The enactment of the One Big Beautiful Bill Act (OBBB) on July 4 will have a significant impact on tax planning for the investment and asset management industry.
The act has mostly favorable provisions for asset management, with varying implications for asset managers, portfolio company investments, and investors. With the legislation now final, investors and funds should focus on assessing its impact and identifying planning opportunities and challenges.
Several key provisions offer different options for implementation. The effective dates will be important, and there may be time-sensitive planning considerations. The act could immediately affect decisions on how to structure new investments in tax efficient ways.
This Alert highlights key provisions of the OBBB affecting the asset management industry. For a broader discussion of the act, see BDO’s Tax Alert: “Republicans Complete Sweeping Reconciliation Bill.” Also available are a table of major provisions, a recording of a July 10 webcast on the act, and discussions of the financial accounting implications, international tax provisions, and real estate implications.
Key Implications for Asset Managers
Preservation of SALT Cap Workarounds and Section 199A
The act makes permanent the Section 199A deduction for pass-through business income. The deduction will still generally not be available for financial services, brokerage services, investing or investment management, trading, or dealing in securities. It will remain available for real estate investment trusts (REITs), banking, and some portfolio company operating businesses structured as pass-throughs.
The OBBB makes the state and local tax (SALT) cap permanent while raising the threshold for five years and then reverting it to $10,000 in 2030. The cap is set at $40,000 for 2025 but phases down to $10,000 once income exceeds $500,000. Both thresholds will increase by 1% for each year through 2029. More importantly, lawmakers struck a provision that would have shut down SALT cap workarounds offered by states with pass-through entity tax (PTET) regimes.
BDO Takeaway
Most states have now enacted PTET regimes that allow pass-through businesses to elect to be taxed at the entity level, where a deduction is allowed without regard to the individual SALT cap. The regimes can offer a valuable benefit to both managers and investors, particularly in years when a transaction will create significant state taxes. The elections can also have complex ramifications and should be modeled first.
IRA Energy Credits Phaseout and Repeal
The OBBB raises approximately $500 billion by repealing, restricting, and phasing out many of the energy credits enacted under the Biden administration as part of the Inflation Reduction Act (IRA). The effective dates for the phaseouts and new restrictions are staggered depending on the specific credit. The act does not affect the transferability or refundability of the credits.
BDO Takeaway
Funds involved in energy investments or projects should carefully assess the impact of the rules. It may be prudent to accelerate some near-term projects while reassessing the economic viability of projects that are less shovel ready. The credit transfer market and tax equity financing market should remain robust for the next several years.
Changing the Regulatory Mandate for Disguised Sales or Payments for Services
The act changes a reference to regulations under Section 707(a)(2) that could affect fund managers. It essentially clarifies that the rules are effective even in the absence of regulations.
Section 707(a)(2) allows the IRS to recharacterize certain transactions involving partners and partnerships. For example, Section 707(a)(2) can be used to treat the exchange of partnership interests for waived management fees or carried interests as a disguised payment for services. If applicable, this can result in fund managers or carry partners recognizing ordinary income rather than capital gains. Additionally, certain contributions of cash to a partnership followed by a distribution to the partners may be recharacterized as a purchase of partnership interests from the selling partners. This recharacterization could result in the recognition of additional taxable gain by the “selling” partner.
The statute was previously drafted to provide that Section 707(a)(2) operates “under regulations prescribed by the Secretary.” To date, no regulations have been finalized addressing disguised sales of partnership interests. Further, only proposed regulations have been issued addressing disguised payment for services. The act modifies the statute to provide that Section 707(a)(2) operates “except as provided by the Secretary.” This appears to clarify that the statute operates even in the absence of regulations. Further, the amendment delegates significant authority to the IRS to provide operational rules.
BDO Takeaway
The IRS has long argued that the prior statute is still operative even in the absence of regulations, and the legislation provides that it should not be “construed to create any inference with respect to the proper treatment under Section 707(a)” before the date of enactment. But there may be some question as to whether taxpayers can argue that the rules do not apply to prior transactions because of the lack of regulations. The provision is effective for services performed and property transferred after July 4, 2025.
Pro-Rata Rules Under GILTI and Subpart F
The act changes the pro-rata share rules to require a U.S. shareholder of a controlled foreign corporation (CFC) to include its pro-rata share of Subpart F or Net CFC Tested Income (formerly GILTI) if it owned stock in the CFC at any time during the foreign corporation’s tax year in which it was a CFC. It removes the requirement that the U.S. shareholder own the CFC’s stock on the last day the foreign corporation was a CFC. Treasury is given the authority to issue regulations allowing taxpayers to make a closing of the tax year election if there is a disposition of a CFC.
