Parallel Play: The U.S. Senate Finance Committee Releases Its Version of the “Big, Beautiful Bill”

This white paper takes a selective look at tax provisions of the Senate Bill with a focus on where such provisions match or diverge from the House Bill. We’ll leave the spending side of things (which outstrip anticipated federal tax revenue by $3.3 trillion) for the political observers. As with our last white paper, we break out our discussion by those affected, including individuals, pass-through entities, international tax and domestic businesses. Provisions affecting tax-exempts and energy are not included in this article.

Provisions That Would Affect Individuals

Income Tax Rates. A keynote of the Senate Bill, like the House Bill, is the making permanent the 37% top marginal tax rate for individuals.

Allowable Itemized Deductions. In lieu of the Pease limitation on itemized deductions contained in current Section 68 of the Tax Code, such provision would be amended to limit the value of itemized deductions, such as allowable state and local taxes, charitable contributions and deductible medical expenses, to the deduction that would accrue if the top marginal rate was 35%. The House Bill takes the same approach. The Senate Bill would create a floor of .5% of a taxpayer’s charitable donations before such donations would become tax deductible.

Casualty Losses. When the casualty loss deduction is reinstated in 2026, such losses would be deductible only if incurred in connection with a federally or state-declared disaster.

Miscellaneous Itemized Deductions. The disallowance of an itemized deduction for miscellaneous deductions, including legal fees, investment expenses (including fees charged by private funds not engaged in trade or business activities) would be permanently disallowed. The House Bill has an identical provision.

Estate and Gift Taxation. The Bill would permanently increase the Lifetime Estate and Gift Tax Exemption to $15 million ($30 million for married couples), indexed for inflation, beginning in 2026. This provision matches the provision in the House bill. The lifetime estate/gift tax exemption is the maximum cumulative amount that a person can give their beneficiaries without triggering a federal estate or gift tax—whether those transfers are made during the person’s lifetime, at death or both.

State and Local Tax (SALT) Deduction. The Senate Bill would leave the current $10,000 deduction in place for SALT deductions. In contrast, the House Bill proposes to increase the deduction for state and local taxes to $40,400 for families with modified adjusted gross incomes (MAGIs) of $505,000 or less.  

The Senate bill would not disallow deductions for state taxes imposed on trades or businesses undertaken by pass-through entities, unless such tax was creditable against the state tax liability of the business owner. The Senate Bill does not have the same alarming provision that is in the House Bill that would treat sales tax paid by partnerships in the same manner as creditable income taxes.

The Senate Bill would require partnerships and S corporations to treat pass-through entity taxes (PTETs) as separately stated items and would impose the $10,000 limit on a pass-through owner’s separately stated share of PTETs. If, however, the partnership is engaged in a trade or business and the PTETs directly related to such trade or business, a partner could deduct any unused portion of their $10,000 SALT cap, plus the greater of $40,000 or 50 percent of their allocation of the PTET. The House bill has no such provision. The House bill allows deductions for PTETs only to pass-throughs that carry on section 199A qualified trades or businesses.

The Senate Bill, like its House counterpart, specifically shuts down charitable contributions in lieu of SALT payments. The Senate Bill, like the House Bill, would deny taxpayers the ability to capitalize SALT payments and thereby obtain additional depreciation or amortization deductions (or experience less gain on the disposition of the property into which the SALT payment had been capitalized).

Deduction for Qualified Business Income (QBI). The House Bill would make the Code § 199A QBI deduction permanent, increase the deduction from 20% to 23%, and would replace the complex phase-in rules for higher-income taxpayers with a more streamlined two-step limitation that may allow partial deductions even where none were previously available. The Senate Bill would leave the QI deduction at 20% but would increase the deduction phase in limit.

Qualified Small Business Stock (QSBS). The House Bill did not contain any proposed changes to the QSBS rules. The Senate Bill, however, would make substantial changes to this regime. Under the Senate Bill, 50% of the gain (up to $15 million, increased from $10 million under current law) from the disposition of QSBS acquired after enactment of the Bill and held for at least three years would be tax-exempt. If the QSBS was held for at least four years, 75% of the gain would be tax-exempt, and if the QSBS was held for at least five years, all of the gain would be tax-exempt. The amount of gain eligible to be excluded from taxable income would be indexed for inflation.

