Senate Begins Consideration of Budget Reconciliation Legislation After Releasing Updated Legislative Text

Almost two weeks after the Senate Finance Committee released its draft legislative text as part of the budget reconciliation legislation, Senate Republicans released an updated version of the budget reconciliation legislation as they work to gather enough votes and to pass the legislation before President Trump’s July 4 deadline.

Soon after the amended text was released on June 28, the Senate voted on a 51-49 margin to begin considering the legislation, with all Republicans except Senator Rand Paul (R-KY) and Senator Thom Tillis (R-NC) supporting and all Democrats opposing.

The Senate Finance Committee previously released its initial version of the reconciliation legislation on June 16, 2025, and the updated Senate reconciliation legislation includes modifications and revisions from the Senate Finance Committee draft to reflect the Senate Parliamentarian’s rulings regarding the Byrd Rule.

For additional information on the House-passed reconciliation legislation (the One Big Beautiful Bill), the Senate Finance Committee's draft legislative text, and a comparison to the current law, please see our previous Steptoe Client Alert.

The updated Senate reconciliation legislation makes additional changes to phase out the energy tax credits as requested by President Trump, adopts an increased $40,000 state and local tax (SALT) cap consistent with the House-passed bill, and removes the proposed section 899 retaliatory tax on certain foreign persons connected to jurisdictions with "unfair foreign taxes."   

The Senate is currently considering amendments to the updated Senate reconciliation legislation and is expected to vote on final passage later this evening or early on Tuesday morning. If the Senate passes the updated reconciliation legislation, it will return to the House of Representatives. The House is expected to adopt the Senate changes to allow Congress to send the bill to President Trump by July 4. However, the path forward remains uncertain, particularly as certain House Republican members urge deeper spending cuts. The CBO recently scored the updated Senate reconciliation legislation as adding $3.3 trillion to the national debt. This is far more expensive (nearly $1 trillion more) than the House-passed version and, despite the Senate proposing using the current policy baseline to make the cost more palatable, House budget hawks may find the price tag too large to bear.

As described below, the updated Senate reconciliation legislation includes several provisions that were included in the Senate Finance Committee draft, but the updated Senate reconciliation legislation diverges in critical areas, including:

International Tax Provisions

• Omits the section 899 retaliatory tax provision in light of the shared understanding between G-7 countries that the US system and the Pillar 2 undertaxed profits rule (UTPR) and income inclusion rule (IIR) should not apply to US-parented groups.
• Increases the base erosion and anti-abuse (BEAT) tax rate to 10.5% as of January 1, 2026, and omits the high-tax exception, treatment of capitalized interest as a base erosion payment, and reduction in base erosion threshold in the Senate Finance Committee draft.
• Excludes from foreign-derived intangible income (FDII) income from the sale or disposition of section 367(d) intangibles and property of a type that is subject to depreciation, amortization, or depletion, but not passive income as in the earlier version.
• Revises global intangible low-taxed income (GILTI) basket expense allocation rule changes to provide that interest and R&E expenses are not allocated to the GILTI basket and no interest or R&E allocated to GILTI basket and other expenses (other than foreign taxes and section 250 deduction) are allocated to GILTI only if "directly allocable."
• Includes new 10% haircut on foreign tax credits attributable to previously taxed earnings and profits (PTEP).
• Corrects a foreign tax credit limitation rule enacted in TCJA that (likely inadvertently) assigned base differences to the foreign branch basket instead of the general basket.
• Reduces the tax on remittance transfers to 1%.

