OBBBA Tax Changes for Private Equity Deals: What You Need to Know

The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, reshapes the tax math for private equity transactions across every stage of the deal lifecycle. The law permanently restores 100% bonus depreciation, reverts Section 163(j) interest deductions to an EBITDA-based calculation, reinstates immediate domestic R&D expensing, and meaningfully expands qualified small business stock (QSBS) benefits. Critically, it left carried interest taxation unchanged. Deal teams, CFOs, and finance leaders at portfolio companies need to understand each change and how it affects diligence, purchase price allocation, and post-close planning in 2026 and beyond.

Why OBBBA Tax Changes Matter for Private Equity

Private equity returns are built on a foundation of tax efficiency: deductible deal costs, interest on acquisition debt, and depreciation on stepped-up assets all affect after-tax cash flows and ultimately IRRs. When Congress altered those levers in 2021 and 2022, deals became more expensive to finance and manage. The OBBBA largely reverses those changes, and in some areas goes further than the pre-2022 baseline.

Understanding which provisions took effect in tax year 2025, which apply starting in 2026, and which have retroactive or catch-up elements is essential for structuring live deals and revisiting tax positions on assets already in the portfolio.

The Legislative Context

The OBBBA built on the Tax Cuts and Jobs Act (TCJA) framework while extending or making permanent several provisions that had been scheduled to phase out. For private equity specifically, the most consequential changes cluster around five areas: (1) bonus depreciation, (2) the Section 163(j) interest limitation, (3) Section 174 R&D expensing, (4) QSBS under Section 1202, and (5) the retained treatment of carried interest.

Bonus Depreciation: 100% Made Permanent

One of the most deal-friendly provisions in the OBBBA is the permanent restoration of 100% bonus depreciation under Section 168(k) for qualified property acquired and placed in service after January 19, 2025.

Before the OBBBA, the TCJA’s phasedown schedule would have reduced bonus depreciation to 40% for property placed in service in 2025, dropping to 20% in 2026 and disappearing entirely in 2027. That trajectory had already begun to erode one of the core tax benefits of asset acquisitions. The OBBBA eliminates the phasedown entirely and makes the full first-year deduction permanent.

What This Means in a Deal

In an asset acquisition or a taxable stock acquisition with a Section 338(h)(10) or 336(e) election, buyers can allocate purchase price to qualifying tangible assets and fully expense those amounts in the year of acquisition. For a deal closing in late 2026, that means a meaningful acceleration of deductions into year one rather than spread over 5, 7, or 15 years.

The result: buyers may be more willing to pay a gross-up to obtain a step-up in basis because the full deduction is available immediately rather than over decades. Tax allocation modeling, which some deal teams historically treated as a closing-day formality, is now being worked into diligence earlier, because the value difference between an asset deal and a stock deal without an election is larger than it has been in years.

Eligible property includes most tangible property with a recovery period of 20 years or less, including used property, provided it meets the acquisition and placed-in-service requirements. The IRS issued Notice 2026-11 on January 14, 2026, providing interim guidance on the permanent 100% additional first-year depreciation deduction and the acquisition and placed-in-service transition rules.

Section 163(j): Back to EBITDA, With New Wrinkles

The OBBBA permanently restores the pre-2022 EBITDA-based calculation of adjusted taxable income (ATI) for purposes of the Section 163(j) business interest expense limitation, effective for tax years beginning after December 31, 2024.

Before 2022, ATI was computed by adding back depreciation, amortization, and depletion, which produced a larger base and allowed more interest to be deducted. Congress removed those add-backs for tax years beginning in 2022, effectively shifting to an EBIT-based calculation that reduced allowable interest deductions at many leveraged companies. The OBBBA reverses that shift permanently. The IRS maintains a Q&A page on the Section 163(j) business interest expense limitation that reflects the OBBBA amendments.

Why It Matters for PE-Backed Companies

Private equity transactions typically use significant acquisition debt. Under the EBIT calculation in effect from 2022 through 2024, high-depreciation businesses, including manufacturers, technology companies with capitalized software, and companies with large real estate footprints, often faced meaningful interest deduction limitations that increased their effective tax burden.

Returning to EBITDA increases the 30% ATI base for virtually every capital-intensive portfolio company. For a business with $50 million in EBITDA and $20 million in depreciation and amortization, the difference between EBIT and EBITDA as the base for the 30% cap is $6 million in additional potential interest deductions per year. At a 21% corporate rate, that is over $1 million in annual tax savings that was previously unavailable.