BDO Takeaway
Managers will need to analyze current investments to understand the impact of this change. Managers will need to closely monitor the investor makeup of offshore funds, especially in the initial launch/fundraising phase.
Active Business Losses Under Section 461(l)
The OBBB makes the active loss limit under Section 461(l) permanent, while reducing the threshold at which it applies beginning in 2026. Lawmakers struck from the act a provision that would have changed how disallowed losses under Section 461(l) are treated.
BDO Takeaway
A disallowed loss under Section 461(l) will still be converted to a net operating loss (NOL) in subsequent years. This allows investors to use an NOL created by Section 461(l) against other sources of income in future years.
Repeal of Itemized Deductions
The act makes permanent the repeal of most itemized deductions, including those for investment expenses (apart from investment interest) incurred for the production of income under Section 212.
BDO Takeaway
Consistent with the treatment since 2018 under the Tax Cuts and Jobs Act, investment expenses will generally only be deductible to the extent they are considered ordinary and necessary expenses of an activity that rises to the level of a trade or business under Section 162. This will continue to impact investors in private equity, venture capital, and other investment funds where items such as management fees generally are not deductible at the individual level.
Limit on Value of Itemized Deductions
The OBBB creates a new limit on itemized deductions, including investment interest. The provision would essentially cap the value of itemized deductions so that the maximum benefit achievable is equivalent to offsetting income taxed at a top rate of 35% rather than offsetting income taxed at the higher individual marginal rate of 37%.
BDO Takeaway
This limit applies after the deduction is capped based on the amount of net investment income. For individuals taxed at the 37% rate, this is essentially equivalent to imposing a 2% tax on the total amount of otherwise deductible investment interest (and any other itemized deductions).
Creation of Trump Accounts
The OBBB establishes new tax-preferred investment accounts for individuals under the age of 18. Contributions are set to begin one year after enactment and are allowable up to $5,000 per year until the calendar year before an individual turns 18. A pilot program will provide a $1,000 tax credit for contributing to an account for every child born from 2025 through 2028. Eligible investments are limited to mutual funds or exchange traded funds that track a qualified index, do not use leverage, and have expenses of less than 0.1%. Qualified indexes include the S&P 500 and other indexes for equity investments primarily in U.S. companies. Industry-specific indexes are prohibited but indexes based on market capitalization are allowed.
BDO Takeaway
The automatic $1,000 contribution for children born from 2025-2028 will create millions of potential accounts for the asset management industry to administer.
Key Implications for Portfolio Company Investments
Expansion of Qualified Small Business Stock Eligibility
The act enhances the exclusion of gain for qualified small business (QSB) stock under Section 1202 issued after July 4, 2025:
- In addition to the existing 100% exclusion for qualified stock held for five years, taxpayers can qualify for a 50% exclusion after three years and a 75% exclusion after four years.
- The current limit on the exclusion (the greater of $10 million or 10 times basis) is increased to the greater of $15 million or 10 times basis, indexed to inflation beginning in 2027.
- The limit on gross assets at the time stock is issued is increased from $50 million to $75 million, indexed to inflation beginning in 2027.
BDO Takeaway
QSB stock is a powerful tax planning structure that has become increasingly popular with private equity in recent years. The changes make the structure more accessible and increase the size of potential investments. State conformity to both the existing rules and new changes will be important for determining whether the structure is appropriate. Key states such as California do not conform to the federal QSB stock exclusion.
Section 163(j) Limit on the Interest Deduction
The OBBB permanently restores the exclusion of amortization, depreciation, and depletion from the calculation of adjusted taxable income (ATI) for purposes of Section 163(j), which generally limits interest deductions to 30% of ATI. The change is effective for tax years beginning after 2024.
The act makes two unfavorable changes for tax years beginning after 2025. Income from Subpart F and Net CFC Tested Income (formerly GILTI) will be excluded from ATI along with Section 78 gross-up amounts for indirect foreign tax credits. More importantly, the limit will apply to any interest capitalized to other assets, except interest capitalized to straddles under Section 263(g) or to specified production property under Section 263A(f).
BDO Takeaway
The changes may allow highly leveraged portfolio companies to deduct suspended interest carryforwards beginning in 2025. Although the act essentially shuts down interest capitalization planning for years beginning in 2026 or later, those strategies remain viable for the 2024 and 2025 tax years. The legislation will not claw back any interest capitalized to other assets in tax years beginning before 2026, even if the capitalized interest has not been fully recovered with the asset. Interest capitalization planning in 2024 and 2025 could help some portfolio companies deduct additional interest more quickly and could be particularly beneficial for companies that may still face the limit even after the favorable change to ATI.
