The Senate’s Opening Move: Key Takeaways from the First Draft

By Richard Lowry, Managing Director, Wealth Strategy

On June 16, the Senate Finance Committee released its updated draft of the Republican tax bill, introducing several notable departures from the version narrowly passed by the House on May 22. The Senate proposal includes a mix of taxpayer-friendly provisions and more restrictive measures, each with the potential to significantly influence tax planning strategies.

Republican lawmakers are aiming to finalize the reconciliation package before their self-imposed July 4 deadline, though that timeline appears increasingly uncertain. As the Senate prepares for a potential floor vote, internal negotiations remain complex. Republican Party leaders must not only reconcile differences within their own caucus but also craft a version that can ultimately win approval in the House once again.

While the Senate draft marks a major step forward, it remains a work in progress. Substantive negotiations are expected to continue right up until a final vote is scheduled, leaving the bill’s ultimate shape, and its impact on taxpayers, still in flux.

Below, we outline key takeaways from the Senate’s latest draft bill and explore the planning considerations these proposed changes may trigger. For a detailed breakdown of the bill’s major provisions, please refer to the comprehensive summary provided at the end.

Section 1202 (QSBS) Overhaul: Phased Exclusions and Heightened Exemptions

The Senate Finance Committee’s version of the One Big Beautiful Bill Act (OBBBA) proposes a substantial expansion of the qualified small business stock (QSBS) exclusion under Internal Revenue Code (IRC) section 1202. Unlike the House-passed version, which did not address QSBS, the Senate draft introduces a tiered gain exclusion structure: 50% for QSBS held at least three years, 75% for four years, and 100% for five years. These changes apply only to stock issued or acquired on or after the date of enactment, and the requirement that shares be “originally issued” by a C-corporation remains unchanged. As a result, the new rules are not retroactive and do not affect shares issued before enactment. However, newly issued C-corporation shares, or shares issued following a qualifying conversion of a partnership or S-corporation, would be eligible, provided the conversion occurs after the enactment date. Given these eligibility requirements, thoughtful planning around entity structure and timing will be important to ensure taxpayers can fully benefit from the new provisions.

The proposal also raises the per-issuer gain exclusion cap from $10 million to $15 million, with annual inflation adjustments. Once the per-issuer exclusion amount has been fully utilized, the taxpayer is no longer eligible for additional inflation adjustments. Additionally, the Senate bill would expand the definition of a “qualified small business” by increasing the aggregate gross asset threshold from $50 million to $75 million, also indexed for inflation. This update would broaden eligibility to include a larger group of growing businesses that may have previously exceeded the existing asset threshold.

A subtle but important nuance in the Senate proposal is its retention of Section 1202’s original reference to the 1993 capital gains tax structure. As a result, for shares qualifying for the 50% or 75% exclusion, the taxable portion remains subject to a 28% capital gains rate plus the 3.8% net investment income tax (NIIT), yielding effective tax rates of approximately 15.9% in year three and 7.95% in year four. While these rates are more favorable than full taxation, they fall short of the full 100% exclusion many investors might expect. Nonetheless, gains excluded under the three- and four-year rules would not be treated as preference items for alternative minimum tax (AMT) purposes, maintaining consistency with the treatment of post-2010 QSBS under current law.

The Senate’s proposed changes to Section 1202 represent a meaningful evolution of the QSBS regime, offering expanded benefits for future investments while preserving key structural requirements. Although the provisions are not retroactive, they present new planning opportunities for investors and founders alike, particularly those considering entity conversions or new equity issuances. Careful attention to timing, structure, and eligibility will be essential to fully leverage these enhanced incentives.

Opportunity Zone Reform: Permanency, 30-Year Gain Exclusion, and Rural Incentives

While the House version of the 2025 tax bill proposed a one-time extension of the opportunity zone (QOZ) incentive beyond 2026, the Senate Finance Committee takes a more expansive approach by making the incentive permanent. In doing so, the Senate bill introduces a series of structural reforms aimed at enhancing the program’s long-term viability and impact.

A central feature of the proposal is the introduction of a recurring 10-year designation cycle for opportunity zones. The first round of new designations would take effect on January 1, 2027, with the selection process beginning in July 2026. Under this framework, capital gains invested in qualified opportunity funds (QOFs) on or after January 1, 2027, would be eligible for deferral until December 31, 2033. This decennial deferral schedule would continue in subsequent years, e.g., gains invested in 2034 would be deferred until 2043. The current December 31, 2026, gain recognition date remains applicable for investments made prior to January 1, 2027.

