August 19, 2025 | By Tania Wang, Partner, M&A Tax, Deanna Walton Harris, Partner, M&A Tax, & Toni Lewis, Partner, US M&A State and Local Tax
On July 4, 2025, President Trump signed into law the One Big Beautiful Bill Act (“OBBBA” or the “Act”), a sweeping tax and spending cuts package. Although the bill could be viewed as an extension of his 2017 Tax Cuts and Jobs Act by making many of those tax cuts permanent, it also included several changes that may alter the investment landscape for businesses. In this article, we describe certain material tax provisions in the Act to help guide the path forward for investors and business entities.
Although this article does not discuss the tax credit implications of the Act for project developers and stakeholders, you can view our analysis of those issues here; we will continue to update that analysis.
Revised Definition of Adjusted Taxable Income (“ATI”) for Purposes of Interest Expense Deductibility
Key Takeaway: The exclusion of depreciation and amortization in ATI may reduce cash tax liability for leveraged buyouts by increasing interest deductions, a particular benefit for capital intensive businesses with meaningful deprecation and for Targets acquired with a stepped-up basis in business assets that results in significant tax depreciation and amortization deductions.
Overview of the Law: Section 163(j) generally provides that a taxpayer’s business interest deduction for a tax year is limited to an amount equal to the taxpayer’s business interest income plus 30 percent of the taxpayer’s adjusted taxable income (“ATI”) for the year. For this purpose, a taxpayer’s ATI is calculated by including deductions for depreciation, amortization, or depletion. Thus, under current law, a taxpayer’s ATI essentially is equal to the taxpayer’s earnings before interest and taxes (“EBIT”). Under the law, a taxpayer’s ATI for tax years beginning after December 31, 2024, and before January 1, 2030, would be determined without regard to deductions for depreciation, amortization, or depletion. Thus, a taxpayer’s ATI essentially would equal the taxpayer’s earnings before interest, taxes, depreciation, and amortization (“EBITDA”), generally returning the calculation to its pre-2022 standard. This change could increase the business interest deduction for taxpayers with significant depreciation or amortization deductions.
Bonus Depreciation
Key Takeway: For Targets with significant capital expenditures, the return of 100 percent bonus depreciation should result in less cash tax liability than in prior years. Pre-closing consideration should be given to the valuation and cost segregation analysis and purchase price allocation analysis to maximize post-closing deductions related to fixed assets.
Additional modeling should be considered to determine whether to elect out of bonus depreciation to optimize depreciation deductions during the hold period or at exit for a future buyer. For example, bonus depreciation may not be advisable if the Target is otherwise generating losses or if the losses result in net operating losses (“NOLs”) that would be limited in subsequent years to 80% of taxable income.
Overview of the Law: The Act permanently allows a 100 percent depreciation rate for property acquired and placed in service after January 19, 2025. Further, the Act includes a new 100 percent “bonus depreciation-like” deduction for non-residential property that constitutes an integral part of a manufacturing activity, mining activity, or agricultural or chemical production activity. This new deduction applies to construction that begins between January 20, 2025, and December 31, 2029, if the property is placed in service before January 1, 2033.
Expensing of Research and Development (R&D) Costs
Key Takeway: For Targets with significant domestic R&D expenditures, the return of immediate expensing will result in less cash tax liability than in prior years. Non-US R&D expenditures will still be subject to capitalization and a fifteen-year amortization period.
Overview of the Law: In what will be a welcome change to research intensive businesses like technology and life sciences companies, the Act significantly changes the treatment of domestic R&D expenses. Under prior law, taxpayers must capitalize and amortize those expenses over five (for domestic R&D expenses) or fifteen years (for non-US R&D expenses). The Act allows immediate expensing of domestic R&D expenses incurred for tax years beginning after December 31, 2024, and ending before January 1, 2032.
- The law does not change the treatment of non-US R&D expenses, which will continue to be amortized over fifteen years.
- A taxpayer may avoid immediate expensing by electing to capitalize and amortize domestic R&D expenses.
