The American Institute of CPAs is worried about a provision in the tax reconciliation bill that would limit the deductibility of state and local taxes paid by partnerships such as accounting firms. 

The legislation, which was approved early Tuesday morning by Republicans on the House Ways and Means Committee after an overnight markup, eases some of the existing disparities from the Tax Cuts and Jobs Act on claiming the Section 199A Qualified Business Income deduction, known as the “specified service trade or business” limitation. It applies to accounting firms, as well as law firms, consultancies and other types of businesses that rely on a specialized reputation or skill. 

The AICPA praised the retention of the Section 199A qualified business income deduction, as well as the increase to 23% of the QBI deduction, which has been 20% under the TCJA, and modification of the SSTB limitation for pass-through entity taxes. But it objected to other changes in the bill to the limitation.

“The proposed bill would unfairly exclude SSTBs from deducting state and local income taxes at the partnership level, as is currently permitted,” said the AICPA. “The targeting of SSTBs would indirectly increase taxes on millions of service-based businesses and expand the disparity in how the tax code treats C corporations versus pass-through entities. The AICPA believes that Congress should retain the current ability for pass-through entities — which make up the vast majority of businesses — to deduct the entity’s state and local taxes at the federal level.”

According to the IRS, “an SSTB is a trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, investing and investment management, trading or dealing in certain assets, or any trade or business where the principal asset is the reputation or skill of one or more of its employees or owners.”

“While the AICPA remains grateful for the diligent work of the Ways and Means Committee to provide taxpayers and practitioners with common-sense tax policies that will have a continued benefit to the country and on the tax administration process, we remain deeply troubled by the proposed changes to the PTET deduction,” said AICPA president and CEO Mark Koziel in a statement Wednesday. “The changes to this vital deduction are unfair to businesses that are the backbone of the American economy, which include accounting firms, medical offices and Main Street businesses, of which the majority are structured as pass-throughs. It is integral that we have parity amongst all types of entities; the AICPA is committed to ensuring that the guiding principles of good tax policy and the interests of taxpayers and tax practitioners are taken into account during the reconciliation process, as these policies will have a significant impact on both. We will continue advocating for policies that exemplify the guiding principles that drive success throughout the profession. Treating any service business more harshly does not seem to follow the principles of good tax policy, such as neutrality, simplicity, fairness, certainty and transparency.”

The provision may have been a mixup, one expert speculated. “It is possible that 199A went up to 23% and the rule for people who are over that income threshold seems to have been revised in a way that could allow perhaps more people to get more generous benefits under 199A,” said Rochelle Hodes, a principal in the Washington national tax office at Crowe, a Top 25 Firm based in Chicago. “That seems to be the high-level takeaway on 199A. But when you look at the change to Section 275, which is addressing the SALT workaround that states have enacted into law, what they call pass-through entity taxes, it appears that the computation of that tax of those provisions could be less than favorable for some of the SSTBs. Nobody knows. Was that intentional? Was it just a relic? Was it two different groups working on two different things? There’s definitely an issue there.”

The AICPA also objected to another provision in the bill involving the permanent suspension of personal casualty loss deductions not attributable to federally declared disasters. “The AICPA has supported reinstating the casualty loss deduction to pre-TCJA rules,” said the Institute.

On the other hand, the AICPA gave a “strong endorsement” to many of the other provisions in the bill, including:

• An increase in the standard deduction for years 2025-2028;
• Making the tax bracket rates under the Tax Cuts and Jobs Act permanent;
• Inclusion of legislation to expand the use of Section 529 accounts for costs associated with obtaining a post-secondary credential, which grants financial flexibility to those pursuing or advancing in the accounting profession;
• Repeal of the American Rescue Plan Act’s lowered threshold for Form 1099-K to $600 for an unlimited number of transactions; the reconciliation legislation will return the requirement to a $20,000 threshold and over 200 transactions;
• Provision regarding Section 174 research and experimental expenditures, which may now be capitalized for domestic research or experimental expenditures over the useful life of the research or over 10 years beginning with the taxable year of expenditure;
• Provision regarding the Paid Family and Medical Leave Tax Credit Extension and Enhancement Act, which would provide certainty to businesses by making a temporary paid family leave tax credit permanent;
• Retention of the TCJA higher exemption amounts for the individual alternative minimum tax, which simplifies filing for many taxpayers; and
• Provision regarding section 163(j), which reinstates the earnings before interest, taxes, depreciation and amortization — or EBITDA — limitation.