The bill also revises the basis step-up mechanism. Gains invested in QOFs after January 1, 2026, would qualify for a 10% reduction in taxable gain, phased in over six years: 1% annually for the first three years, 2% in years four and five, and 3% in year six. For rural opportunity zones, the benefit is tripled, resulting in a 30% reduction over the same period. Additionally, the substantial improvement requirement for rural areas would be relaxed, requiring only a 50% investment relative to the property’s cost (down from 100%), and this standard would apply to both new and existing projects. Rural areas are defined as locations outside cities or towns with populations over 50,000 and not part of contiguous urbanized areas.

The proposal also eliminates the current 2047 deadline for the 10-year gain exclusion. Instead, it provides that if a QOF investment is held for more than 30 years, the investor’s tax basis is automatically adjusted to fair market value at the end of that period, effectively excluding all appreciation from taxation, even without a sale. It remains unclear whether this basis adjustment would trigger a new depreciation schedule, which could have implications for real estate investors.

To enhance transparency and oversight, the bill imposes new reporting obligations on QOFs and QOZ businesses. However, the durability of these provisions is uncertain, as similar reporting requirements were removed from the original 2017 legislation during reconciliation.

Despite these enhancements, the bill omits several key elements. Notably, it lacks transition rules for projects located in tracts that lose their QOZ designation in 2027 or in future designation cycles, an omission that could create uncertainty for ongoing developments. The structure of the deferral periods may also unintentionally incentivize investors to delay capital deployment until after each gain recognition date to maximize tax benefits. Additionally, several anticipated provisions were excluded, including the ability for QOFs to invest in other funds, the reinvestment of interim gains during the 10-year holding period without triggering tax, and rules better tailored to operating businesses rather than real estate-focused investments.

The Senate Finance Committee’s proposal marks a significant evolution of the Opportunity Zone program, shifting it from a time-limited incentive to a permanent fixture of the tax code. By introducing a recurring designation cycle, expanding benefits for rural investments, and eliminating the 2047 sunset on gain exclusion, the bill aims to provide long-term certainty and broaden the program’s reach. However, the absence of transition rules, the potential for investment timing distortions, and the exclusion of several anticipated provisions highlight areas where further refinement may be needed. As the legislative process unfolds, the final shape of these reforms, and their practical implications for investors and communities, will depend on how these issues are addressed in reconciliation and subsequent regulatory guidance.

Senate Tax Plan Retains $10,000 SALT Cap, Expands PTET Relief

The federal deduction for state and local taxes (SALT) remains one of the most debated elements of the 2025 tax bill and is widely expected to evolve as negotiations continue. In this context, the Senate Finance Committee’s proposal introduces a complex but structured approach to both the SALT deduction and the treatment of pass-through entity taxes (PTETs).

Under the Senate bill, the SALT deduction cap would remain permanently at $10,000 for individuals ($5,000 for married individuals filing separately). This cap applies to “specified taxes,” such as state and local income and property taxes paid directly by individuals. However, the bill’s summary notes that this amount is still under discussion, leaving room for potential adjustments.

In contrast, the bill creates a separate and more generous cap for PTETs; state or local taxes paid at the entity level by partnerships or S corporations. The PTET cap is calculated as the greater of $40,000 ($20,000 for separate filers) or 50% of the individual’s PTET liability, plus any unused portion of the $10,000 SALT cap. This structure is intended to provide enhanced SALT relief for business owners who pay taxes through their entities.

Unlike the House bill, which would eliminate PTET deductions for specified service trades or businesses (SSTBs) such as law, accounting, and healthcare, the Senate proposal does not limit eligibility by industry. This broader access could benefit a wider range of pass-through business owners, though the relief remains capped.

The Senate’s approach could offer meaningful tax relief for high-income individuals and business owners, particularly in high-tax states. Its permanence may also provide greater predictability for long-term planning. However, the dual-cap system introduces complexity that could pose compliance challenges. As the legislative process unfolds, the final outcome will likely reflect a compromise between simplicity, equity, and fiscal responsibility.

Business Provisions: Bonus Depreciation and QBI Permanency, Restored R&D Deduction

The Senate and House versions of the 2025 tax bill share several business-focused provisions, but they diverge in key areas, particularly around permanence, scope, and timing. These differences reflect broader policy priorities, with the Senate emphasizing long-term certainty and simplification, while the House favors broader but time-limited relief.

One of the most notable distinctions lies in the treatment of bonus depreciation. The Senate bill proposes making 100% bonus depreciation permanent for qualifying property placed in service on or after January 19, 2025. In contrast, the House bill extends 100% bonus depreciation only through 2029, after which it phases out. This difference could significantly impact long-term capital investment planning.

