OBBBA Effective Dates Caution

Often, the effective date for tax legislation is for tax years beginning after 12/31/xx with xx being the year the legislation was enacted. So, provisions often start the year after the law is enacted. That doesn't give much time for planning or for the IRS to issue needed guidance. For example, the Tax Cuts & Jobs Act was signed into law on December 22, 2017 with most provisions effective 1/1/18.

The House's 5/22/25 and Senate's 6/28/25 versions of the One Big Beautiful Bill (H.R. 1) have varying effective dates both within the bill and between these versions for similar provisions. Also, some provisions in the House are temporary and most in the Senate are permanent.

But I want to highlight a few changes that would repeal provisions for individuals this year that were supposed to be in the law through 2032! 

These provisions were set to expire after 2032 per changes made by the Inflation Reduction Act of 2022.

Residential energy credits of Sections 25C and 25D (§25D was to phase out for 2033 and 2034):

  House and Senate bills - these credits end for property placed in service after 12/31/25.

Used clean vehicle credit of Section 25E:

  House bill - must acquire (take possession) by 12/31/25

  Senate bill - must acquire by 9/30/25

New clean vehicle credit of Section 30D:

  House bill - ends after 2025 but for 2026, limited to vehicles for which manufacturer produced no more than 200,000 vehicles.

   Senate bill - must acquire by 9/30/25

So, it's important to watch for the effective date in the final bill. But, if someone is eligible and really wants the clean vehicle credit, best to assume it ends 9/30/25. And if you really want the solar panel credit of §25D (or other items it covers) or energy efficient doors, windows and other items of §25C, best to act now to be sure it is all installed by 12/31/25. While it is unlikely the new termination date will be later than 2025 for the residential energy credits given current versions of OBBB, you never know.

What do you think?

H.R. 1 OBBB Depreciation Query

H.R. 1, One Big Beautiful Bill (OBBB) Act, was passed by the House on May 22 and the Senate is still working on their version although the Senate Finance Committee released their tax provisions on June 16. There are lots of tax provisions in the bill! Just look at the House version's table of contents with tax changes running from SEC. 110000 to 112208 + SEC. 70301 modifying a multistate tax nexus provision from 1959.

Changes include extending many of the temporary provisions of the TCJA passed in December 2017, such as lower tax rates for individuals and a higher standard deduction. H.R. 1 brings back 100% bonus depreciation for eligible assets. Bonus depreciation had begun to phase down per TCJA terms to 80% starting in 2023, 60% in 2024 and 40% in 2025. See SEC. 111001

But I question what seems like an odd effective date for this depreciation change - eligible property acquired and placed in service after January 19, 2025 (so starting on Inauguration Day). Property placed in service on January 1 to January 19 gets 40% bonus depreciation. Generally bonus depreciation rules apply per calendar year even for fiscal year taxpayers. So, why not allow 100% for all of 2025 especially given that the 40% for the first 19 days is from the TCJA drafted by the same party drafting H.R. 1? And it would follow the general rule of having the same rule for an entire calendar year. 

My query: What do you think - should we have 100% bonus for all of 2025 or only starting after January 19 and deal with 40% for the first 19 days? 100% versus 40% is a big difference in first year depreciation.

How Does the Revised SALT Cap in House OBBBA Work?

On May 22, the House passed H.R. 1, the One Big Beautiful Bill Act (OBBBA), and it now goes to the Senate Finance Committee where changes will occur. Some of the House provisions will need to be removed due to the Senate using the Budget Reconciliation Process which calls for restrictions on the nature of the changes, such as they must deal with revenues. And, the Senate will have different ideas on what is currently in the bill which includes over 40 tax changes and some non-tax provisions.

One item of contention among members of both parties is whether to keep the TCJA $10,000 SALT cap that expires at the end of this year. This is an important provision because it could cause the bill to not get enough votes to pass so compromise is likely. The House bill will increase the cap but adds a lot more, particularly to IRC Section 275, Certain Taxes. This rule is in Part IX of Subchapter B of Chapter 1 of Subtitle A or Title 26 (IRC); Part IX is titled Items Not Deductible. With the TCJA, the SALT cap was at IRC Section 164(b)(6) and was brief.

Where a legislative proposal or public law makes changes to various parts of an existing Code section, I often find it helpful to create a track changes of the affected Code sections to get a better understanding of the changes.  I have created such a document for the House's SALT changes which you can find in this 18-page pdf with changes shown using track changes.  Part of the reason it is long is because I include all of Section 164 despite few changes to it in order to get a better understanding of the changes to Section 275. The SALT cap changes also change a few partnership provisions.

I wish I could explain here how the SALT cap changes work, but I still need more time to figure it all out as the changes are a bit intertwined with other Code sections and H.R. 1 changes. This change does not meet the principle of simplicity!

If you have figured it all out I applaud you! Please leave comments to help us all out. 

It is likely that the Senate and Conference Committee will continue to make changes.

What do you think?

18th Anniversary of the 21st Century Taxation Blog

Well, I'm amazed to be marking today the 18th anniversary of starting this 21st Century Taxation Blog - and that we are still in need of having a 21st century tax system that reflects how we live and do business today. 

