The House Committee on Ways and Means has put forth budget reconciliation legislative recommendations related to tax, outlined in a recent Committee Print and described in a document prepared by the staff of the Joint Committee on Taxation (JCX-18-25). These proposals, primarily effective for taxable years beginning after December 31, 2025, would significantly alter numerous provisions of the Internal Revenue Code of 1986 ("Code"), making permanent many of the temporary changes enacted by Public Law 115-97 and introducing new modifications. This article provides a technical summary of the key proposed changes, including their impact on specified service trade or businesses (SSTBs), their effective dates, and whether they are made permanent based on the provided text.

Additional provisions are expected to be added to the bill related to areas where there does not yet appear to be a consensus in the Republican caucus on how to handle the matter, the key one being the deductions for state and local taxes. As well, certain exclusions from income proposed by the President during his campaign are also missing from this bill but the expectation is that some sort of provisions implementing those will be added to the legislation before final passage.

Unless otherwise expressly provided, amendments and repeals in this title refer to the Internal Revenue Code of 1986.

Section 15 of the IRC Does Not Apply to These Changes

Section 15 of the Code, relating to the effect of rate changes during a taxable year, is stipulated not to apply to any rate change resulting from these provisions.

What Section 15 of the Code Does Exactly

Section 15 of the U.S. Code, titled "Effect of changes," provides a general rule for calculating tax when a rate of tax imposed by this chapter changes during a taxable year. This rule applies unless the effective date of the change is the first day of the taxable year.

Here's how it works according to the general rule:

Tentative taxes are computed by applying the rate for the period before the effective date of the change, and the rate for the period on and after such date, to the taxable income for the entire taxable year.
The tax for such taxable year is then the sum of the proportion of each tentative tax that the number of days in each period bears to the number of days in the entire taxable year. This is essentially a proration method based on the number of days each rate is in effect within the taxable year.

Section 15 also includes specific rules:

If a tax is repealed, the repeal is considered a change of rate, and the rate for the period after the repeal is zero.
Rules define the effective date of a change based on whether the change applies to taxable years "beginning after," "ending after," or "beginning on or after" a certain date.
The section specifies that it shall not apply to any change in rates under subsection (f) of section 1, relating to adjustments in tax tables for inflation. Historically, it also did not apply to certain changes made by previous tax acts like the Economic Recovery Tax Act of 1981, rate reductions after 2000 by the Economic Growth and Tax Relief Reconciliation Act of 2001, and other specific acts unless an exception was made (e.g., corporate rate reductions in 1986 and 1993 acts were exceptions).
If a change involves the highest rate of tax under section 1 or 11(b), references to that highest rate elsewhere in the chapter (unless imposing a tax by reference to it) are treated as a weighted average of the highest rates before and after the change, based on the respective portions of the taxable year.

Impact of Section 15 Not Applying to Changes in the Proposed Law (Title XI)

The Committee Print and the Description of the bill explicitly state that Section 15 of the Internal Revenue Code of 1986 shall not apply to any change in rate of tax by reason of any provision of, or amendment made by, this title (Title XI).

The impact of this provision is that the proration method outlined in Section 15 will not be used for tax rate changes that result from the provisions within Title XI of this bill.

Instead of using the Section 15 proration method to calculate the tax for a taxable year that straddles the effective date of a change, the specific effective dates provided for each provision within Title XI will govern how those changes apply. For example, the bill includes numerous provisions with specific effective dates, typically stating that amendments apply to taxable years beginning after December 31, 2025, or in some cases, earlier or later dates.

By stating that Section 15 does not apply, the bill ensures that these specific effective date rules in Title XI take precedence over the general proration rule of Section 15. This means that for a taxable year spanning across an effective date, the change enacted by Title XI will generally apply in full to the portion of the taxable year beginning on or after the effective date, based on the specific language of each provision, rather than applying a blend of rates/rules through daily proration as Section 15 would require.