Both bills restore full and immediate deductibility of domestic research and development (R&D) expenses. However, the Senate version goes further by offering retroactive relief for expenses capitalized between 2022 and 2024. It also permits small businesses to accelerate amortized deductions over one to two years. The House bill does not include these retroactive or small business-specific provisions.

The treatment of business interest deductions under Section 163(j) also differs. The Senate bill reinstates the earnings before interest, taxes, depreciation, and amortization (EBITDA)-based limitation and makes it permanent. It also modifies the ordering rules to apply Section 163(j) before interest capitalization, a change that is generally favorable to investors. The House bill also reinstates the EBITDA limitation, but only through 2029, providing less long-term certainty.

For pass-through entities, both bills make the Section 199A qualified business income (QBI) deduction permanent. However, the House version increases the deduction from 20% to 23%, while the Senate bill retains the current 20% rate.

In summary, while both the Senate and House tax proposals aim to encourage business growth, their differing approaches, especially regarding permanence, retroactivity, and deduction thresholds, highlight contrasting policy priorities. These distinctions will be critical for businesses and tax advisors as the final version of the legislation takes shape.

Comprehensive Summary of the Key Provisions of the Senate Bill

Key Provisions for Individuals

• Individual Tax Rates -The Senate bill would make permanent the individual tax rates established by the 2017 Tax Cuts and Jobs Act (TCJA), with an additional year of inflation adjustment applied to the 10%, 12%, and 22% brackets.
• Standard Deduction – The increased standard deduction amounts from the TCJA would be made permanent. Beginning in 2026, the standard deduction would be $16,000 for single filers, $24,000 for heads of household, and $32,000 for married couples filing jointly. These amounts would be adjusted annually for inflation.
• Personal Exemptions and Senior Deduction – Personal exemptions would remain at zero. However, a temporary $6,000 deduction would be available for taxpayers aged 65 or older, phasing out at $75,000 modified adjusted gross income (MAGI) for single filers and $150,000 for joint filers. This provision would apply from 2025 through 2028.
• Child Tax Credit – The child tax credit would increase to $2,200 per child starting in 2025 and be indexed for inflation. The $1,400 refundable portion would be made permanent, along with the higher income phaseout thresholds of $200,000 (single) and $400,000 (joint). A $500 nonrefundable credit for other dependents would also be retained.
• Qualified Business Income (QBI) Deduction – The 20% deduction for QBI under Section 199A would be made permanent. The bill would expand the phase-in thresholds for specified service trades or businesses (SSTBs) to $75,000 for single filers and $150,000 for joint filers. A $400 minimum deduction would be introduced for taxpayers with at least $1,000 in QBI from active participation.
• State and Local Tax (SALT) Deduction Cap – Under current law, the deduction for state and local taxes (SALT) is capped at $10,000 per return. The House initially proposed raising this cap to $30,000, but a manager’s amendment later increased the proposed cap to $40,000 per household, or $20,000 for married individuals filing separately, beginning in 2025. In contrast, the Senate version of the bill would retain the existing $10,000 cap. However, this provision remains under active negotiation and could change as the bill progresses. Additionally, the Senate bill includes measures aimed at curbing strategies used by taxpayers to circumvent the SALT cap, reinforcing the cap’s effectiveness.
• Estate and Gift Tax – The estate and gift tax exemption amounts would be permanently increased to $15 million for single filers and $30 million for joint filers starting in 2026, with future inflation adjustments.
• Alternative Minimum Tax (AMT) – The bill would permanently extend the TCJA’s increased AMT exemption amounts and revert the phaseout thresholds to their 2018 levels—$500,000 for single filers and $1 million for joint filers—indexed for inflation.
• Mortgage Interest Deduction – The deduction would be permanently limited to interest on up to $750,000 of acquisition debt. Interest on home equity loans would be excluded from qualified residence interest, and mortgage insurance premiums would be treated as deductible.
• Casualty Loss Deductions – The bill would make permanent the TCJA’s limitation of casualty loss deductions to federally declared disasters, expanding it to include certain state-declared disasters.
• Miscellaneous Itemized Deductions – Most miscellaneous itemized deductions would remain suspended. However, unreimbursed employee expenses for eligible educators would continue to be deductible.
• Itemized Deduction Limitation – The Pease limitation would be permanently repealed. A new cap would limit the value of itemized deductions to 35 cents per dollar for taxpayers in the highest tax bracket.
• Wagering Losses – The Senate bill proposes an amendment to Section 165(d) to clarify that “losses from wagering transactions” include any otherwise allowable deductions under Chapter 1 of the Internal Revenue Code that are incurred in the course of wagering activities. However, the bill would limit the deductible amount of such losses to 90% of the total losses incurred. Additionally, these losses would remain deductible only to the extent of the taxpayer’s wagering gains for the tax year, maintaining the principle that gambling losses cannot exceed gambling winnings.
• Tip Income Deduction – An above-the-line deduction of up to $25,000 would be available for qualified tip income. This applies to both employees and independent contractors and phases out at $150,000 MAGI for single filers and $300,000 for joint filers. This provision would be in effect from 2025 through 2028.
• Overtime Deduction – The bill introduces an above-the-line deduction of up to $12,500 ($25,000 for joint filers) for qualified overtime compensation. The deduction phases out at $150,000/$300,000 MAGI and is available from 2025 through 2028.
• Child and Dependent Care Credit – The credit rate would increase from 35% to 50% of qualifying expenses, with a phase-down beginning at $15,000 of adjusted gross income.
• 529 Education Savings Plans – The bill would expand the use of 529 plans to cover additional elementary, secondary, and postsecondary credentialing expenses, allowing for broader tax-free educational distributions.
• Charitable Contribution Deduction – Non-itemizers could claim a deduction of up to $1,000 (single) or $2,000 (joint) for certain charitable contributions. For itemizers, a 0.5% floor would apply, reducing the deductible amount by 0.5% of the taxpayer’s contribution base. Corporations would face a 1% floor within the existing 10% limit.