One important caveat: for tax years beginning after December 31, 2025, the OBBBA also excludes Subpart F income, net CFC tested income (the OBBBA-renamed successor to GILTI, sometimes abbreviated NCTI), and Section 78 gross-up amounts from the ATI calculation. Deal teams with portfolio companies holding foreign subsidiaries should model this change carefully, as it partially offsets the EBITDA benefit for internationally structured businesses that previously relied on those foreign inclusions to boost ATI.

Section 174 R&D Expensing: Domestic Research Is Immediately Deductible Again

The OBBBA created new Section 174A, which restores immediate expensing of domestic research and experimental (R&E) expenditures for tax years beginning after December 31, 2024. The restoration is permanent. Foreign R&D remains capitalized and amortized over 15 years.

For context: the Tax Cuts and Jobs Act had required domestic R&E to be amortized over 5 years (15 years for foreign R&E) beginning in 2022. That change significantly increased taxable income for technology, software, biotech, and manufacturing companies that previously deducted R&D in the year incurred.

Catch-Up Options for 2022-2024 Capitalized Amounts

The OBBBA also addressed the backlog of R&E costs that were capitalized under the 2022 through 2024 rules. Businesses that are not eligible for, or choose not to pursue, retroactive small-business amendments can elect to accelerate their remaining unamortized domestic R&E balances from those years. The election allows the deduction to be taken entirely in the 2025 tax year, or spread evenly over 2025 and 2026.

For private equity portfolio companies in R&D-intensive sectors, this creates a meaningful one-time deduction opportunity that affects 2025 tax returns. Acquirers evaluating businesses with significant historical R&D spend should understand the unamortized balance, whether the catch-up election has been made, and how it affects normalized taxable income in the diligence model.

The IRS issued Rev. Proc. 2025-28 providing procedural guidance on accounting method changes required to implement the OBBBA’s R&E expensing restoration.

QSBS Expansion: Bigger Benefits for Growth-Stage Acquisitions

The OBBBA made significant changes to Section 1202 qualified small business stock (QSBS) for stock issued after July 4, 2025. These changes matter for PE investors who acquire minority stakes in early-stage companies, founders who receive equity, and management teams at portfolio companies.

What Changed

Before the OBBBA, QSBS required a 5-year holding period to qualify for 100% gain exclusion (subject to the greater of a $10 million or 10x basis cap), and the issuing company’s aggregate gross assets could not exceed $50 million at issuance.

Under the OBBBA, for stock issued after July 4, 2025:

• The 5-year cliff is replaced with a tiered structure: 50% exclusion at 3 years, 75% at 4 years, 100% at 5 years.
• The per-issuer gain exclusion cap increases from $10 million to $15 million (indexed for inflation after 2026).
• The aggregate gross asset threshold increases from $50 million to $75 million (also inflation-indexed after 2026).

The expanded gross asset threshold opens QSBS benefits to a meaningfully wider segment of the middle market. For growth-stage companies where Modus’s advisory services clients frequently operate, entity formation decisions now have to account for QSBS eligibility from day one.

One planning note for fund sponsors: the 3-year holding period for the new partial exclusion aligns with the Section 1061 three-year holding period required for fund managers to receive long-term capital gain treatment on carried interest. That alignment creates interesting structuring considerations when fund managers also hold direct QSBS positions.

Carried Interest: No Change

Despite years of legislative proposals, the OBBBA does not alter the taxation of carried interest under Section 1061. Fund managers can continue to receive long-term capital gain treatment on their carried interest, subject to the existing 3-year holding period requirement. The applicable 20% long-term capital gains rate and the net investment income tax remain in place as before.

For PE fund sponsors, this is significant: the major risk factor that many had priced into fundraising discussions and compensation planning did not materialize. Existing fund structures and GP-level economics do not need to be renegotiated on account of the OBBBA.

Other Provisions Affecting PE Portfolios

Excess Business Loss Limitation Made Permanent

The OBBBA permanently extended the Section 461(l) excess business loss (EBL) limitation, which had been scheduled to expire after 2028. For 2025, the inflation-adjusted threshold is $313,000 for single filers and $626,000 for joint filers. Losses above that limit become NOL carryforwards, subject to the 80% taxable income cap under Section 172(a).

Watch the 2026 step-down. The OBBBA reset the inflation base year, so the 2026 thresholds actually fall to $256,000 for single filers and $512,000 for joint filers rather than rising with inflation. That means less individual-level loss can be used against nonbusiness income in 2026 than in 2025.

For pass-through portfolio companies with individual or flow-through investors, this is a planning constraint. Managers should model the EBL limitation when projecting after-tax distributions from loss-generating portfolio companies, particularly in early hold periods with heavy capital expenditures.

