On July 4, 2025, President Donald Trump signed into law extensive tax legislation as part of the One Big Beautiful Bill Act (OBBBA) that will impact the investment fund industry.
Perhaps one of the most important aspects of the OBBBA is not what it changes but rather what remains unchanged.
- Notably, the OBBBA does not change the current favorable taxation of carried interest, management fee waivers, or long-term capital gains rates.
- The OBBBA also does not change the pass-through entity tax (PTET) mechanism that allows fund managers to deduct state and local taxes imposed on income from management companies and certain carried interest vehicles.
- The OBBBA also omitted new proposed Section 899 that was in the House version of the legislation, which would have imposed retaliatory taxes against certain countries deemed by the U.S. administration to have unfair taxes. Section 899 would have significantly impacted foreign investors.
Below is a summary of the key tax changes in the OBBBA that funds should consider.
- Qualified Small Business Stock (QSBS)/Section
1202:
- The OBBBA expands QSBS benefits.
- Extends tiered benefits for partial QSBS gain exclusion for qualifying stock held three and four years, while continuing to allow for 100% gain exclusion at the five-year mark
- Increases the limit of the QSBS benefit at the individual level from $10 million to $15 million per issuer.
- Allows more small businesses to qualify for QSBS treatment by increasing the gross asset limitation from $50 million to $75 million of gross assets at the time of stock issuance.
- For more information, please click here.
- Miscellaneous Itemized Deduction Limits
- The OBBBA makes permanent the disallowance of miscellaneous itemized deductions for individuals that was implemented by the 2017 Tax Cuts and Jobs Act.
- Individual investors will not be able to deduct management fees and other fund-related expenses.
- Estate and Gift Tax Exemption Amounts
- The OBBBA increases the estate and gift tax exemption amounts from $13.99 million to $15 million and makes the increase permanent.
- This permanent increase is relevant for carried interest estate planning strategies.
- University Endowment Excise Tax
- The OBBBA increases the current 1.4% excise tax imposed on the net investment income of certain private colleges and universities.
- Imposes a new tiered tax rate structure that could result in an excise tax of up to 8%.
- This increase could affect investment decisions for large institutional endowment investors.
- Opportunity Zones
- The OBBBA extends the opportunity zone program indefinitely.
- The changes to the program include rolling 10-year census tract designations, new criteria for designation of the opportunity zones, changes to the deferral periods and investors' basis calculations, a new 30-year investment period rule, and enhanced reporting requirements.
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- Business Tax Provisions Affecting Portfolio
Companies
- The OBBBA enacts a number of tax provisions impacting businesses.
- Restores 100% bonus depreciation under Section 168(k) for qualified assets acquired starting on January 20, 2025.
- Increases interest expense deductions (also relevant for fund structures with leveraged blockers) by changing the Section 163(j) 30% business interest expense limitation to be based on "adjusted taxable income" calculated similar to the more favorable EBITDA calculation rather than the EBIT calculation.
- Provides immediate expensing of domestic research and development costs.
- Makes permanent the 20% deduction under Section 199A for qualified business income from pass-through entities such as partnerships and S corporations and for ordinary REIT dividends, effective after December 31, 2025.
- Increases the percentage of a REIT's total assets that may be represented by securities of one or more taxable REIT subsidiaries (TRS) from 20% to 25%, effective after December 31, 2025.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
