Key Insights for Private Equity on the One Big Beautiful Bill Act

President Trump signed H.R. 1 (commonly referred to as the One Big Beautiful Bill Act or “OBBBA”) into law on July 4, 2025, achieving a major legislative milestone for his presidency. The OBBBA contains significant changes and enhancements to the tax code, many of which will have impacts on private equity at both the fund and portfolio company levels. While many managers are relieved that provisions harmful to the industry were cut, the beneficial changes may still complicate tax planning.  

The changes to the tax code will offer investors and qualifying companies the following: 

• A reduction in the holding period for QSBS, higher gross asset limits for acquiring larger targets, and increased exclusion amount allow investors, particularly independent and private equity sponsors, to access liquidity more quickly. This provides greater flexibility to exit during favorable market conditions while still enjoying enhanced exclusion benefits and substantial  tax advantages. 

• The reinstatement of IRC Sections 174, 163(j), and 168(k) and addition of 168(n) is expected to boost after-tax cash flow early in the holding period by reducing tax distribution requirements. High-margin companies, stand to benefit from accelerated deductions, enabling debt paydown or reinvestment into growth initiatives. As noted in a previous article, institutional investors are returning to old school value creation, focusing on pricing, product innovation, and operational efficiency as key drivers of value. 

Expansion of IRC Sec. 1202 Qualified Small Business Stock Exclusion 

Possibly the most beneficial provision in the bill was one that was not expected. The OBBBA makes changes to the exclusion of gain allowed under IRC Sec. 1202 for Qualified Small Business Stock (QSBS). For stock issued after July 4, 2025, the exclusion is increased to the greater of $15 million or ten times the taxpayer’s basis in the stock, up from $10 million. Additionally, the OBBBA increases the gross assets allowed to $75 million, up from $50 million. Prior to the bill’s passage, both the base exclusion and gross assets amounts were static – that is, they were not increased for inflation. Beginning for tax years after December 31, 2026, both the base exclusion and gross assets amounts will be adjusted annually for inflation.  

Another meaningful change is the holding period. Since its inception, taxpayers have been required to hold QSBS stock for over five years in order to take advantage of the exclusion amount. The bill introduces a holding period schedule which allows for some exclusion of gain after only three years, as follows: 

The non-excluded portion of QSBS gain is treated as collectibles gain, and taxed at 28% maximum federal rate, regardless of the taxpayer's regular capital gains rate. Effectively, the 50% exclusion results in about 33% tax savings, while the 75% exclusion equates to roughly 66% tax savings. 

No changes were made to IRC Sec. 1045 rollover of QSBS; it remains in effect.   

Again, this change is only for stock issued after the date of enactment.  

Planning: The recent changes present valuable benefits at both the fund and portfolio company levels. With the asset threshold for qualified targets now raised to $75 million, a broader range of companies will qualify, thereby increasing the pool of eligible acquisition targets for private equity firms. This expansion can lead to more strategic investment opportunities, allowing funds to diversify their portfolios with high-potential companies that were previously inaccessible. 

Additionally, the potential for earlier exits may become a more attractive option for investors. As the benefits of the new provisions take effect, private equity firms might find it advantageous to capitalize on favorable market conditions and exit strategies sooner than anticipated. This could enhance returns and provide liquidity options, ultimately benefiting both the funds and their portfolio companies. 

Furthermore, these changes may encourage more entities to either form or convert to C corporation status, as the tax advantages associated with the new provisions become more appealing. This shift could lead to increased investment in C corporations, further enriching the landscape for private equity investments. 

Revival of Major Business Breaks  

The more generous deductions allowed under IRC Secs. 174, 163(j), and 168(k) were all significantly reduced or eliminated under the TCJA. The OBBBA revived and made these provisions permanent, while also enhancing other expensing provisions. These changes should particularly help companies increase their cash flow, providing more immediate benefits.  

IRC Sec. 174A  – Research and Development Expenses 

For decades, IRC Sec. 174 allowed taxpayers to deduct their research and development (R&D) expenses in the year in which they were incurred. The TCJA altered IRC Sec. 174 dramatically and required businesses to capitalize and then amortize these expenses over five years (15 years for foreign expenses) beginning after December 31, 2021. The OBBBA does not completely revive full R&D expensing, but it allows companies to expense their domestic R&D expenditures in the year in which they are incurred. Foreign R&D expenses must still be capitalized and amortized over 15 years. 

The bill provides additional relief for unamortized R&D expenses, depending on whether the taxpayer is considered a small business or not. All businesses, regardless of size, may elect to deduct their remaining unamortized domestic R&D expenses either in 2025 or ratably in 2025 and 2026. Small businesses will be allowed to elect to amend their prior 2022, 2023, and 2024 year returns to deduct R&D expenses in those years.  

Planning: This provides portfolio companies with planning and cash-flow opportunities. However, the various options available, along with the interaction with the Research and Development Tax Credit, may introduce additional complexities and challenges. Companies should consult with their advisors to identify which option will yield the best results for their specific circumstances.   