Title XI includes many provisions that could potentially be considered changes in tax rates or have a significant impact on a taxpayer's effective tax rate, such as:

Extension of modification of rates (Section 1(j)) [17, 18, 65 section A].
Extension and temporary enhancement of the increased standard deduction (Section 63(c)) [19, 20, 21, 65 section B, 68-73].
Termination of deduction for personal exemptions (Section 151(d)) [21, 22, 65 section C, 73-75].
Extension and temporary enhancement of the increased child tax credit (Section 24) [22, 23, 65 section D, 75-86].
Extension and permanent enhancement of the deduction for qualified business income (Section 199A), including changes to the deduction percentage and limitations [28, 29, 30, 31, 32, 33, 34, 65 section E, 87-92].
Extension and permanent enhancement of increased estate and gift tax exemption amounts (Section 2010(c)) [34, 35, 65 section F, 93-96].
Extension of increased alternative minimum tax exemption and phase-out thresholds (Section 55(d)) [36, 65 section G, 96-98].
Extension of limitations on various itemized deductions (Qualified Residence Interest, Casualty Loss, Miscellaneous Itemized Deductions, Overall Limitation) [37, 38, 39, 65 sections H, I, J, K, 98-106].
Extension of limitation on wagering losses [42, 65 section N, 109, 110].
Lowering of preferential rates on GILTI and FDII by increasing deductions (Section 250) [53, 65 section A, 137-148].
Repeal of special rules for BEAT rates and credit interaction (Section 59A(b)) [54, 55, 66 section B, 148-155].

By explicitly stating that Section 15 does not apply, the bill ensures that the effective dates written into each of these specific provisions dictate their application to taxable years that may cross the effective date boundary, bypassing the standard Section 15 proration calculation.

Key Proposed Changes and Their Effects

Several significant changes affecting individuals and businesses are proposed.

1. Deduction for Qualified Business Income (Section 199A)

This proposal includes several technical modifications to the Section 199A deduction.

Permanence: The deduction for qualified business income, including the deduction for income attributable to the domestic production activities of specified agricultural or horticultural cooperatives, is made permanent by striking Section 199A(i).
Increased Percentage: The general deduction percentage is increased from 20 percent to 22 percent in Section 199A(a)(2), (b)(1)(B), and (b)(2)(A). This applies to the calculation of the maximum allowable deduction based on taxable income, the percentage for qualified REIT dividends/publicly traded partnership income, and the per-business deductible amount before limitations.
Modification of Limitations Based on Taxable Income: This is a crucial change, particularly for SSTBs with higher income. For taxpayers whose taxable income exceeds the threshold amount (which is indexed for inflation, with the base year changed from 2018 to 2025 under the proposal), the limitation calculation is revised in Section 199A(b)(3).
- The proposal replaces the existing phase-in rules.
- A new two-step process is introduced:
  - Step One: The deductible amount for each qualified trade or business is calculated by applying the greater of the W-2 wages or W-2 wages and capital investment tests. Unlike present law's phase-in, these limitations apply in full. For an SSTB, the general rule under Section 199A(d)(1)(A) that it is not a qualified trade or business applies in this step for income exceeding the threshold [15(A)(ii), 16(B)(i)], meaning the deduction from an SSTB would typically be $0 in this step.
  - Step Two: The sum of deductible amounts from all trades or businesses (including specified service trades or businesses) is calculated based only on 22 percent of the qualified business income, without regard to the W-2 wages or W-2 wages and capital investment limitations. This sum is then reduced (but not below zero) by a limitation phase-in amount. The limitation phase-in amount is equal to 75 percent of the excess (if any) of the taxpayer's taxable income over the threshold amount.
  - Final Deduction: The taxpayer's allowable deduction is the greater of the aggregate deductible amounts determined under Step One and Step Two.
SSTB Impact: This modification significantly alters the treatment of income from an SSTB for taxpayers with taxable income exceeding the threshold amount. Under present law, taxpayers with taxable income above the phase-in range were generally allowed no deduction for income from an SSTB. The proposal amends Section 199A(d) by striking paragraph (3), the provision that caused an SSTB to fail as a qualified trade or business solely due to its nature for higher-income taxpayers. While SSTBs still result in a $0 deduction under Step One (which includes the W-2/UBIA tests and the SSTB exclusion based on business type), they are included in the calculation for Step Two. Step Two provides a potential deduction based on 22% of SSTB QBI, subject to a 75% reduction based on overall taxable income exceeding the threshold, which can result in a deduction where none was previously available for higher-income SSTBs.
BDC Interest Dividends: The proposal allows qualified BDC interest dividends to be included in the calculation of the combined qualified business amount alongside qualified REIT dividends and qualified publicly-traded partnership income (Section 199A(b)(1)(B), (c)(1), (e)).

