“One Big Beautiful Bill Act” Targets Service Businesses

By: William L. Bricker, Linda Galler, and Matthew Crawford

H.R. 1, the “One Big Beautiful Bill Act” (the “House Bill”), passed the House of Representatives on May 22, 2025. It contains many surprises, including significant changes to the rules on the deductibility of state and local taxes (“SALT”).  The 2017 Tax Cuts and Jobs Act (TCJA) included a $10,000 cap on SALT deductions by individual taxpayers through 2025.

In response to taxpayer concerns (primarily in states with high taxes), many states passed laws offering a pass-through entity tax workaround (“PTET”) to certain business owners. The IRS respects these PTET arrangements, under which partnerships and S corporations can elect to pay SALT at the entity level, deduct the payments on their federal tax returns, and then pass the deductions through to their partners or shareholders. See Notice 2020-75 (Nov. 10. 2020). The result is that business owners can effectively claim SALT deductions above the $10,000 cap.

The House Bill makes several changes in the area of SALT deductions.  First, the SALT cap would increase to $40,000 (and increase in future years to reflect inflation).  Second, the PTET workaround would no longer be available for certain service businesses, such as law firms, accounting firms, architecture practices, and medical groups. Owners of non-service entities, such as investment partnerships, investment banks, private equity firms, and the rest of Wall Street, would continue to benefit from both the PTET workaround and the increased SALT cap.

Whether the Senate will modify the House Bill remains to be seen. The current goal is to bring a bill to the Senate floor for a vote the week before July 4. Congressional leaders hope that a final bill can be sent to the President before the July 4 holiday.