OBBB Act tax changes: What VC and PE fund CFOs need to know

This article focuses on fund-level implications and portfolio company considerations specific to VC and PE firms. 

The One Big Beautiful Bill Act (OBBB Act) introduces tax reforms with lasting implications for fund structuring, investor returns, and compliance oversight. While the legislation preserves key provisions from the 2017 Tax Cuts and Jobs Act (TCJA), it also brings new opportunities, like enhanced qualified small business stock (QSBS) treatment and permanent 100% expensing, alongside increased complexity in areas such as international tax and R&D capitalization.

This alert highlights the most relevant updates and strategic considerations for fund CFOs and their portfolio companies.

Fund Structing and Investor Impacts 

• Individual Tax Environment — Stability Maintained. The permanent extension of individual tax rates from TCJA (2017) provides stability for investor returns. Further, proposed changes to carried interest treatment and pass-through entity taxation rules were excluded from the final legislation, preserving existing structures.
• Full Expensing. 
  • Bonus Depreciation for Qualified Property (Section 168(k)): OBBB Act makes 100% expensing permanent for qualified property.
  • Domestic Research and Experimental Expenditures (Section 174A): TCJA (2017) required these expenditures to be capitalized and amortized over a five-year period for tax years after December 31, 2021. OBBB Act allows for elective expensing for amounts incurred after December 31, 2024 (and retroactively for some small businesses going back to 2022). Transition rules contain significant ambiguities that could lead to misapplication and compliance issues. Professional guidance is critical for proper implementation.
• Enhanced QSBS Benefits — Strategic Opportunity. Section 1202 Qualified Small Business Stock rules have been enhanced, representing a significant boost to small business and start-up (venture) investments:
  • Expanded qualifying thresholds: Previously, a business could not have assets of more than $50 million; this cap was raised to $75 million.
  • Phased holding period: Replaces the previous all-or-nothing five-year rule. 
    • 50% tax benefit at three years
    • 75% tax benefit at four years
    • 100% tax benefit at five years
  • Increased gain exclusion: $10 million gain exclusion increased to $15 million. The alternative 10x tax basis exclusion remains unchanged.
  • Rollover provisions: Remain an option, and now, with more flexible investment timelines and other exit strategies, QSBS investments should blossom.
• Increased Deductibility of Business Interest (Section 163(j)). The TCJA (2017) imposed a limit on the deductibility for business interest, set to 30% of EBITDA from 2017 to 2021, but that base was reduced to EBIT for 2022 and beyond. The OBBB Act makes EBITDA permanent.
• Qualified Business Income Deduction (Section 199A). The TCJA allowed certain non-corporate taxpayers a 20% deduction against “qualified business income,” but this was set to expire after 2025. OBBB Act makes this permanent. Further, Congress is currently considering an increase to 23%, which would significantly favor the non-corporate form of organization for certain businesses, so these developments should be closely monitored. 
• Excess Business Loss Limitation (Section 461(l)). OBBB Act makes the TCJA’s limitation on excess business losses of non-corporate taxpayers permanent (it was set to expire in 2028). 
• Estate Planning Certainty. The estate tax exclusion has been permanently increased from $13.99 million to $15 million (with continued indexing for inflation), eliminating the year-to-year uncertainty that previously drove urgent estate planning actions.

Critical Compliance Areas Requiring Immediate Attention

The OBBB Act introduces new layers of complexity that fund managers must address, particularly in cross-border taxation, credit claims, and state-level compliance. Key areas of concern include:

• International Tax Complexity. GILTI and FDII are re-named and readjusted, creating moderate net impacts and continuing the growing conflict between US tax policy and OECD frameworks (Pillar 1 (marketplace nexus) and Pillar 2 (global minimum tax)) and challenges for multinational portfolio investments, especially in digital services. While the effective rates of net CFC tested income (NCTI, formerly GILTI) and foreign derived deduction eligible income (FDDEI, formerly FDII) increased (10.5% to 12.6%, and 13.125% to 14%, respectively), the foreign tax credit (FTC) haircut is reduced from 20% to 10%; therefore, the ability to use more FTCs means the overall tax rate will temper the NCTI impact. 
• Employee Retention Credit Risks. Portfolio companies face potential IRS fraud investigations related to improperly claimed employee retention credits, requiring enhanced due diligence and remediation efforts, especially in the context of M&A transactions. OBBB Act extends certain statutes of limitation on assessments to 2028.
• Portfolio Company Due Diligence. State tax nexus: Post-Wayfair states continue aggressive approaches to corporate income tax and individual income tax nexus. COVID-19 has only enhanced these issues especially with remote worker questions. Portfolio companies with remote workers or customers in multiple states face significant compliance risks and potential back-tax liabilities. Enhanced due diligence protocols are essential.

Strategic Actions for Fund-Level Compliance and Growth 

To stay ahead, fund leaders should take targeted steps to align tax strategy, portfolio oversight, and operational readiness with the new regulatory landscape.

1. Immediate: Review all current investments for QSBS qualification and holding period optimization.
2. Immediate: Audit portfolio companies for state tax nexus compliance, particularly those with remote workforces.
3. Near-term: Establish enhanced due diligence protocols for R&D expensing transition rules.
4. Ongoing: Monitor international tax developments and OECD framework implementation for global portfolio companies.

Nixon Peabody’s fund-focused Tax team is advising clients on how to align fund operations, LP communications, and portfolio oversight with the new tax landscape.