What's Happening?
The One Big Beautiful Bill Act (OBBBA) introduces significant tax rule changes affecting private equity transactions. Key changes include the expansion of qualified small business stock benefits under
Section 1202, increasing the gross asset threshold from $50 million to $75 million and the lifetime per-holder gain exclusion cap from $10 million to $15 million. The Act also makes permanent the qualified business income deduction under Section 199A, with higher income thresholds before phaseout. Additionally, the OBBBA restores 100% immediate expensing of domestic research and experimental expenditures under Section 174A, reversing previous amortization requirements. These changes are set to influence how private equity transactions are structured, financed, and modeled.
Why It's Important?
The tax rule changes under the OBBBA have significant implications for private equity sponsors and their portfolio companies. By expanding the qualified small business stock benefits, more companies can qualify for tax advantages, potentially increasing investment attractiveness. The permanent qualified business income deduction provides predictability and broader applicability, enhancing after-tax returns for passthrough entities. The restoration of immediate expensing for R&E expenditures improves cash flows for R&D-intensive companies, aligning tax benefits with operational cycles. These changes offer strategic planning opportunities for private equity investors, allowing them to optimize transaction structures and maximize post-tax value creation.
What's Next?
Private equity firms and their advisors will need to adapt to the new tax landscape by reevaluating transaction structures and modeling after-tax returns. The expanded interest deduction base and permanent bonus depreciation offer opportunities for strategic leverage modeling and asset expensing. Advisors will play a crucial role in guiding clients through these changes, ensuring compliance and optimizing tax benefits. As the OBBBA provisions take effect, private equity investors are positioned to capitalize on the new incentives, potentially driving increased deal activity and valuation premiums in capital-intensive sectors.