The Senate Bill would also increase the allowable “gross assets” of a C corporation eligible to issue QSBS to $75 million, up from $50 million.

Provisions That Would Affect Private Funds and Other Pass-Throughs

Litigation Finance Funds. On May 20, 2025, Senator Thom Tillis (R-NC) and Representative Kevin Hern (R-OK) proposed legislation to establish a new tax regime to curtail third-party litigation funding. The Senate Bill incorporates this proposal without much change. If enacted in its current form, existing transactions would not be grandfathered, and the proposal would apply to transactions entered into prior to 2026 if payments are received by the funder in 2026 or thereafter.

The proposal is so unique that it would be included in a totally new subsection of the Tax Code. Like the relatively new partnership audit rules, the litigation finance proposal would impose the tax on pass-through entities, regardless of whether the pass-through entity has tax-exempt partners or non-U.S. partners, including those entitled to the provisions of an income tax treaty to which the United States is a party. Tax-exempts and non-U.S. persons would be subject to the tax even if they obtained the litigation finance exposure directly.

The proposal would impose a flat tax rate of 40.8% on qualified litigation proceeds. Qualified litigation proceeds include the realized gains, net income or other profit derived from, or pursuant to, any litigation financing agreement. While there is some uncertainty, the reference to “net income” should allow persons with economic exposure to litigation finance transactions to net litigation finance losses against gains. Clearly, however, capital losses, net operating losses and carryovers of such items would not be allowed to reduce income and gains from litigation finance transactions. The tax would be enforced by payer withholding.

The “litigation financing agreements” subject to the tax include not only traditional litigation funding contracts but also any agreement “which creates a direct or collateralized interest” in litigation outcomes. Forward contract transactions would be specifically included within the definition, as would loans to litigants with yields in excess of 7%. Transactions of $10,000 or less would be exempted. Accordingly, numerous loans to law firms could be swept up in the proposal.

There are a significant number of ancillary considerations not addressed by the proposal. For example, if the taxpayer is a corporation, it is not clear that the corporation would reduce its earnings and profits by the tax imposed on the qualified litigation proceeds. Similarly, if the net after-tax amount of qualified litigation proceeds does not increase the partners’ basis in their partnership interests, partners could experience tax on the distribution of such amounts. Furthermore, as written, a risk exists that the tax applies to transactions without any U.S. nexus or even U.S. funders. Glitches like these can be expected when a proposal, such as this one, is introduced to attack an industry rather than further any established tax policy.

Qualified Opportunity Zones (QOZs). The House Bill would authorize a new round of OZ designations by the states beginning on January 1, 2027, and sunsetting on December 31, 2033, by which time all deferred gains must be taken into income. The Senate Bill comports with the House Bill’s increased limitations of statewide area income for eligible census tracts for QOZ designation to 70% from the 80% in current law, but the Senate Bill does not require the House Version’s 30% rural QOZ set aside. This limitation could result in fewer QOZs.

The Senate Bill, like the House Bill, would take effect for amounts invested in QOFs on or after Jan. 1, 2027. Under the Senate Bill, states may designate new QOZs beginning on July 1, 2026, six months earlier than under the House Bill. This eliminates a potential 90-day (or 120 days, if extended) period during which no new QOZs would exist. A new designation period would commence on July 1 of each 10-year anniversary.

The Senate Bill would keep both existing and future QOZs designated for a period of 10 years commencing on January 1 following the date the Treasury Department certifies the QOZ. This provision would allow all current QOZs to retain their QOZ status until December 31, 2028, as opposed to the end of 2026, under the House Bill.

Under the Senate Bill, annual capital gains (including 2026 capital gains that may invested in 2027) may be invested in QOFs starting January 1, 2027. The Senate Bill requires recognition of gains realized and deferred under the QOZ regime after 2026 upon the earlier of (a) a taxpayer’s disposition of its QOF investment or (b) December 31, 2033, with the latter date resetting every 10 years for gains a taxpayer realizes and defers after such date.

