How the One Big Beautiful Bill Act Impacts Private Equity

Private equity firms are no strangers to shifting tax landscapes, but the latest round of tax changes in the One Big Beautiful Bill Act (OBBBA) is different.

These updates aren’t just technical adjustments. They’re reshaping the way PE firms approach deal structure, entity selection and exit planning. Here, we’ve outlined a few of the greatest tax impacts that PE firms should know from the new legislation (plus what you should be thinking about next).

Section 1202: Qualified Small Business Stock

For private equity firms, the Qualified Small Business Stock (QSBS) provision under Section 1202 can be a game-changer when it comes to planning exits and maximizing after-tax returns.

If your portfolio company is structured as a C corporation (and meets the requirements), gains from the sale of its stock may be partially (or even fully) excluded from federal tax. The recent legislative changes have made QSBS exclusions more relevant for PE-backed companies, and the details are worth close attention.

Shorter Holding Periods Mean More Flexibility

Previously, to qualify for the QSBS exclusion, you had to hold the stock for five years. Now:

• If you hold the stock for three years, you can exclude 50% of the gain.
• If you hold the stock for four years, the exclusion jumps to 75%.
• If you hold the stock for five years, you’re eligible for a full 100% exclusion.

The QSBS changes are especially important for PE firms, where portfolio companies are often held for three to seven years before exit.

Higher Exclusion Caps Lead to Bigger Benefits

The cap on excluded gains has increased from $10 million per shareholder per corporation to $15 million, or 10 times your basis in the stock, whichever is greater.

Larger Companies Now Qualify

The asset threshold for qualifying corporations has been raised from $50 million to $75 million, which means that larger portfolio companies may now qualify for the QSBS exclusion. For PE firms managing growth-stage or scaling businesses, this opens up new planning opportunities.

Section 163(j): Interest Expense Limitation

Another recent change that’s especially pertinent to private equity firms involves the business interest expense limitation under Section 163(j).

Since 2018, the deduction for business interest expense has been capped at 30% of taxable EBITDA. With the Tax Cuts and Jobs Act, this limitation became even tighter in 2022, moving to 30% of EBIT. This reduced the amount of deductible interest for many leveraged portfolio companies. The new law, effective for tax years beginning after December 31, 2024, reverses this. Depreciation and amortization can once again be added back, restoring the calculation to 30% of EBITDA.

This is a welcome change for PE-backed companies, where acquisition structures can produce substantial tax-amortizable goodwill (sometimes in the hundreds of millions). That goodwill can drive $10, $15, or even $20 million in annual deductions.

Restoring the add-back directly increases the base for the interest deduction, which can be material for PE firms.

Section 174: Research and Development Expenses

Another area of the tax law that’s changed (and one that’s already affecting private equity portfolio companies) is how research and development (R&D) expenses are treated under Section 174.

Historically, these expenses were fully deductible until the Tax Cuts and Jobs Act (TCJA) introduced new revenue-raising measures. Starting in 2022, taxpayers were required to capitalize domestic R&D expenses over five years and offshore R&D over fifteen years. This delayed the deduction and created timing issues for many portfolio companies, resulting in higher tax payments in the short term.

The new law, effective for tax years beginning in 2025, reverses this for domestic R&D. Companies can once again deduct domestic R&D expenses in the year they’re incurred. For PE-backed companies weighing where to conduct R&D, this is a clear incentive to keep those activities domestic.

There’s also a retroactive component for smaller businesses. If your portfolio company has less than $31 million in gross receipts, it qualifies as a small taxpayer under Section 174. This allows you to go back and retroactively deduct any capitalized domestic R&D expenses from 2022, 2023, and 2024. The IRS has issued guidance on how to do this.

Looking ahead, all taxpayers have flexibility in 2025 to retroactively deduct any unamortized domestic R&D expenses that are carrying forward. This means you can “catch up” those deductions in 2025, providing a one-time opportunity to clear out any remaining capitalized expenses.

In many private equity transactions, there are millions of dollars in unamortized Section 174 expenses still on the books. Being able to write those off in the year of a deal, or just before a sale, can deliver a significant tax benefit. If your portfolio includes companies with substantial R&D spend, these provisions should be front and center in your year-end and transaction planning.

Bonus Depreciation

Previously, bonus depreciation was scheduled to drop to 40% in 2025, which would have limited the immediate expensing available for new investments. The OBBBA reverses that trajectory, restoring bonus depreciation to 100% and making it permanent.

For private equity firms, this means that portfolio companies can fully expense qualifying property in the year it’s placed in service, providing certainty and flexibility for capital planning. However, any property with a contract in place prior to January 19, 2025, is not eligible for 100% expensing under the new rules. This detail is critical for deal teams and finance leads to track as they plan and execute capital projects.

The permanence of 100% bonus depreciation gives PE firms and their portfolio companies a solid framework for modeling future investments and managing taxable income. With this provision, there’s less guesswork around timing deductions, and more opportunity to align tax strategy with operational needs.

Qualified Production Property (QPP)

The new law also introduces a provision for Qualified Production Property (QPP), which allows for 100% expensing of qualifying manufacturing property and expands the scope of assets eligible for immediate deduction.

There are some boundaries to keep in mind. Portions of a building related to sales or administrative functions are excluded from 100% expensing, the same January 19, 2025, contract date applies, and there’s a ten-year use requirement.

For PE-backed companies planning significant manufacturing investments, these changes can significantly impact your first-year deductions and overall tax posture. In practice, this means that a large portion of a qualifying building can be written off immediately, rather than over a 39-year period. Some portfolio companies are already preparing to take advantage of this provision in the current year.

As with other recent changes, the QPP rules are likely to evolve as the IRS issues further guidance. For now, the opportunity to accelerate deductions on manufacturing property is a win for PE firms looking to optimize after-tax returns on capital-intensive investments.

What Should Private Equity Companies Do Now?

The OBBBA brings some of the most significant tax updates for private equity in recent years. Each provision carries new opportunities and considerations for deal structuring, entity selection and tax planning across the investment lifecycle.

For private equity firms, the practical impact is already being felt in tax distribution calculations, capital planning and transaction strategy. And as always, the details matter. Staying up to date on IRS guidance and proactively considering these changes in your decision-making processes can make a big difference.

If you’re evaluating how these tax changes might affect your portfolio, now is the time to dig into the specifics and ensure your strategies are aligned with the latest rules. Contact your Warren Averett advisor directly to learn more, or ask a member of our team to reach out to you.