Summary
Recently, President Donald Trump signed the bill known as the One Big Beautiful Bill Act (OBBBA) into law. OBBBA permanently extends many provisions of the Internal Revenue Code (Code) introduced by the Tax Cuts and Jobs Act (TCJA) that were scheduled to expire at the end of this year and includes several other amendments to the Code that could have significant tax consequences for individuals and businesses.
The Upshot
OBBBA introduces several provisions that could affect venture capital and private equity funds and their sponsors, such as permanent extensions to the qualified business income deduction, enhancements to qualified small business stock exclusion, and changes to the calculation of business interest expense. OBBBA does not alter the taxation of carried interest which is favorable for fund sponsors. Modifications to excise taxes for private university endowments could potentially impact the investor base.
The Bottom Line
It’s important to stay informed about the changes brought by the OBBBA and explore how these provisions might affect your business strategies and investments. Attorneys in our Tax Group are closely monitoring these developments and are available to discuss customized strategies for navigating the new tax regulations.
On July 4th, 2025, President Donald Trump signed the bill known as the One Big Beautiful Bill Act (OBBBA) into law. OBBBA permanently extends many provisions of the Internal Revenue Code (Code) introduced by the Tax Cuts and Jobs Act (TCJA) that were scheduled to expire at the end of this year and includes several other amendments to the Code that could have significant tax consequences for individuals and businesses.
While the discussion below outlines the key changes under OBBBA that would impact Venture Capital and Private Equity Funds and their sponsors, we first want to highlight two important items that are not part of OBBBA – taxation of carried interest and the “revenge” tax.
No Change in Taxation of Carried Interest
Despite multiple suggestions from various sources in the months and weeks leading up to the passage of the OBBBA hinting at possible changes to the taxation of carried interest, the OBBBA does not contain any provisions changing the current law regarding the taxation of carried interest. This is welcomed news to fund sponsors.
No “Revenge” Tax
In consideration of an agreement between the United States and the G7 nations, OBBBA did not include the initially proposed Code Section 899, informally known as the “Revenge” Tax, which would have enabled the United States to charge higher taxes on foreign countries that implemented “unfair foreign taxes” against U.S. individuals or companies. We will keep monitoring developments in connection with the G7 arrangement and Section 899 for potential impact.
Relaxed Limitation on Deductibility of Business Interest (Code Section 163(j))
Current Law
Under current law, business interest expense deductions are generally limited to 30% of adjusted taxable income (ATI). ATI is the taxable income of the taxpayer calculated with certain exclusions (such as non-business income, gain, deduction or loss, any business interest income, any net operating loss, any 199A deduction, or depreciation, amortization, or depletion), similar to an EBITDA (“Earnings before Interest, Taxes, Depreciation, and Amortization”) concept. For tax years prior to 2022, ATI was calculated without regard to depreciation, amortization, or depletion. Beginning in 2022, the calculation of ATI shifted to excluding addbacks for depreciation and amortization. This generally resulted in a lower ATI and, subsequently, a lower interest deduction.
OBBBA Changes to Business Interest Expense
OBBBA makes several changes to the calculation of ATI. First, OBBBA reverts to the original, pre-2022 calculation by including depreciation and amortization as an add back for tax years beginning after December 31, 2025, and by permanently increasing the ATI for purposes of calculating the limitation.
Second, OBBBA creates a new category of exclusion that includes certain international tax items (such as subpart F and GILTI inclusions), which will have the opposite effect as the first change and will reduce the ATI.
Lastly, OBBBA introduces certain ordering rules for interest expense allocation, which have an effect of decreasing the interest expense deduction allowable to taxpayers. This is welcomed news to leveraged blockers who would potentially be increasing their ability to deduct interest expense.
Qualified Business Income Deduction (Code Section 199A)
Current Law
Code Section 199A allows certain individuals, trusts, and estates to deduct 20% of their (i) “qualified business income” from sole proprietorships, partnerships, and S corporations and (ii) REIT dividends. For taxpayers with income that exceeds certain threshold amounts, the Code Section 199A deduction is subject to limitations based on wages paid and unadjusted basis in qualified property. This deduction was set to expire at the end of 2025.
OBBBA Changes to the Qualified Business Income Deduction
OBBBA permanently extends the 20% deduction. In addition, OBBBA made certain taxpayer favorable changes by relaxing the income-based phase-out of the deduction.
Enhancements to Qualified Small Business Stock Benefits (Code Section 1202)
Current Law
Code Section 1202 allows eligible shareholders (mostly individuals and other non-corporate investors) who invest in stock of a corporation that meets the requirements of a qualified small business stock (QSBS) and hold such stock for more than five years to exclude all or part of the gain realized from the sale of such stock from income. The gain is also excluded for alternative minimum tax (AMT) purposes and the 3.8% net investment income tax (NIIT). For a corporation to be considered a “qualified small business,” such corporation must meet certain requirements - including as to its gross asset value of its assets - and satisfy the active trade or business requirement.
OBBBA Changes to Qualified Small Business Stock
OBBBA includes enhancements to QSBS benefits, such as including eligibility for benefits after a shorter holding period. Changes under OBBBA apply to qualified small business stock that was issued after July 4, 2025 (the “effective date”).