The bill is likely to go through further changes as it makes its way through the House and Senate, where some Republicans from blue states have raised objections to various provisions, particularly with the SALT deduction. 

“There is not a consensus among the Republican caucus regarding how the expiring SALT cap should be resolved,” said Hodes. “That’s how I would put it.”

Key Senate Republicans are resisting the House’s plan to gut clean energy tax credits, vowing to soften the blow for emerging technologies and nuclear power.

The pushback comes after House Republicans released a plan to help pay for an extension of President Donald Trump’s tax cuts by cutting more than $500 billion in energy tax credits from former President Joe Biden’s signature climate law.

The comments from GOP lawmakers mean industries facing a sharp cutoff in federal help still have a chance to preserve their tax incentives for longer.

The plan “needs refinement,” said Thom Tillis, a North Carolina Republican, who serves on the Senate’s tax writing committee and was one of four Republicans to sign a letter to Senate leadership last month, vowing to defend Democrats’ Inflation Reduction Act’s energy tax credits. “It needs more transitions. It’s not quite what we would author out here.” 

The House’s plan to phase out technology-neutral tax credits for green energy projects that begin operating in 2029 is too aggressive, and emerging technologies should be given more time, said Senator Kevin Cramer, a North Dakota Republican.

“I think that the newer credits that have yet to really be applied will need to be extended beyond 2029,” Cramer told reporters in the Capitol Tuesday. “I would expect we will make some changes to try and improve it.” 

Cramer also said the House GOP’s deadline to phase out a production tax credit for nuclear power by 2032 needs to be pushed back. 

In all, the House bill would save $560 billion by rolling back incentives for clean energy and electric vehicles. Production and investment credits for clean electricity production from energy sources like wind and solar and another credit for nuclear electricity would be phased out, while credits for electric vehicles and hydrogen production would also end.

The legislation, which the House is aiming to pass by the end of the month, would then go to the Senate, where Republicans can only afford three defections and still pass it.

The tax credits, which were initially estimated by congressional estimators to cost $270 billion, have been forecast to cost trillions of dollars over the coming decades. That makes them a tempting target for Republicans seeking to pay for extending tax cuts that are also estimated to cost trillions.

But the credits are also providing jobs and spurring the construction of factories in numerous GOP districts.

Emerging Republican pushback means the House plan is likely a “ceiling for changes to the credits,” research firm Capstone LLC wrote in a note to clients. It said additional changes weakening the energy tax cuts could be made by moderate House Republicans before the bill is sent to the Senate.

Senator Lisa Murkowski, an Alaska Republican and moderate who also signed the April letter vowing to defend the credits, said she anticipated changes. 

“Anything that comes over from the House, almost by law, we’ve got to redo,” Murkowski told reporters.

Wealthy Americans and business investors are among the big winners in House Republicans’ draft tax legislation while targets of President Donald Trump’s ire such as immigrants and elite universities were hammered. 

The tax plan is likely to undergo significant changes as it winds through the House and then the Senate. But the committees’ drafts released this week have set up initial goalposts. 

Here’s who’s winning and losing so far in the tax fight.

Winners

Multimillionaires

The rich would dodge a tax increase and gain the ability to pass more wealth on to their heirs in the bill approved early Wednesday by the House’s tax committee.

House Republicans omitted a proposal the Trump administration floated to raise the income tax rate from 37% to 39.6% on people with very high incomes. Instead, wealthy families get another tax break: the estate tax exemption will rise to $15 million for individuals and $30 million for married couples next year, and rise with inflation afterward. Moreover, their Trump tax cuts would become permanent.

Small business owners

The bill increases the pass-through business tax deduction from 20% to 23% and expands the definition of who can qualify. The deduction is available to owners of sole proprietorships, LLCs and partnerships.

Private equity

The carried interest tax break benefiting private equity, venture capital and real estate partnerships would survive again, despite the president’s push to eliminate it. Private equity also won an expanded interest expensing tax break.

Domestic car dealers

Up to $10,000 a year in loan interest for U.S.-made cars would be tax deductible through 2028, a boon to auto dealers looking to close sales. But the break phases out slowly for individuals with more than $100,000 in income and couples with more than $200,000. This new break will cost an estimated $57 billion in lost tax revenue.