In addition to deferral of invested gain, taxpayers would be entitled to an annual incremental step-up in the tax basis of their QOF investment over the first six years they hold their investment in the QOF up to 10% and ultimate exclusion of gain by investors upon exit. The Senate Bill, like the House Bill, provides for Rural Qualified Opportunity Fund benefits. These include a 300% increase in the basis step-ups (30% maximum total) and a reduction of the substantial improvement requirement for QOZB property from 100% to 50%.

The Senate Bill provides a special rule for investments held at least 30 years. If the investment is sold on or after 30 years, the taxpayer’s tax basis in the investment is stepped-up to the fair market value of the investment as of the 30th anniversary of the investment. As a result, any further appreciation in value after the 30th anniversary would be subject to tax at the time of sale.

The Senate Proposal would repeal special disaster relief for QOZs in Puerto Rico for Hurricane Maria.

The Senate Bill does not provide for the automatic deferral of any interim gain from an investment sold within an investor’s 10-year hold period, even if the proceeds are reinvested in another QOZ project within 12 months of the sale. The current rule permitting investors that are allocated interim gain to make a new deferral election and a QOF investment with a new 10-year investment clock remains in effect.

In contrast to the House Bill, the Senate Bill does not allow a limited investment of ordinary income or after-tax income into QOFs. The House Bill capped such investments at an aggregate $10,000 for each investor.

REIT Changes. The House Bill provision that would increase the amount of stock of taxable REIT subsidiaries that REITs can hold to 25% from 20% is not included in the Senate Bill.

Disguised Payments for Services. Code § 707 permits the IRS to issue regulations that treat a non-taxable partnership distribution or an allocation of partnership capital gain as a disguised taxable payment for services. Both the House Bill and the Senate Bill would change this standard to provide that the rule would be self-executing and not require IRS regulations before the IRS sought to treat an allocation and payment as a disguised payment for services.

Provisions That Would Affect Cross-Border Transactions

Remittance Tax. The Senate Bill, like the House Bill, would impose a 3.5% tax on cross-border transfers of cash by non-U.S. persons to recipients located outside of the United States. The Senate Bill specifically provides that remittance providers are liable for the tax to the extent it is not paid by the person making the remittance.

The Senate Bill would exempt transfers from bank and brokerage accounts. This is a significant revision from the House Bill. The Senate Bill alleviates the need for excessive due diligence by providing for refund procedures for overwithholding. In order to avoid withholding altogether, the remittance company would be required to obtain substantial information about the person making the transfer. If the remittance is made through a U.S.-issued credit card, no tax is imposed.

The Senate Bill would incorporate the anti-conduit rules of Code § 7701(l) to prevent avoidance of the tax. Under the anti-conduit rules, transfers to unrelated financial institutions that stand in between the transferor and transferee are ignored and the transferor is treated as making the payment directly to the ultimate recipient. The incorporation of this standard could increase the reporting on cross-border financial institutions.

Revenge Tax. The Revenge Tax (also known as the Section 899 tax) was presaged in the House Bill. Under both Bills, non-U.S. taxpayers and their U.S. subsidiaries individuals connected to “discriminatory foreign countries” that enact certain international tax rules adversely affecting U.S. businesses would be subjected to increased U.S. tax rates. Observers have predicted that the House Bill would result in massive foreign disinvestment in the U.S. and corresponding pressure on the value of the U.S. dollar.

Both Bills would increase various income tax rates, including FDAP and FIRPTA withholding and branch profits taxes, on “applicable persons.” An applicable person includes any government of a “discriminatory foreign country,” individual residents (other than U.S. citizens or U.S. tax residents) of a discriminatory foreign country, foreign corporations that are tax resident in a discriminatory foreign country or that are 50% or more owned (by vote or value) by applicable persons, trusts where the majority of beneficial interests are owned by applicable persons, private foundations created or organized within a discriminatory foreign country, and certain foreign partnerships, branches and other entities connected to a discriminatory jurisdiction as identified by the Treasury Secretary.

