Key Takeaways
- Senate narrowly passes tax legislation extending 2017 individual tax rates and business incentives permanently.
- The bill includes new tax breaks for seniors, overtime pay, and Opportunity Zones.
- House approval is uncertain, with a scheduled vote and additional negotiations possible.
By a narrow margin of 51-50, with Vice President J.D. Vance casting the tie-breaker vote, the U.S. Senate passed major tax legislation on Tuesday, July 1, 2025, that would extend portions of the 2017 Tax Cuts and Jobs Act while also making other significant changes to the tax code.
Republicans, who passed the measure with no Democratic votes, said they were optimistic the House of Representatives would soon approve the legislation and send it to the president’s desk to be enacted into law. However, some representatives have expressed reservations due to changes from the version of the bill passed by the House in May.
Key Tax Changes and Business Incentives in the New Legislation
Individual Rates:
The legislation would permanently extend current individual income tax rates, preventing hikes that are set to go into effect at the end of the year.
“Big Three” Business Provisions:
The legislation would enact 100% bonus depreciation on certain assets, immediate expensing of research and development costs under Sec. 174, and a looser calculation of the limitation on interest deductibility in Sec. 163(j) — these changes would be retroactive to January 2025. And, these changes would be permanent under the Senate legislation. The bill also allows smaller businesses to retroactively expense R&D costs from 2022 to 2025 and would allow all businesses to immediately deduct remaining unamortized expenses from that period.
Pass-through Deduction:
The legislation would permanently extend the 20% deduction available for pass-through entities such as partnerships or sole proprietorships. Unlike the House version, it does not include an increase in the rate.
State and Local Tax (SALT) Cap:
The legislation would extend the current limit on the deductibility of state and local taxes, using a $40,000 limit subject to certain income phase-out limitations ($500,000 for married individuals, $250,000 for single filers). Further, the Senate fully allows for so called “passthrough entity tax elections”, meaning electing pass-through entities can continue to deduct income taxes at the entity level if state law allows.
Inflation Reduction Act (IRA) Energy Credits:
The Senate legislation would eliminate credits for electric vehicles and puts in strong restrictions on many of the green energy credits enacted by the 2022 Inflation Reduction Act. Unlike the House version, it does retain the ability of some energy credits to be transferred to third parties.
International:
The Senate dropped a “retaliatory tax” provision aimed at certain countries and foreign businesses. The bill does make some changes to the current U.S. international tax rules, including an increase in the tax on global intangible low-taxed income (GILTI) and a reduction in the deduction for foreign-derived intangible income (FDII).
New Tax Breaks:
The Senate bill includes new increased tax deductions and exemptions promoted by President Trump for overtime pay and tips. The legislation also includes a new exemption for auto loan interest, as well as a $6,000 deduction for seniors older than 65 years.
Opportunity Zones:
The Opportunity Zone program, a tax incentive for economically distressed areas, will be permanently extended and broadened by the Senate legislation. The changes include a new type of Opportunity Zone fund for rural areas.
Estate and Gift Tax:
The legislation would permanently set the estate and lifetime gift tax exemption to $15 million per individual (indexed for inflation for future years).
Critical Next Steps and Legislative Deadlines Ahead
At this time, it is unclear if the House of Representatives will be able to pass the bill without changes, which would also need to be approved by the Senate. Nevertheless, House Republicans are pushing forward, with a vote scheduled for Wednesday morning.
While President Trump has pressed for Congress to produce legislation for him to sign before Independence Day, that timeline allows for few additional votes should additional changes be necessary.
If the negotiations stretch past July 4th, lawmakers will have until the August recess to work out their differences. It appears likely that Congress will be able to finish work on a bill sometime during July.
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