What's Happening?
The One Big Beautiful Bill Act (OBBBA) introduces significant changes to federal tax legislation affecting private equity transactions. Key provisions include reverting the adjustable taxable income calculation
to an EBITDA base, making 100% bonus depreciation permanent for qualified property, expanding qualified small business stock benefits, restoring immediate expensing of domestic research and experimental expenditures, and making permanent the qualified business income deduction for passthrough business income. These changes are set to impact how transactions are structured, financed, and modeled, with implications for leveraged buyouts, dividend recapitalizations, and growth financings.
Why It's Important?
The OBBBA's tax changes are poised to significantly impact private equity sponsors and their portfolio companies. The shift to an EBITDA base for interest deductibility enhances leverage modeling, potentially increasing post-tax cash flows. The permanent bonus depreciation benefits capital-intensive sectors like industrials and manufacturing, offering immediate expensing of eligible assets. The expansion of qualified small business stock benefits increases the universe of companies eligible for tax advantages, while the restoration of immediate R&E expensing aligns tax benefits with operational cash cycles. These changes offer strategic planning opportunities for private equity investors and public accounting professionals, enhancing transaction-level advisory roles.
What's Next?
Private equity firms and accounting professionals will need to adapt quickly to leverage the new tax landscape. Advisors are expected to play a critical role in guiding clients through expanded interest deduction bases, permanent bonus depreciation, enhanced QSBS benefits, R&E expensing, and QBI incentives. The unchanged federal corporate income tax rate and preserved PTET deductibility provide stability amidst these shifts. Firms that effectively navigate these changes will be well-positioned to drive post-tax value creation for their clients.
Beyond the Headlines
The OBBBA's tax changes may lead to broader implications for entity selection and transaction structuring. Advisors will need to evaluate C corporation versus passthrough structures for platform investments, considering the new incentives. The legislation's permanence removes uncertainty in modeling passthrough entity structures, potentially influencing long-term strategic decisions for private equity firms.