Business Provisions

• Bonus Depreciation – The Senate bill would permanently extend the Section 168 bonus depreciation deduction. It would allow 100% expensing for qualified property acquired and placed in service on or after January 19, 2025, including specified plants planted or grafted on or after that date. In contrast, the House bill proposed 100% bonus depreciation only through the end of 2029.
• Section 179 Expensing – The maximum amount a taxpayer may expense under Section 179 would increase to $2.5 million, with the phaseout threshold beginning at $4 million in qualifying property costs.
• Research and Development (R&D) Expenses – The bill would allow immediate expensing of domestic research or experimental expenditures for tax years beginning after December 31, 2024. However, foreign R&D expenses would still need to be capitalized and amortized over 15 years. Small businesses with average annual gross receipts of $31 million or less could apply this change retroactively to tax years beginning after 2021. Additionally, all taxpayers could elect to accelerate deductions for domestic R&D expenses incurred between 2022 and 2024 over one or two years.
• Business Interest Limitation – The Senate bill would reinstate the EBITDA-based limitation under Section 163(j) for tax years beginning after 2024. This means adjusted taxable income would be calculated without subtracting depreciation, amortization, or depletion. The bill also expands the definition of “motor vehicle” to allow interest deductions on floor plan financing for certain trailers and campers.
• Special Depreciation for Production Property – A new 100% first-year depreciation deduction would be available for “qualified production property,” defined as nonresidential real property used in manufacturing.
• Advanced Manufacturing Investment Credit – The credit rate for advanced manufacturing investments would increase from 25% to 30% for property placed in service after December 31, 2025.
• Employer-Provided Child Care Credit – The Section 45F credit would increase from $150,000 to $500,000. The percentage of qualified expenses eligible for the credit would rise from 25% to 40%, and to 50% for qualifying small businesses using a five-year average gross receipts test.
• Opportunity Zones – The Senate bill would make opportunity zones permanent, with modifications including a narrower definition of “low-income community.” These changes would take effect on January 1, 2027.

International Provisions

• Foreign Tax Credit – The bill would limit deductions allocable to global intangible low-taxed income (GILTI) when calculating the foreign tax credit. It would also revise how deemed paid credits are determined and adjust sourcing rules for income from U.S.-produced inventory.
• GILTI and FDII Reform – The Section 250 deduction would be reduced to 33.34% for foreign-derived intangible income (FDII) and 40% for GILTI, resulting in a 14% effective tax rate for both. The bill would redefine FDII and GILTI as “foreign-derived deduction eligible income” and “net CFC tested income,” respectively, and eliminate the use of deemed tangible income returns in their calculation.
• Base Erosion and Anti-Abuse Tax (BEAT) – The Senate bill would revise BEAT by adjusting the base erosion minimum tax calculation, exempting certain foreign-taxed payments, and lowering the base erosion threshold from 3% to 2%.
• Business Interest Limitation – The Section 163(j) limitation would be calculated before applying any interest capitalization rules. Subpart F and GILTI inclusions, along with related gross-up amounts and Section 956 amounts, would be excluded from adjusted taxable income.
• Unfair Foreign Taxes – The bill would impose up to a 15% tax on certain entities connected to countries deemed to impose unfair foreign taxes. This includes foreign governments, residents, and entities owned by such persons. Domestic entities owned by residents of these countries would also face expanded BEAT rules.

Contact Cresset today to explore how the proposed changes may impact your financial strategy.

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