementation based on the long-term incentive structures that the Senate proposes to end.

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 Senate version proved to be far less generous to service and hourly workers as proposed limitations introduced include a $25,000 annual cap 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 but there are income limitations as to who can claim.

The House proposed an unlimited above-the-line deduction for tips and overtime pay over the same period as the Senate — 2025 through 2028, with 2025 being retroactive to the start of the year.

Paychex Can Help Businesses Navigate Change

Paychex will continue monitoring the process. 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 can help businesses make the required necessary adjustments to their workplace processes.