- The OBBBA includes in the definition of R&D expenses amounts paid or incurred in connection with the development of software.
Qualified Small Business Stock (“QSBS”)
Key Takeaway: For private equity funds with a material US taxable investor base, strong consideration should be given to whether a new investment may be structured to meet the QSBS eligibility requirements. The sale of QSBS can result in up to a $750 million capital gain exclusion for US individual taxpayers, including carried interest holders.
Overview of the Law: Under prior law, the QSBS exclusion allowed a taxpayer to exclude capital gain recognized with respect to certain stock in a C corporation in a qualified trade or business; the exclusion was limited to the greater of $10 million or 10 times the investor’s basis in the stock. To meet the QSBS requirements, the investment needed to be less than $50 million and the shares needed to have been held for five years.
The law now limits the exclusion to the greater of $15 million or 10 times the investor’s basis in the stock. Additionally, the law created a tiered gain exclusion depending on the holding period of the stock acquired after the date of the OBBBA’s enactment. The exclusion rate is 50 percent after a three-year holding period, 75 percent after a four-year holding period, and the full 100 percent after a five-year holding period.
New State and Local Tax Deduction
Key takeaway: Subject to a Target’s state tax profile, the pass-through entity tax (“PTET”) remains a mechanism to reduce potential Seller taxes on a deemed sale of an S corporation’s assets. For most deals, it is not expected that the increase in the SALT cap will impact these calculations due to the phase-out on the SALT deduction at $500,000.
Overview of the Law: The new legislation increases the state and local tax (“SALT”) deduction cap for individuals from $10,000 to $40,000 in 2025. This includes deductions for state income tax, property tax, and sales tax. The higher deduction phases out for income exceeding $500,000. The $40,000 cap and the $500,000 thresholds will increase annually by 1% until 2030. The increased cap will expire and revert back to $10,000 in 2030.
Although earlier versions of the bill limited the ability to deduct state PTET payments at the federal level, the Act does not include such limitations. Generally, Buyers prefer asset deals because it results in a fair market value step-up in the tax basis of the assets of a Target, which results in post-closing depreciation and amortization deductions. However, historically, a deemed asset deal for an S corporation resulted in additional tax to the Seller despite the flow-through nature of S corporation. In the case of an S corporation, Buyers would often pay a gross-up or “make whole” payment to induce Sellers into a deemed asset purchase. Due to introduction of the SALT cap and the advent of the PTET, it is not always the case that a deemed asset deal for an S corporation results in additional tax to the seller. Due to the SALT cap, sellers do not receive a federal benefit from a state income taxes paid related to a stock sale. However, with a deemed asset deal, Sellers are able to elect the PTET in certain states where available and receive a federal benefit for the state income taxes paid. Accordingly, S corporation targets/owners with certain state tax profiles may actually benefit from a deemed asset sale resulting in results in lower after-tax proceeds for Seller and tax basis step-up for Buyer.
State Conformity to Federal IRC Changes
Key takeaway: States may not conform to the new federal tax law. Given that state taxes generally account for approximately 4-7 percent of the US federal/state blended income tax rate, consider whether a Target is operating significantly in states that are non-conforming.
Overview of the Law: Changes in federal tax law do not always have a domino effect among the states. To determine state conformity to the new legislation, we must first consider whether the state conforms to the Internal Revenue Code (the “IRC”) on a rolling basis, static date, or uses an alternative method. To the extent a state conforms to the IRC on a rolling basis (e.g., Illinois, New York, Massachusetts), the state generally needs to decouple from any new IRC sections or amendments if the state does not wish to incorporate the amendment. For states with a static conformity date (i.e., they conform to the IRC as of a specific date), the state must affirmatively approve the latest version of the IRC. A number of states with static conformity dates will often adopt the IRC on an annual basis (e.g., Arizona, Florida, etc.), effectuating a rolling conformity. However, certain states have not updated their conformity to the IRC for several years (and have no inclination to update for the most recent IRC updates). For example, California has a static conformity date as of January 1, 2015, Texas has a static conformity date as of January 1, 2007 (and utilizes a gross-margin based calculation), and New Hampshire has a static conformity date of December 31, 2018.
