Senate Version of Tax Bill Retains Key Housing, Business Provisions

The Senate Finance Committee on Monday evening unveiled its portion of the One Big Beautiful Bill Act — sweeping tax and domestic policy legislation that narrowly passed the House last month. The bill includes some changes to the House-passed version, which means if it passes the Senate it will go to a vote again in the House before making its way to the president’s desk to be signed into law.

Like the House bill, the Senate version includes several provisions that NAHB believes are very positive for small businesses, real estate and our members.

NAHB secured several key victories in the Senate tax bill:

Individual Provisions

• The Tax Cuts and Jobs Act would be made permanent, including the tax rate structure and increased exemptions for the Alternative Minimum Tax.
• The estate tax exemption would increase to $15 million, made permanent and be indexed for inflation.
• Current mortgage interest deduction rules would be made permanent and mortgage insurance premiums would now be allowed to be deducted.
• The Pease limitation on itemized deductions would be permanently repealed. In its place is a new limitation that reduces the value of itemized deductions for taxpayers in the top bracket from 37 cents to 35 cents, but excludes 199A deductions for this limitation.

Business Provisions

• The Section 199A Qualified Business Income Deduction, which helps provide tax parity for pass-through entities, would be made permanent at 20%.
• The Low-Income Housing Tax Credit would be expanded. While the House bill included temporary increases, the Senate bill would permanently increase 9% credit allocations by 12% and permanently reduce the bond test for 4% credit deals to 25%, which will expand resources in bond-constrained states. The Senate bill did drop the temporary rural basis boost included by the House.
• 100% bonus depreciation would be restored.
• Section 179 business expensing limits would be increased for small businesses.
• Opportunity Zones would be made permanent.
• The 1099 reporting threshold would be increased permanently to $2,000 and indexed for inflation starting for 2025.

State and Local Tax Deduction for Individuals and Pass-Through Businesses

The House-passed bill would increase the controversial limit on state and local tax (SALT) deductions for individuals from the current $10,000 to $40,000. This increase was part of a last-minute deal with Republicans representing high-cost and high-tax states which paved the way to passage of the bill in the House by a narrow 215 to 214 vote.

Senate Republicans do not support the SALT cap increase included in the House bill, but also recognize that changing the deal risks killing the bill in the House. Any changes to the House-passed bill by the Senate will require approval by the House.

Pending the outcome of negotiations in the Senate over the SALT cap, the Senate Finance Committee text includes the current law $10,000 cap as a placeholder.

The Senate bill also alters the treatment of so-called “SALT workarounds” adopted by most states with a state income tax. Known as a pass-through entity tax (PTET), this elective mechanism allows owners of pass-through entities to pay state income taxes at the entity level to avoid the SALT cap limitation.

The IRS blessed these arrangements in IRS Notice 2020-75. The House-passed bill would rescind the IRS notice, effectively ending the SALT workaround, but creates an exemption for certain business entities: builders and remodelers would generally still be allowed to deduct a PTET, while lawyers, accountants and consultants would not.

The Senate bill takes a different approach to these SALT workarounds, imposing a limit on the deduction rather than a repeal. In general, pass-through business owners would be able to deduct the individual SALT deduction plus an additional $40,000 in PTET allocations, or 50% of PTET allocations, whichever is greater.

Energy Tax Credits

Like the House bill, the Senate version proposes to end several energy tax credits used in the housing industry, though the Senate plan would provide a longer sunset period than the House for many of the energy tax provisions:

1. Section 45L New Energy Efficient Home Tax Credit would be eliminated 12 months after the date of enactment under the Senate bill (currently runs through 2032). This is a $2,500 tax credit for energy efficient new homes obtaining Energy Star certification, with a higher tier for net-zero ready homes.
2. Section 25D Residential Clean Energy Credit would be eliminated 180 days after the date of enactment (currently runs through 2032). Under current law, taxpayers may claim a credit for residential expenditures for solar electric property, solar water heating property, fuel cell property, small wind energy property, geothermal heat pump property, and battery storage property. The value of the credit is 30% of the expenditures.
3. Section 48E Clean Electricity Tax Credit, a 30% tax credit for installing clean power technology such as solar, and previously known as the Investment Tax Credit. The 48E credit would be phased out, from a 30% credit this year to 18% next year, 6% in 2027 and 0% in 2028. Like the House bill, this would also prohibit companies that lease solar systems to home owners from claiming the credit. This is a common arrangement to mitigate the upfront costs of solar for home owners while still allowing home owners to benefit from reduced energy costs.