Section 179 Expensing Expanded

The OBBBA also increased the Section 179 first-year expensing limit, providing an additional tool for portfolio companies that want to immediately expense equipment and other eligible property even outside the bonus depreciation framework. Mid-market companies that do not want to rely solely on 168(k) have a stronger fallback.

Implications for Deal Modeling and Due Diligence

The combination of permanent bonus depreciation, restored EBITDA-based interest deductions, and immediate R&D expensing means that the normalized tax profile of many acquisition targets looks materially different in 2025 and 2026 than it did during the 2022 through 2024 period. Buyers who run diligence models based on recent historical tax payments without adjusting for these changes will overstate the tax burden of acquisition targets and potentially under-bid.

Modus’s M&A advisory and audit teams work through normalized tax analysis as part of quality of earnings engagements, and these OBBBA changes are now a standard line item in transaction diligence. The AI-native workpaper infrastructure Modus uses ties each tax adjustment to source documents, making it easier for deal teams to review the analysis and trace the supporting logic without extended back-and-forth.

Practical Takeaways for Deal Teams in 2026

For buyers entering a new transaction:

• Model the step-up value using permanent 100% bonus depreciation, not the old phasedown schedule.
• Re-run Section 163(j) capacity using EBITDA, not EBIT, starting in the 2025 tax year.
• Identify targets with large unamortized R&D balances and understand whether the 2025 or 2025/2026 catch-up election has been made or is still available.
• Evaluate QSBS eligibility for stock issuances that occur post-close, especially in growth-equity structures.

For portfolio company CFOs and controllers:

• File accounting method change requests to implement Section 174A immediate expensing if not already done.
• Re-model Section 163(j) capacity with the EBITDA add-back, especially if interest was partially limited in 2022 through 2024, to see whether any carryforward disallowed interest is now usable.
• Review excess business loss position for flow-through entities to avoid surprises at the investor level.

For fund sponsors:

• No changes to fund-level carried interest economics are required.
• Monitor IRS guidance as Treasury works through the 2026 Priority Guidance Plan, which lists OBBBA implementation as a primary focus.

Related reading: Bonus Depreciation 2026: 100% Is Back and Permanent

Frequently Asked Questions

How does OBBBA affect private equity deals?

The OBBBA improves the after-tax economics of private equity transactions in several ways. It permanently restores 100% bonus depreciation for qualifying property acquired after January 19, 2025, reverts the Section 163(j) interest deduction calculation to an EBITDA-based formula starting in tax year 2025, restores immediate expensing for domestic R&D under Section 174A, and expands QSBS benefits for stock issued after July 4, 2025. Carried interest taxation was not changed.

Did OBBBA change carried interest taxation?

No. The OBBBA did not alter Section 1061 or the carried interest rules. Fund managers continue to receive long-term capital gain treatment on carried interest after a 3-year holding period, and the applicable tax rates remain unchanged.

When did the OBBBA bonus depreciation restoration take effect?

The OBBBA restored 100% bonus depreciation for qualified property acquired and placed in service after January 19, 2025. The acquisition date is generally the date of a written binding contract. The provision is permanent, with no phasedown or sunset.

What changed with the Section 163(j) interest deduction under OBBBA?

The OBBBA restored the EBITDA-based calculation of adjusted taxable income (ATI) for Section 163(j), effective for tax years beginning after December 31, 2024. Depreciation, amortization, and depletion are added back to determine the 30% ATI cap. This increases allowable interest deductions for most leveraged businesses compared to the EBIT-based calculation that applied from 2022 through 2024.

How does OBBBA affect R&D-heavy portfolio companies?

Domestic R&E expenses are immediately deductible under new Section 174A for tax years beginning after December 31, 2024. Businesses with unamortized R&D costs from 2022 through 2024 can elect to accelerate those deductions in 2025, or split them over 2025 and 2026. Foreign R&D continues to be amortized over 15 years. This change improves taxable income and cash tax positions for technology, biotech, software, and manufacturing portfolio companies.

What are the new QSBS limits under OBBBA?

For QSBS stock issued after July 4, 2025: the per-issuer gain exclusion cap increases from $10 million to $15 million; the aggregate gross asset threshold increases from $50 million to $75 million; and the holding period structure shifts from a 5-year cliff to a tiered system (50% exclusion at 3 years, 75% at 4 years, 100% at 5 years). These changes apply only to newly issued QSBS; stock issued on or before July 4, 2025, remains subject to the prior rules.