Effective Date: The modifications to Section 199A are effective for taxable years beginning after December 31, 2025. Expiration: Made permanent.

2. Individual Income Tax Rates (Section 1(j))

The proposal makes permanent the modified income tax rate brackets that were scheduled to expire. It strikes the expiration date ("and before January 1, 2026") in Section 1(j)(1). Effective Date: Taxable years beginning after December 31, 2025. Expiration: Made permanent.

3. Standard Deduction (Section 63(c)(7))

The temporary increase to the basic standard deduction enacted by Public Law 115-97 is made permanent. The proposal strikes the expiration date in Section 63(c)(7). Additionally, a temporary additional increase in the standard deduction is added for taxable years beginning after December 31, 2024, and before January 1, 2029. These temporary additional amounts ($1,000 for most single filers, $1,500 for heads of household, $2,000 for married filing jointly/surviving spouses) are not indexed for inflation. Effective Date: The permanent extension is effective for taxable years beginning after December 31, 2025. The temporary additional increase is effective for taxable years beginning after December 31, 2024. Expiration: The permanent extension has no expiration. The temporary additional increase expires before January 1, 2029.

4. Personal Exemptions (Section 151(d)(5))

The temporary reduction of the personal exemption amount to zero, enacted by Public Law 115-97, is made permanent. The proposal amends Section 151(d)(5) by striking the expiration date. Effective Date: Taxable years beginning after December 31, 2025. Expiration: Made permanent ($0 exemption).

5. Child Tax Credit (Section 24)

Several provisions related to the Child Tax Credit are extended and modified.

The temporary increase of the maximum credit to $2,000 (under present law scheduled to revert to $1,000 after 2025) is extended.
A temporary increase to $2,500 is provided for taxable years beginning after December 31, 2024, and before December 31, 2028. The credit amount reverts to $2,000 for subsequent years, indexed for inflation with a base year of 2024 (Section 24(h)(2), (i)).
The maximum amount of the refundable credit (Section 24(h)(5)) is made permanent at $1,400, indexed for inflation with a base year of 2017 (Section 24(i)(1)). The earned income threshold for the refundable credit is also made permanent at $2,500.
The income phaseout thresholds of $400,000 for joint filers and $200,000 for others are made permanent.
The $500 nonrefundable credit for other dependents is made permanent.
New requirements for Social Security Numbers (SSNs) are added in Section 24(h)(7). The SSNs of the taxpayer, qualifying child, and spouse (if applicable) must be included on the return. These SSNs must be issued before the return's due date and meet certain Social Security Administration criteria (Section 205(c)(2)(B)(i) of the Social Security Act is referenced). Rules similar to Section 32(d) apply regarding married individuals filing jointly. Effective Date: Generally effective for taxable years beginning after December 31, 2024. The $2,000 amount indexation applies after 2028. Expiration: The $2,500 credit amount expires before December 31, 2028. The $1,400 refundable max, the $2,000 permanent amount (indexed after 2028), the phaseout thresholds, and the $500 other dependent credit are made permanent.

6. Estate and Gift Tax Exemption (Section 2010(c)(3))

The temporary increase to the unified estate and gift tax exemption amount is made permanent and increased. The exemption is permanently increased to an inflation-indexed $15 million (Section 2010(c)(3) amended). The inflation adjustment uses a base year of 2025. The generation-skipping transfer tax exemption is also permanently increased to an indexed $15 million. Effective Date: Effective for taxable years beginning after December 31, 2025. Applies to decedents dying and gifts made after December 31, 2025. Expiration: Made permanent.