Under proposed Code § 899, “discriminatory foreign countries” are those that impose one or more “unfair foreign taxes,” which may include an undertaxed profits rule, and, to the extent identified by the Treasury Secretary, an “extraterritorial tax,” a “discriminatory tax,” or any other tax enacted with a public or stated purpose that it will be disproportionately economically borne by U.S. persons. Under the House Bill, the tax rate would increase by five percentage points annually, up to a maximum of 20 percentage points above the statutory rate.

In addition, any corporation that is more than 50% owned (by vote or value) by applicable persons would become subject to the Base Erosion Anti-Abuse Tax (BEAT) under Code § 59A regardless of whether it meets the average annual gross receipts test or base erosion percentage threshold, and by treating certain capitalized amounts as if they had been deducted, among other changes (including by treating payments subject to U.S. withholding taxes as base erosion payments). Under the House Bill, such corporations could also face an increased BEAT rate of 12.5%, compared to the standard 10% rate. Under the Senate Bill the threshold for the threshold for related party payments before the BEAT applies would be reduced to .5%. Pundits are referring to these changes as the “super BEAT.”

The potential reach of this legislation is quite broad. As drafted, non-U.S. automakers and European financial institutions could be severely affected. Under the House Bill, any country implementing the undertaxed profits rule (UTPR) under the OECD Pillar Two regime, a diverted profit tax, or digital services tax could be considered a discriminatory foreign country. Since the current U.S. effective tax rate on “global intangible low-taxed income” is 10.5%, it falls below the 15% minimum, allowing Pillar Two jurisdictions to impose a top-up tax. As a result, EU member states and other countries that have adopted UTPR and whose taxpayers derive U.S.-source income could be exposed to the provisions of proposed Code § 899, unless an exception were to apply. News reports indicate that the EU is considering adjustments to OECD Pillar Two to ameliorate the impact of the Revenge Tax.

The Senate Bill, presumably in response to the avalanche of criticism leveled against the House Bill version of the Revenge Tax (and concerns over President Trump’s mercurial imposition of penalties on trading partners) proposes a number of changes to alleviate the impact of the House Bill version of proposed section 899. In addition, the Senate Bill would make the Revenge Tax applicable in 2027, not 2026 as in the case with the House Bill.

Importantly, the Senate Bill would trigger the Revenge Tax only by undertaxed profits rules, not by digital services taxes (DSTs). Nonetheless, the super BEAT would continue to be triggered by DSTs. The Senate Bill would not become effective until one year after enactment, contrasted with the 2026 effective date for the rule in the House Bill. The Senate Bill would limit the increase in applicable tax rate to 15%, instead of the 20% provided for in the House Bill. The increased tax rates would be self-executing, as is the case with the super-BEAT.

GILTI and FDII. Through the end of 2025, taxpayers are entitled to a 37.5% deduction for qualifying foreign derived intangible income (FDII), resulting in a current effective tax rate of 13.125%. This rate is scheduled to increase to 16.406% starting in tax year 2026. Current law provides a 50% deduction for global intangible low taxed income (GILTI) which reduces the effective U.S. tax rate on GILTI to 10.5%. This rate is set to rise to 13.125% in 2026.

The House Bill would halt both increase in FDII and GILTI taxes by permanently preserving the current deduction level. In contrast, the Senate Bill would set the GILTI deduction at 40% and the FDII deduction at 33.34%. These changes would set the effective rate of tax on both GILTI and FDII at 14%. The Senate Bill would also make favorable changes to the allocation of deductions to income subject to foreign taxes.

Base Erosion Anti-Abuse Tax. The BEAT affects a narrow group of taxpayers, as it applies only to U.S. corporations with average annual gross receipts of at least $500 million (over a three-year period, subject to aggregation rules) and whose deductible related party payments exceed 3% of all deductible payments (2% for financial institutions). The BEAT applies to the extent that the BEAT liability exceeds an affected taxpayer’s regular tax liability reduced by foreign tax credits. As described above, if proposed section 899 becomes law, however, the super BEAT could affect a significantly larger number of in-bound U.S. taxpayers.

Both of the House and Senate Bill would delete a provision of existing law that would have increased the likelihood of a BEAT liability for non-U.S. taxpayers who claim general business credits that is scheduled to apply beginning in 2026. While the House Bill would retain the current BEAT rate of 10%, the Senate Bill would increase the BEAT tax rate to 14%. The Senate Bill would end the discrimination against financial institutions by lowering the BEAT threshold to 2% for all taxpayers. The Senate Bill would also increase the likelihood of the BEAT applying by treating capitalized interest payments as base erosion payments.