Bonus Depreciation and Small Business Expensing
The act permanently restores 100% bonus depreciation for property placed in service after January 19, 2025. The change could affect the Section 743(b) basis adjustment for funds purchasing interests in a partnership. The act also increases the Section 179 deduction to $2.5 million with a phaseout threshold of $4 million for property placed in service after 2024, with both thresholds indexed to inflation in future years.
Restoration of Limitation on Downward Attribution of Stock Ownership
The act reinstates Section 958(b)(4), which, prior to the Tax Cuts and Jobs Act (TCJA), prohibited the downward attribution of stock ownership from a foreign person to a U.S. person for purposes of determining CFC and U.S. shareholder status. The repeal of Section 958(b)(4) under the TCJA resulted in many foreign corporations becoming CFCs and created filing obligations for constructive U.S. shareholders. These rules are effective for tax years beginning after December 31, 2025.
BDO Takeaway
The restoration of Section 958(b)(4) could simplify reporting obligations for certain taxpayers. Taxpayers that were affected by the repeal of Section 958(b)(4) in the past should carefully review these rules to see if they are impacted by the reinstatement of the section.
Section 174A Research Expensing
The act permanently restores the expensing of domestic research costs for tax years beginning after December 31, 2024. The permanent expensing rules are created under new Section 174A, while Section 174 is retained and amended to provide for the continued 15-year amortization of foreign research costs. Taxpayers retain the option of electing to capitalize domestic Section 174A costs and amortize such amounts over 10 years or the useful life of the research (with a 60-month minimum).
The act will generally require taxpayers to implement the new treatment with an automatic accounting method change on a cut-off basis, but it offers two alternative transition rules. Taxpayers can elect to claim any unamortized amounts incurred in calendar years 2022, 2023, and 2024 in either the first tax year beginning after 2024 or ratably over the first two tax years beginning after 2024. Separate transition rules are available for eligible small business taxpayers meeting the gross receipts test under Section 448 ($31 million in 2025) for the first tax year beginning after 2024, allowing those taxpayers to file amended returns to claim expensing for tax years before 2025.
BDO Takeaway
There are important interactions between Section 174 and other tax attributes, especially for portfolio companies that will continue to face a limit on interest deductions even after the OBBB change. Companies should consider modeling out the implementation options and capitalization elections to determine the most favorable treatment.
Real Estate Investment Trusts
The OBBB raises the percentage of allowable assets a REIT may have in a taxable REIT subsidiary from 20% to 25% effective for tax years beginning after 2025. The change provides additional structuring flexibility for managers with REITs in their structure.
Deductions for Overtime Pay and Tip Income
The act creates a deduction of up to $12,500 (single) and $25,000 (joint) on qualified overtime compensation, as well as a deduction of up to $25,000 on qualified tips reported on Forms W-2, 1099-K, 1099-NEC, or 4317. These deductions are allowed from 2025 through 2028 without regard to whether a taxpayer itemizes deductions.
BDO Takeaway
These new deductions will carry certain reporting requirements and compliance complexities, impacting portfolio companies with eligible employees. Hospitality companies, in particular, will need to make several determinations at the entity level that could affect whether employees qualify. All companies should consider communicating with employees that receive tips or overtime wages on the withholding considerations.
Key Implications for Investors
Endowment Tax Increase
The OBBB will increase the 1.4% tax on net investment income of private colleges and universities, but it will limit the application of the tax to universities with at least 3,000 tuition-paying students (up from 500). The OBBB imposes a new rate structure with excise taxes up to 8%. For institutions with a student adjusted endowment over $500,000 and not exceeding $750,000, the rate remains 1.4%. For institutions with a student adjusted endowment over $750,000 and not exceeding $ 2 million, the rate is 4%. For institutions with a student adjusted endowment over $2 million, the top rate is 8%. The changes are effective for tax years beginning after 2025.
BDO Takeaway
Affected universities have some runway before the change takes effect, particularly those with fiscal years ending on June 30. There may be planning opportunities to accelerate income or trigger gains at lower rates.
How BDO Can Help
The OBBB modifies the tax treatment of investment activity in important ways and creates new planning opportunities. BDO tax professionals can help asset managers and investors assess the impact on their investments and investment structures. Many of the business changes have special implications for portfolio companies, and BDO can help model out implementation and planning options. Please visit BDO’s Asset Management, Tax Policy, and Partnership Tax Services pages for more information on how BDO can help.