7. Alternative Minimum Tax Exemption (Section 55(d)(4))

The temporary increases to the AMT exemption amounts and phase-out thresholds, enacted by Public Law 115-97, are made permanent. The proposal amends Section 55(d)(4) by striking the expiration date. Effective Date: Taxable years beginning after December 31, 2025. Expiration: Made permanent.

8. Qualified Residence Interest Deduction Limitation (Section 163(h)(3)(F))

The temporary limitation on the deduction for qualified residence interest is made permanent. This includes making permanent the $750,000 ($375,000 for married filing separately) limitation on acquisition indebtedness (Section 163(h)(3)(F)(i) amended). The exclusion of interest on home equity indebtedness from the definition of qualified residence interest is also made permanent. Effective Date: Taxable years beginning after December 31, 2025. Expiration: Made permanent.

9. Casualty Loss Deduction Limitation (Section 165(h)(5))

The temporary limitation on personal casualty losses, which generally allows a deduction only to the extent of personal casualty gains (except for Presidentially declared disasters subject to the 10% AGI floor) (Section 165(h)(5)), is made permanent. The proposal strikes the expiration date. Effective Date: Taxable years beginning after December 31, 2025. Expiration: Made permanent.

10. Miscellaneous Itemized Deductions (Section 67(g))

The temporary repeal of miscellaneous itemized deductions subject to the 2% AGI floor, enacted by Public Law 115-97, is made permanent. The proposal amends Section 67(g) by striking the expiration date. Effective Date: Taxable years beginning after December 31, 2025. Expiration: Made permanent (deduction remains repealed).

11. Overall Limitation on Itemized Deductions (Section 68(f))

The temporary suspension of the overall limitation on itemized deductions (the "Pease" limitation) is made permanent. The proposal amends Section 68(f) by striking the expiration date. Effective Date: Taxable years beginning after December 31, 2025. Expiration: Made permanent (limitation remains repealed).

12. Qualified Bicycle Commuting Reimbursement Exclusion (Section 132(f)(8))

The temporary repeal of the exclusion for qualified bicycle commuting reimbursements is made permanent. The proposal amends Section 132(f)(8) by striking the expiration date. Effective Date: Taxable years beginning after December 31, 2025. Expiration: Made permanent (exclusion remains terminated).

13. Moving Expense Deduction and Exclusion (Section 217(k), Section 132(g)(2))

The temporary repeal of the deduction for moving expenses (Section 217(k)) and the exclusion for qualified moving expense reimbursements (Section 132(g)(2)), which maintained exceptions only for active duty military, is made permanent. The proposal strikes the expiration dates in these sections. Effective Date: Taxable years beginning after December 31, 2025. Expiration: Made permanent (repeal for most taxpayers is permanent).

14. Wagering Loss Limitation (Section 165(d))

The temporary clarification that "losses from wagering transactions" include any deductions otherwise allowable under Chapter 1 of the Code incurred in carrying on any wagering transaction is made permanent. The proposal amends Section 165(d) by striking the expiration date. Effective Date: Taxable years beginning after December 31, 2025. The clarification applies to taxable years beginning after December 31, 2017. Expiration: Made permanent.

15. ABLE Account Contribution Limitation (Section 529A(b)(2)(B))

The ability for a designated beneficiary who is an employee to contribute compensation up to the poverty line to their ABLE account, regardless of the annual gift tax exclusion limit, is made permanent. The proposal strikes the expiration date in Section 529A(b)(2)(B)(ii). Additionally, the annual contribution limit (excluding employment contributions) is tied to the annual gift tax exclusion amount determined under Section 2503(b) but with a modified inflation adjustment using a 1996 base year instead of 1997. Effective Date: Generally effective for contributions made after December 31, 2025. The modified inflation adjustment is effective for taxable years beginning after December 31, 2025. Expiration: Made permanent.

16. Savers Credit for ABLE Contributions (Section 25B(d)(1))

The provision including ABLE account contributions made by the designated beneficiary as eligible contributions for purposes of the Savers Credit is made permanent. The proposal amends Section 25B(d)(1) and repeals Section 103(e) of the SECURE 2.0 Act of 2022 (Public Law 117-328), applying the Code as though that paragraph were never enacted. Effective Date: Taxable years ending after December 31, 2025. Expiration: Made permanent.