To the extent that states do not automatically conform or do not swiftly approve conformity as of the date of the OBBBA’s passing, we anticipate state-level impacts.
Employee Retention Credit (“ERC”) Updates
Key takeaway: The ERC has been a significant tax diligence item due to the scrutiny on ineligible claims made. However, the extension of the statute is limited to Q3 and Q4 of 2021 ERC claims. Note that Q3 2021 would have been the last quarter available to claim for most taxpayers as very few taxpayers qualified for recovery startup business treatment and were able to claim Q4 2021.
Overview of the Law: Notably for ERC, retroactive limitations and extensions of the statute of limitations have been extended to certain ERC quarters. The legislation suspends claims for ERCs filed after January 31, 2024, for Q3 2021 (and Q4 2021 for recovery startup businesses) that have not been paid prior to April 15, 2025. Additionally, the statute of limitations for Q3 and Q4 2021 has been extended to six years from the later of the date on which the claim for credit or refunds was filed (i.e., April 15, 2028, assuming that the original Forms 941 were filed no later than April 15, 2022). Previously the statute had only been extended to April 15, 2027.
Additional provisions were included in the legislation to target COVID-ERTC promoters. Promoters are defined by the percentage of their gross income attributable to providing assistance with respect to ERC but are generally persons providing ERC review and calculation services that may have used unscrupulous methods to convince taxpayers to claim ERC when they were not eligible.
International Provisions Section 899: Revenge Tax
In an earlier provision of the act, there was a proposal to add new section 899, which would have increased the tax rate on income earned by non-US persons and business on US assets. The tax rate was proposed to increase by 5 percent annually over a three-year period up to 15 percent above existing tax rates.
The proposed Section 899 was removed from the tax bill after the G7 reached an agreement with the US regarding the application of the OECD global minimum tax rules to US companies.
Foreign Derived Deduction Eligible Income and Net CFC Tested Income
Key takeaway: For Targets with non-US operations and sales, there will be a nominal increase in tax rate related to such operations.
Overview of the Law:
- Foreign-Derived Deduction Eligible Income (FDDEI, formerly knowns as “Foreign-Derived Intangible Income or FDII)
The FDDEI rules allow US taxpayers that sell goods and/or provide services to non-US customers to obtain a deduction on qualifying income. The Act decreases the FDDEI deduction percentage for tax years beginning after December 31, 2024 to 33.34%, thereby resulting in an effective tax rate of 14 percent (which is an increase from the 13.25 percent rate that would have applied 2026 if the new legislation had not been adopted).
- Net CFC Tested Income (NTCI, formerly known as Global Intangible Low-Taxed Income or GILTI)
The NCTI rule creates a deemed income inclusion for US taxpayers that own a controlled foreign corporation with a deduction for a portion of this income.
The Act decreases the deduction percentage for tax years beginning after December 31, 2024 to 40 percent, such that the new effective tax rate becomes 14 percent (an increase from the 13.25 percent rate for that would have applied in 2026 without the new legislation). There is, however, some relief for taxpayers who are subject to GILTI, as a company is allowed to use 90 percent of its foreign tax credits against its NCTI (up from 80 percent).
Key Takeaways
Switching back to an EBITDA approach to compute interest deductibility provides additional benefit for leveraged buyouts. The return of immediate expensing on fixed assets and domestic R&D expenses will reduce cash tax liabilities. QSBS provisions will bolster venture and growth transactions providing US individual investors greater after-tax returns. For non-US investors, the elimination of the proposed retaliatory tax under Section 899 is a relief, in spite of other provisions that have been tweaked to be less taxpayer friendly (e.g., the change in the effective tax rate of GILTI and FDII). Overall, the new tax legislation includes a number of provisions that provide beautiful tax results for M&A transactions.