Manufacturers

The bill revives several favorable tax rules for businesses, including bonus depreciation for the cost of production upgrades and a research and development tax break, winning the endorsement of the National Association of Manufacturers. Those breaks, however, would also be temporary. 

Elderly and tipped workers

In a nod to some of Trump’s populist campaign promises, taxpayers aged 65 and older would get a larger standard deduction, while tips and overtime pay would be exempted from income taxes. The provisions included limits to shrink their cost and would expire after 2028.

Parents

The child tax credit would increase from $2,000 to $2,500 through 2028. Newly minted parents could open up new “MAGA” investment accounts for their babies seeded with $1,000 from the government.

Corporations

Other tax increases that had been considered that would have hit big business, such as an increase in the stock buyback tax or a limit on the state and local deduction for corporations, were mostly rejected.

Defense contractors

The package boosts defense spending by $150 billion, with much of the funding going to new weapons systems made by major contractors.

Losers

Low-Income Americans

Some of the cost for the tax bill would be defrayed through cuts to Medicaid health coverage and food stamps, both of which benefit low-income Americans. House Republicans are seeking to impose work requirements on able-bodied Medicaid recipients up to 64 years old and beneficiaries would have to pick up more costs. 

The GOP also has proposed cuts to the nation’s largest anti-hunger program, the Supplemental Nutrition Assistance Program. That includes expanding current work requirements to cover more beneficiaries. Beginning in 2028, states also would be required to pay a portion of food benefit costs, which are now fully paid by the federal government.

Residents of high-tax states

Lawmakers representing high-tax states such as New York, New Jersey and California pressed to increase a limit on the deduction for state and local taxes first imposed to help pay for Trump’s 2017 tax law. But House Republicans’ plan to raise the limit to $30,000 — up from the current $10,000 — fell far short of demands.

Negotiations are still underway and the disappointed lawmakers have plenty of leverage. House Speaker Mike Johnson said a SALT deal is likely Wednesday. House Ways and Means Chairman Jason Smith has criticized the demands for an even bigger SALT deduction, saying that a $30,000 cap covers more than 90% of the constituents in high-tax districts.

The limit would expire entirely at the end of the year without new legislation and because of the small Republican majority just a few lawmakers from high-tax states could block the House bill if they withhold their votes, as they have threatened to do.

Renewable energy

Clean energy industries would be hit by the Republican plan, which would roll back many provisions of former President Joe Biden’s landmark climate law. 

A tax credit for solar panels and other clean energy systems would be phased out, as would investment and production tax credits for wind, solar and other clean electricity production. Tax credits for the production of nuclear power and hydrogen production also would be phased out. 

Electric vehicle makers

Tesla Inc., General Motors Co. and other electric vehicle makers would be hit by elimination of a consumer tax credit of up to $7,500 for the purchase of electric vehicles. 

The GOP proposal also ends tax credits for used and commercial electric vehicles. 

Elite universities

Add tax bills to the escalating battle the Trump administration and Republicans are waging against elite universities such as Harvard and Columbia.

Private colleges and universities with at least 500 students and endowments exceeding $2 million per student would pay a rate of 21% on net investment income, up from the current tax of 1.4%. That includes Harvard, Yale, Stanford, Princeton and MIT.

But the plan won’t only impact the wealthiest private colleges. Colleges with endowments over $750,000 to $1.25 million per pupil will pay a 7% tax, while colleges with endowments over $1.25 million per student but below $2 million would pay 14%. Religious institutions are exempted.

Private foundations

Private foundations also would face an escalating tax based on their size: 2.78% for private foundations with assets between $50 million and $250 million, 5% for entities with assets between $250 million and $5 billion; and 10% for foundations with assets of at least $5 billion, such as the Gates Foundation, a longtime target for Republicans.

Immigrants

Several provisions would raise taxes on immigrants. That includes a new 5% tax on transfers of money to foreign countries, known as remittances. Many immigrants in the U.S. send money to relatives in their countries of origin. U.S. citizens could apply for credits to offset that cost.

The proposal also would restrict some immigrants’ access to tax credits for health coverage premiums. The change would prevent immigrants granted asylum or temporary protected status from accessing those credits.