Energy Tax Provisions

• Accelerates the end dates for wind and solar investment tax credits under section 48E and production tax credits under section 45Y, so that the projects would qualify for these credits only if placed in service by 2028 — compared to the previous Senate Finance Committee draft, which required a project to only begin construction by 2028.
• Adds a new excise tax on wind and solar projects that receive material assistance from a prohibited foreign entity. This tax applies to projects that begin construction after the date of enactment and before January 1, 2028, but are placed in service after December 31, 2027, or that begin construction after December 31, 2027, and before January 1, 2036 – in other words, projects for which the investment and production tax credits are already phased out.
• Modifies the other foreign entity of concern rules to reduce the threshold for specified foreign entity creditors to 15% from 25% and to tweak the rules applicable to publicly traded entities.
• Terminates the credits for clean vehicles under sections 30D, 25E, and 45W at the end of September, rather than 90 days (for previously owned clean vehicles) or 180 days (for new clean vehicles and commercial clean vehicles) from enactment as under the Senate Finance Committee draft.  
• Grants a two-year reprieve for the hydrogen production energy credit, pushing back the phase-out date from the end of 2025 as proposed in the Senate Finance Committee draft, to the end of 2027.
• Modifies the advance manufacturing production tax credit under section 45X to partially allow the credit for integration of primary components into secondary components sold to related individuals and to provide a 2.5% credit for metallurgic coal production.
• Modifies the clean fuel credit under section 45Z to extend it for two years (through 2029) instead of four years, to allow feedstocks from Canada and Mexico in addition to the United States, and to disallow negative emissions rates.
• Terminates the credit for sustainable aviation fuel.
• Extends the credit for small agri-biodiesel producers under section 40A for an additional two years, until December 31, 2026, and provides for its transferability under section 6418.
• Permits a deduction for purposes of the 15% corporate alternative minimum tax for certain intangible drilling and development costs.
• Increases the CHIPS Act’s advanced manufacturing investment credit under section 48D to 35% instead of 30%.

Opportunity Zone Provisions 

• Modifies the opportunity zone rules to eliminate the gradual seven-year basis step-up in favor of a 10% step-up after five years.

Pass-Through Provisions

• Removes the limitations on PTET workarounds for the SALT cap and does not include the House-passed limitations on the SALT deduction for certain pass-through businesses that are considered a specified service trade or businesses as defined in section 199A. 
• Permanently extends excess business loss limitation, but, unlike the Senate Finance Committee draft, omits:
  • • Language that would have taken into account excess business loss carryovers in determining a taxpayer's excess business losses in subsequent years.
    • New rules governing treatment of excess business losses upon termination of an estate or trust.
    • Language that would have subjected excess business loss carryovers to tax attribute reduction rules applicable to COD income and to the successor tax attribute rules of section 1398(g). 

Small Business Provisions 

• Includes new provisions regarding the treatment of capital gains from the sale of certain farmland property.

Individual Provisions 

• Adopts the House-passed provisions to increase the SALT cap to $40,000 through 2029 and phases out the deduction for income over $500,000 per year. The $40,000 SALT cap and the $500,000 income limit would each increase by 1% annually through 2029. In 2030, the SALT cap would return to $10,000 for all taxpayers.
• Reduces the increased standard deduction to $15,750 for individual taxpayers and $31,500 for married taxpayers filing jointly, a $250 and $500 reduction, respectively, from the Senate Finance Committee draft.
• Extends AMT relief but increases the phaseout from 25% to 50%.

Exempt Organization Provisions

• Maintains the top rate of 8% for the private college endowment excise tax, but the threshold at which the excise tax applies would increase from 500 students to 3,000 students.
• Removes the exemption from the private college endowment excise tax for "qualified religious institutions."
• Modifies the tax credit for contributions to scholarship-granting organizations to require the scholarship-granting organization to be approved in the state where it operates and that the organization spends not less than 90% of its revenues on scholarships.
• Increases charitable deduction to $50,000 for expenses incurred in support of Native Alaskan subsistence whaling and includes additional provisions related to non-profit community development activities in remote native villages in Alaksa.
• Increases the annual amount that can be contributed to a state 529 account from $10,000 to $20,000.

Miscellaneous Provisions

• Maintains the structure of the third-party litigation financing tax provisions but reduces the rate from an amount equal to the highest individual tax rate (currently 37%) plus an additional 3.8% to a rate of 31.8%.
• Modifies the exempt bond facility financing provisions under section 142 to include spaceport facilities.
• Permanently increases the limitation on the cover over of tax for the federal excise tax on distilled spirits.
• Continues to disallow deductions for employer-provided meals and adds commercial vessels and fishing boats to the exception to the disallowance for the deduction.
• Adds provisions related to the percentage of completion method of accounting for certain residential construction contracts.