The only constants in life are death, taxes, and change. All of which are implicated by the recent passage of the One Big Beautiful Bill Act (OBBBA).

The newly enacted OBBBA introduces a series of tax and spending reforms that touch nearly every stage of the M&A investment lifecycle. The key elements of the OBBBA’s tax policy changes materially impact the go-forward federal, state, and international tax landscape for private equity funds seeking out new targets with their trillions of dry powder or looking to sell existing assets in their portfolios.

This article provides a summary of the OBBBA's new key tax provisions through the lens of middle-market private equity.

Some impactful highlights include:

  • Interest Expensing Based on EBITDA: Increased interest deductibility
  • 100% Bonus Depreciation: Increased present value of after-tax cash flows on asset purchases
  • Expanded Qualified Small Business Stock (QSBS): Increased tax-free thresholds and partial relief for short holding periods.
  • 100% R&D Expensing: Accelerated expensing of U.S. R&D costs
  • Qualified Business Income (QBI) Deduction: Investors gain incentives to structure via passthrough structure for entities generating QBI
  • Additional Considerations: The OBBBA also notably did not make certain changes. It maintained the 21% federal corporate tax rate as well as federal PTET deductibility and, notably, did not touch the carried interest rules.

Interest Deductibility -- Section 163(j)

New Rules

  • The OBBBA permanently returns to calculating adjustable taxable income (ATI) with a tax EBITDA-based formula, rather than EBIT, for tax years starting after December 31, 2024. This change increases the maximum deductible interest under the 30% ATI limitation.
  • It also coordinates other interest capitalization provisions with Section 163(j), clarifying that interest pursuant to other Code sections is excluded from the 163(j) limitation calculation. Interest properly capitalized will continue to be added to the basis of the asset and recovered over time, but it will not reduce deductible interest under the new 163(j) standard.

PE Outlook

  • These changes allow private equity investors to obtain more tax-efficient debt for leveraged buyouts (LBOs), dividend recapitalizations, or growth financings where leverage is a key value driver.
  • EBITDA-based ATI restores an expanded interest deduction base, sheltering earnings and improving cash flow.
  • Capitalized interest no longer reduces the 163(j) interest deduction limitation, allowing greater alignment between financial accounting and tax treatment.

Bonus Depreciation and Asset Expensing -- Section 168

New Rules

  • The OBBBA makes permanent the 100% first-year “bonus” depreciation deduction for qualified property acquired and placed in service after January 19, 2025. This includes new and used tangible property with a recovery period of 20 years or less.
  • It also creates a 100% depreciation for certain domestic nonresidential real property used as part of a “qualified production activity.”

PE Outlook

  • These changes significantly increase the value of a tax basis step-up for private equity buyers, especially for capital intensive targets, since they can instantly recover these expenses, as compared to the prior 40% bonus depreciation rule.
  • Due to this increased net present value, private equity buyers should consider structuring transactions to obtain a tax basis step-up, and even be willing to “gross-up” sellers for any incremental tax costs incurred.
  • These rules can cause certain industries to become more attractive from an after-tax cash flow perspective, including industrials and manufacturing.

QSBS Gain Exclusion Expansion – Section 1202

New Rules

  • The OBBBA delivers a boost to Section 1202 Qualified Small Business Stock (QSBS), increasing the gross QSBS asset threshold to $75 million (up from $50 million) and lifetime per-holder gain exclusion cap to $15 million (up from $10 million).
  • The gain exclusion now scales based on holding period:
    • 50% exclusion for QSBS held more than three years
    • 75% exclusion for QSBS held more than four years
    • 100% exclusion for QSBS held more than five years

PE Outlook

  • These changes dramatically increase the pool of potential private equity targets that could qualify for a QSBS structure.
  • Further, the graduated exclusions offer more diverse liquidity options for an exit that occurs prior to the five-year mark, providing a combination of flexibility and tax benefits.
  • Higher per-issuer limits make QSBS planning viable for repeat investments or larger rounds. Portfolio company eligibility expands under the new $75 million gross assets test, allowing funds to apply QSBS treatment to later-stage growth investments that would have previously exceeded the asset threshold.

Research & Experimental (R&E) Expenditures -- Section 174A

New Rules

  • The OBBBA creates Section 174A, which restores 100% immediate expensing of qualifying domestic R&E expenditures (but not foreign), and reverses the Tax Cuts and Jobs Act (TCJA) requirement that taxpayers amortize domestic R&E expenditures over five years.
  • All taxpayers can accelerate current amortized R&E balances over a one or two-year period, and certain small businesses may retroactively deduct previously capitalized R&E expenses.

PE Outlook

  • These changes under Section 174A can significantly improve after-tax cash flow for innovation-centric portfolio companies. It may also make targets in certain high-R&E industries more attractive, including tech and healthcare.
  • Funds should benefit from improved return on innovation investments and more predictable tax outcomes, aligning with internal R&D accounting practices and cost-benefit modeling.

Qualified Business Income Deduction -- Section 199A

New Rules

  • The OBBBA makes permanent the QBI deduction under Section 199A, originally enacted as part of the TCJA. The change is intended to expand the deduction’s accessibility to a wider range of taxpayers by increasing the phase-in thresholds and introducing a guaranteed minimum deduction for qualifying active business income.
  • The OBBBA raises the income levels at which the QBI deduction becomes subject to wage and qualified property limitations. For 2025, the phase-in threshold for joint filers increases from $364,200 to $500,000.
  • A new “floor deduction” equal to at least 10% of net active QBI is introduced for eligible businesses regardless of owner income. This ensures that business owners with income above the phase-out threshold still receive a baseline deduction as long as the income is derived from a qualifying “active trade or business.”

PE Outlook

  • These changes provide more certainty in the tax treatment of pass-through structures, especially for platform companies generating QBI.
  • Portfolio company owners will benefit from a larger and more predictable deduction, increasing post-tax income.

Summary

In summary, the provisions introduced by the OBBBA fundamentally reshape the near-term tax landscape for private equity funds buying targets or selling portfolio companies. These changes present opportunities and challenges that demand careful navigation. Understanding how these changes impact entity selection, deal structuring, and tax planning is essential for optimizing post-tax investment returns and managing risk in a dynamic regulatory environment.