IRC Sec. 163(j) – Business Interest Expense Limitation 

Another major change the TCJA made was to limit large companies’ business interest expense to 30% of their earnings before interest, taxes, depreciation, and amortization (EBITDA). Under the TCJA, the calculation changed for tax years starting after December 31, 2021, and limited the deduction to 30% of EBIT (earnings before interest and taxes). The bill reverts to the use of EBITDA for purposes of the limitation. The change is also retroactive to the tax years beginning after December 31, 2024.  

However, the bill did make one less beneficial change – it explicitly disallows the use of other code sections (such as IRC Secs. 266 or 263) to capitalize interest expenses as a workaround for the limitation. This limit is effective for taxable years beginning after December 31, 2025. 

Planning: This change is beneficial at every level from funds and portfolio companies to management companies. However, this is  especially helpful for heavily leveraged portfolio companies and leveraged blockers, as it will allow for more of the debt interest to be deducted. Companies that have previously taken advantage of interest capitalization should plan for disallowance for taxable years after December 31, 2025. There may be an opportunity to treat the catch-up R&D deduction as amortization. This treatment could increase the EBITDA denominator under the business interest expensing rules, potentially resulting in a larger allowable interest expense deduction, if elected in 2025. 

IRC Secs. 168(k) and 179 – Bonus Depreciation and Expensing 

The bill makes 100% bonus depreciation permanent for qualified property acquired and placed –in service on or after January 19, 2025. (Property acquired and placed in service before that date will still be limited to 40%.) Additionally, the bill increases the IRC Sec. 179 expense limit to $2.5 million, up from $1 million. The phase-out threshold for IRC Sec. 179 is increased to $4 million. This change to IRC Sec. 179 is especially beneficial at the state level, as many states do not fully conform to bonus depreciation.  

Planning: Portfolio and management companies will benefit from this change, providing increased cash flow. Companies that have historically been limited to bonus depreciation due to the lower IRC Sec. 179 phase-outs may have new opportunities to save taxes on the state level as well.  

IRC Sec. 168(n) – Qualified Production Property 

To promote reshoring, facility investment, and long-term capital expenditures in U.S. manufacturing infrastructure, the bill introduces new section IRC Sec. 168(n). The provision offers a temporary incentive by allowing 100% first year depreciation for domestic Qualified Production Property depreciation placed in service during the specified window. To qualify, the property must: 

• Be used in a qualified production activity,  
• Commence its original use with the taxpayer,  
• Begin construction after January 19, 2025, but before January 1, 2029, and 
• Be placed in service in the United States or a US possession before January 1, 2031. 

Planning: Manufacturing buildings and facilities are generally depreciated over a 39-year period. The acceleration of depreciation from 39 years to one year can significantly enhance near-term cash flow, especially for capital-intensive projects. Moreover, the immediate deductions may generate net operating losses (NOLs) that can be used to offset taxable income in future years, further strengthening liquidity.  

IRC Sec. 199A – Qualified Business Income Deduction 

IRC Sec. 199A allows eligible taxpayers to deduct up to 20% of their qualified business income (QBI) from their taxable income. This provision was scheduled to expire after 2025, but the OBBBA made it permanent.  

Once the taxpayer’s income exceeds certain income thresholds, the deduction is generally limited in the following ways: 

• If the taxpayer is in a specified service trade or business (SSTB), the deduction begins to phase out over certain amounts until no deduction is allowed. 
• If the taxpayer does not fall under an SSTB, the allowable deduction may be capped at 50% of W-2 wages, depending on the circumstances, once their income surpasses the threshold for phase-out.  

Planning: The permanence of IRC Sec. 199A is a significant advantage for portfolio companies organized as pass-through entities. Furthermore, certain management companies may see modest benefits from the slight increases in the threshold income phase-out amounts for SSTBs. 

Notably Absent Provisions 

Many provisions that could have negatively impacted the private equity industry were ultimately removed. These include: 

• Efforts to repeal the tax advantages of carried interest were not included in any versions of the bill.
• The proposed changes to IRC Sec. 461(l) that aimed to prohibit the use of excess business loss expenses as NOLs were ultimately eliminated. However, IRC Sec. 461(l) still restricts non-corporate taxpayers from deducting excess business losses. 
• The proposed "revenge tax" under the new IRC Sec. 899 would have imposed retaliatory taxes on taxpayer companies from foreign nations deemed to have "discriminatory taxes" against U.S. companies or taxpayers. This provision was removed in return for the global minimum tax under Pillar Two not being applied to U.S. companies. There were substantial concerns that this provision could have greatly discouraged investments in the U.S.  
• A provision that would have taxed litigation funding proceeds at 31.8% was removed by the senate parliamentarian at the eleventh hour. The provision also created concerns about possibly discouraging investment in the U.S.  
• Multiple variations on restricting the use of pass-through entity taxes (PTET) did not make it into the final bill; including one provision that would have disallowed specified services trade or business (as defined under IRC Sec. 199A) from taking any PTET deduction. This would have had an outsized impact on many investment management companies.  

Private equity firms must stay vigilant and proactive in their approach to understanding how the new provisions may influence their investment decisions and overall portfolio management. Navigating these developments successfully will require careful analysis and strategic foresight. 

If you have any questions about how these changes might impact your specific situation or investment strategy, please don't hesitate to reach out to us below. Our team is here to provide expert guidance and support as you adapt to these evolving tax dynamics in the private equity landscape.