17. 529 to ABLE Rollovers (Section 529(c)(3)(C)(i)(III))

The provision allowing nontaxable rollovers from qualified tuition programs (529 accounts) to ABLE accounts under specified conditions is made permanent. The proposal amends Section 529(c)(3)(C)(i)(III) by striking the expiration date. Effective Date: Taxable years beginning after December 31, 2025. Expiration: Made permanent.

18. Combat Zone Benefits (Public Law 115-97, Section 11026)

The treatment of certain qualified hazardous duty areas as combat zones for determining eligibility for specified tax benefits for members of the Armed Forces is made permanent. The proposal amends Section 11026(a) of Public Law 115-97 by striking "with respect to the applicable period". The definition of a qualified hazardous duty area is also modified to include Kenya, Mali, Burkina Faso, and Chad, in addition to the Sinai Peninsula. Effective Date: January 1, 2026. Expiration: Made permanent.

19. Exclusion for Student Loan Discharges on Death or Disability (Section 108(f)(5))

The exclusion from gross income for the discharge of qualifying student loans on account of death or total and permanent disability is restored. The proposal amends Section 108(f)(5). It includes requirements for the taxpayer to include their SSN and, if married, their spouse's SSN on the tax return for the year of discharge. The SSN requirements reference Section 24(h)(7) for the definition and apply rules similar to Section 32(d) for married individuals. The omission of a required SSN is treated as a mathematical or clerical error under Section 6213. Effective Date: Discharges after December 31, 2025. Expiration: Made permanent (the exclusion is restored without a new expiration date).

20. FDII and GILTI Deduction (Section 250)

The proposal lowers the preferential rates on Foreign-Derived Intangible Income (FDII) and Global Intangible Low-Taxed Income (GILTI) relative to the rates that would otherwise apply post-2025 under present law. It does this by increasing the corporate deduction for GILTI (including the Section 78 gross-up) from 37.5 percent (the post-2025 rate under present law) to 50 percent. The deduction for FDII is increased from 21.875 percent (the post-2025 rate under present law) to 37.5 percent. This effectively restores the 2018-2025 deduction percentages. The proposal amends Section 250(a) by striking paragraph (3), which contained the scheduled post-2025 rate changes. Effective Date: Taxable years beginning after December 31, 2025. Expiration: Made permanent (the revised deduction percentages are permanent).

21. Base Erosion Minimum Tax Amount (BEAT) (Section 59A)

The special rules that would apply to the BEAT for taxable years beginning after December 31, 2025, are repealed. Under present law, the BEAT rate was scheduled to increase to 12.5 percent, and regular tax liability would be reduced by all credits for purposes of the calculation. The proposal amends Section 59A(b) by striking paragraph (2), effectively preventing these post-2025 changes from taking effect. Effective Date: Taxable years beginning after December 31, 2025. Expiration: Made permanent (the repeal of the scheduled post-2025 changes is permanent).

Conclusion

The proposed legislative changes, particularly those effective after December 31, 2025, represent a significant shift, largely characterized by making permanent the temporary provisions enacted by Public Law 115-97, often with technical adjustments or enhancements. For CPAs advising clients, understanding the precise modifications, especially the revised Section 199A limitations for SSTBs with taxable income exceeding the threshold amount, the permanence of repealed deductions/limitations, and the adjusted credit rules, is crucial for effective tax planning and compliance in the coming years.

Prepared with assistance from NotebookLM.

Sources Consulted

House Ways & Means Committee Print Pursuant to H.Con.Res. 14, the Concurrent Resolution on the Budget for Fiscal Year 2025, May 9, 2025, https://docs.house.gov/meetings/WM/WM00/20250513/118260/BILLS-119CommitteePrintih.pdf

Joint Committee on Taxation, “Description of the Budget Reconciliation Legislative Recommendations Related to Tax,” JCX-18-25, May 9, 2025, https://www.jct.gov/publications/2025/jcx-18-25/