Today, I'll note the 2025 IRS Dirty Dozen list which was a topic of a webinar I delivered today for CCH/CPELink. I delivered a webinar on the 2024 list last year. In diving deeper into the list, I went back to its start in 2001 when there were just 8 items. I like to share with others work that I find helpful to me, so I posted by list of the Dirty Dozen items since 2001.  I categorize them into 3 broad areas:

1. Tax Shelters and Questionable Tax Minimization Strategies Involving Taxpayer Funds

2. Thefts and Other Frauds and Scams Against Taxpayers, Employers and Tax Preparers (mostly bad actors trying to get your money)

3. Fakes - Improper Reporting and Preparer Fraud (mostly improper ways to get money from the government)

See my chart here - https://www.sjsu.edu/people/annette.nellen/website/DirtyDozenTable.pdf

icymi - other items I post for reference you might find useful are lists of all Treasury regulations, and other official guidance from the IRS going back to 2011. The relevant Code sections for each item are listed and if it ties to a specific piece of tax legislation. And there are links to get the full text.  This can be useful to see what has been issued or if someone tells you there was, for example, a 2022 revenue ruling on the topic but they don't recall the number.  See the 2025 list and links to past lists here - https://www.sjsu.edu/people/annette.nellen/website/2025regs.html. 

I also have a variety of tax items posted here - http://www.21stcenturytaxation.com/

Looking forward beyond18 years of tax blogging, I want to focus more on how to improve tax and budget literacy so people can better understand their own taxes, and also understand how the system works and how to get involved in asking good questions of elected officials about tax changes as well as the logic (or lack of logic) of some existing tax rules. Quick example, only about 3% of employees earn tip income which Congress is about to exclude from income taxes. Where are the 97% of employees who don't have this type of income? Why not ask for a higher standard deduction or reduce the lowest two tax brackets to 9% and 11% (rather than 10% and 12%) to benefit far more individuals?  [For more on the tip income deduction, see my post of 2/23/25]

My goal in creating this website and blog was to highlight how tax systems can be improved to reflect how we live and do business today and to reflect principles of good tax policy.

I very much welcome comments and suggestions.

Thank you for reading!

SE Tax, NIIT, Additional §1401 Tax - What's Up?

There has been more focus on self-employment tax in recent years than in many years prior. There is ongoing litigation on what "limited partner, as such" under Section 1402(a)(13), added in 1977, means. This special rule provides that net earnings from self-employment does not include the distributive share of any item of income or loss of a limited partner, as such, other than guaranteed payments for services actually rendered to or on behalf of the partnership.

Does limited partner mean that under state law you are a limited partner, or does it depend on what the partner does? After all, Congress did not just say "limited partner," it wrote "limited partner, as such." Most limited partners are not involved in partnership operations, but some (as hinted at in (a)(13) above) are providing services for which they receive a guaranteed payment. Some "limited partners" might be involved in some key activities of the partnership such as in a recent case - Denham Capital Management LP, TC Memo 2024-114 (12/23/24). As noted by the Tax Court: "The Partners treated their work for Denham as their full-time employment. Each of the Partners participated in the management of Denham in some way."

In this case, the court agreed with the IRS that these limited partners were not limited partners as such. They found these partners were operating the business in a way that Congress would view them as subject to SE tax. 

There are other cases in appeals, such as Soroban Capital Partners LP, 161 TC 310 (2023).

In January 2025, the IRS updated its training materials on SE tax and partners with lots of background on the relevant law and issues.

A few observations:

These limited partnership cases involved lots of dollars - well beyond the Social Security wage/SE base which is $176,100 for 2025, so the issue is whether the limited partners owe Medicare tax of 2.9% on their distributive share + the 0.9% additional Medicare tax under Section 1401 for a total of 3.8%.

What isn't addressed in the cases is the Section 1411 net investment income tax (NIIT) and application of Section 469, passive activity loss limitation. Because the limited partners worked over 500 hours in the partnership, assuming it was just one activity, they are material participants so the income is non-passive (active) and not subject to the NIIT (Reg. 1.469-5(f)). If on appeal, these partners win and are not subject to SE tax, they still won't owe the NIIT.

The FY2025 Treasury Greenbook under President Biden includes a proposal (also suggested by others), that basically would find that income above the Section 1411 and 1401 thresholds ($200K if Single, $250K if MFJ) will be subject to either the additional Medicare tax (total rate of 3.8%) or the NIIT (also at 3.8%). See page 73 of the Greenbook.

Will we see any clarification or change to Section 1402(a)(13) to perhaps not only address what "limited partner" means but also how Congress thinks this applies to LLC members (the IRS and Tax Court apply a functional analysis to LLC members as well as to limited partners as such). This can't happen in the upcoming tax bill which will be handled via the budget reconciliation process because one of several limitations on this approach which allows only 51 votes in the Senate rather than 60, it that it can't address Social Security.

I don't think we'll see separate legislation on this topic but we should see more rulings including from courts of appeals.

What do you think?