Holding Period Changes: OBBBA reduced the minimum required holding period to three years and introduced a tiered exclusion based on a taxpayer’s applicable holding period:
Ballard Spahr Observation:
- The federal tax rate applicable to the sale of a “qualified small business stock” is 28%, which was not changed by the OBBBA. Therefore, the gain not excluded for holding periods of three and four years would be subject to tax at a higher rate than the current long-term capital gain rate of 20%.
- For purposes of calculating the holding period for purposes of the three- and four-years exclusion, ownership of QSBS issued before the effective date in case of stock for stock exchanges or other permitted QSBS transfers, is not tacked.
Increase in the Amount of Gain Limitation: prior to OBBBA, there were two separate gain exclusion caps (i) cumulative per-taxpayer, per-issuer $10 million cap (the “10 million cap”) and (ii) 10 times the aggregate tax basis of the QSBS stock sold in the applicable tax year. For stock that was issued after the effective date, OBBBA increased the 10 million cap from $10 million to $15 million (and introduced an inflation adjustment).
Increase in Gross Assets Limit: One of the requirements for stock of a corporation to be considered a QSBS is that the adjusted gross assets both prior and immediately after the applicable stock issuance is less than $50 million (“gross asset cap”). OBBBA increases the gross assets cap from $50 million to $75 million (and this amount is also now subject to inflation adjustment).
Ballard Spahr Observation: This increase should allow more corporations to issue stock that is QSBS and should be welcomed news to both founders and in the context of potential M&A transactions.
Research and Experimental Expenditures Tax Benefits
Current Law
Domestic research and experimental (R&E) expenditures must be capitalized and amortized over five years; this change was enacted as part of the TCJA. Prior to the TCJA, taxpayers were able to elect to deduct such R&E expenditures in the year they were incurred.
OBBBA Changes to R&E Expenditures
OBBBA reinstates the pre-TCJA elective regime. Under OBBBA, at the election of the taxpayer, domestic R&E expenses incurred in tax years beginning after December 31, 2024, may either be (1) immediately deducted, or (2) capitalized and amortized over the useful life of the research (not less than 60 months). No change was made to the expenditure of foreign R&E costs and those would still be capitalized and amortized over 15 years.
Bonus Depreciation
Current Law
The TCJA temporarily increased the additional first year bonus depreciation deduction for certain qualified property to 100%. This provision began phasing out starting in 2023 in a manner that that reduced the bonus depreciation rate by 20% each year and was scheduled to completely phase out by 2027.
OBBBA Changes to Bonus Depreciation
OBBBA eliminated the phase-out and permanently restored 100% bonus depreciation for certain qualified property that is placed in service after January 19, 2025. Qualified property includes leasehold improvements and nonresidential interior improvements as well as equipment and machinery.
Depreciation of Production Property
Current Law
Under current law, most nonresidential real property can be depreciated over 39 years.
OBBBA Changes to Depreciation of Production Property
OBBBA creates a temporary benefit for the construction of manufacturing facilities. Under OBBBA, an elective first year 100% depreciation allowance is permitted for qualified production property (i) for which construction begins after January 19, 2025, and before January 1, 2029, (ii) that is placed in service before January 1, 2031, (iii) the original use of which must commence with the taxpayer and (iv) that is used by the taxpayer as an integral part of a qualified production activity. Qualified production property means any nonresidential real property that is used for manufacturing, production, or refining (“qualified production activity”). Qualified production property does not include any nonresidential real property used for offices, administrative services, lodging, sales activities, research activities, software engineering activities, or other functions unrelated to manufacturing, production, or refining. As mentioned above, qualified production property must be used by the taxpayer, so it cannot be leased to a tenant (i.e., it must be owner-occupied).
If at any time during a 10-year period beginning on the date the property was placed in service, such property stops being qualified production property, the depreciation expense is recaptured.
Extended Excess Business Losses
Current Law
The excess business loss limitation restricts non-corporate taxpayers from claiming excess business losses in the current tax year against portfolio and wage income. Such losses, however, may be carried forward as net operating losses to following tax years (and therefore may be used against wages and portfolio income), effectively resulting in a deferral of such losses for one year. This limitation was set to expire after 2028.
OBBBA changed to Excess Business Losses
OBBBA makes this limitation permanent.
Changes in Excise Taxes Imposed on Private University Endowments
Current Law
Net investments of certain private colleges and universities are subject to excise tax of 1.4%.
OBBBA Changes to Excise Taxes
OBBBA replaces the flat rate 1.4% excise tax with a graduated tax of up to 8%, which significantly increases the tax rate imposed on the net investment income of institutions that have endowments of $750,000 or more. OBBBA also modified the scope of the excise tax by imposing it on private colleges and universities that have at least 3,000 tuition-paying students and have a student-adjusted endowment of at least $500,000.
Ballard Observation: This significant increase in the excise tax rate could potentially impact the investment policy of such institutions and could potentially have an impact on the venture capital and private equity investor pool.
[View source.]