Technical Changes to the Controlled Foreign Corporation (CFC) Rules. The Senate Bill would make several technical changes to the CFC rules. First, the CFC look-thru rules, which allow a CFC to look through dividends, interest, rents and royalties to determine whether such items should be characterized as subpart F income would be made permanent. Second, the one-month deferral rules, which allows a CFC to adopt a taxable year that permits its U.S. shareholders to achieve up to one month of deferral would be repealed. Third, the downward attribution, which results in counterintuitive attribution of ownership, would be repealed. Last, certain exceptions from the rules for determining a U.S. shareholder’s pro rata share of subpart F income and GILTI would be repealed.

Provisions That Would Affect Domestic Corporate Taxation

Bonus Depreciation. Both the House Bill and the Senate Bill would reinstate 100% bonus depreciation for corporate aircraft and other qualified property placed in service after January 19, 2025. Code § 168(k) permits taxpayers to claim bonus depreciation, which allows for an immediate deduction on the cost of qualifying corporate aircraft and other property used in a trade or business during the first year that the asset is placed in service. In the absence of any action, beginning in 2027, however, the bonus depreciation would be eliminated. The Senate Bill would make bonus depreciation permanent while the House Bill would sunset bonus depreciation on January 1, 2030 (January 1, 2031, for longer production period property and certain aircraft).

Deduction of Research and Development Expenditures. Proposed amendments to Code § 174 would provide optionality to taxpayers for domestic research and experimental (R&D) expenditures paid or incurred in tax years beginning after December 31, 2024, including by restoring expensing for R&D expenditures. Foreign R&D would not benefit from the proposed amendments and would be required to continue to be capitalized over a 15-year period. Under the Senate Bill, taxpayers with annual gross receipts of $31 million or less would be entitled to retroactively elect bonus depreciation to as far back as 2022.

Business Interest Deduction Limitation. Both the House Bill and the Senate Bill would reinstate the more favorable EBITDA standard that was used prior to 2022 for calculating the business interest limit under Code § 163(j), beginning in 2025. This change increases the amount of deductible interest and expanding relief for capital-intensive businesses. Under the House Bill, this change would apply for tax years after 2025 through 2029. Under the Senate Bill, this change would be permanent. Also under the Senate Bill, interest that is required to be capitalized would not be treated as business interest expense.

Under current law, interest paid or accrued by a business generally is deductible in the computation of taxable income, subject to certain limitations. The deduction for interest expense is generally limited to the sum of business interest income of the taxpayer and 30% of the adjusted taxable income of the taxpayer. For tax years beginning before 2022, adjusted taxable income was calculated based on EBITDA (i.e., earnings before interest, taxes, depreciation, and amortization). Under current law, for tax years beginning after 2021, adjusted taxable income is calculated based on EBIT (i.e., without depreciation and amortization). The bill temporarily reverts back to the more generous EBITDA standard excluding depreciation and amortization deductions from the limitation for tax years after 2025 through 2029. This change increases the interest deduction cap for many businesses and particularly benefits capital-intensive businesses in industries such as manufacturing, energy and transportation.

Agricultural Loans. Both the House Bill and the Senate Bill provide an income exclusion for agricultural loans. Under the Senate Bill, financial institutions and certain of their affiliates would be entitled to exclude from income 25% of the income made from agricultural loans made after the date of enactment of the Bill (not including refinancings). The Senate Bill, however, would prevent a lender from claiming an interest deduction for any interest incurred in making an agricultural loan (not just the tax-exempt part).

The summaries included above are just that—summaries. Pillsbury Tax team members are available to discuss any of these provisions in more detail. In addition, the legislative process remains fluid, and the provisions discussed above could be changed as the Bills move toward passage.

_{[1] For Pillsbury’s prior coverage of the version of the House bill released by the House Ways and Means Committee, please see https://www.pillsburylaw.com/en/news-and-insights/2025-federal-income-tax-provisions.html.}