The asset management industry was largely unscathed by the One Big Beautiful Bill Act (OBBBA), despite several ominous proposals in earlier versions of the legislation. In fact, there are several provisions that are favorable to private funds, portfolio companies and investment management companies. Because of these changes, asset management companies should plan around these new OBBBA provisions when considering new investments and maximize investor returns by taking advantage of the various taxpayer-favorable opportunities and tax certainty provided by the OBBBA.
Although the OBBBA makes a wide range of modifications to current tax law, several key provisions important to the asset management industry remain unchanged:
- Carried interest holding periods remain at three years
- Management fee waivers continue to be a potential tax-efficient strategy for fund managers if they adhere to specific guidelines
- Maximum long-term capital gains rates remain at 20%
- Net investment income tax provisions continue to apply
- There is nothing in the OBBBA that addresses the limited partner exception for self-employment tax based on state law designation as a limited partner, despite significant IRS scrutiny and litigation in this area
- The so-called “revenge tax” under proposed Section 899 was not enacted
- The proposed excise tax on litigation financing was not enacted
‘Big three’ business provisions
The so-called “big three” business provisions from 2017’s Tax Cuts and Jobs Act (TCJA) that have been the focus of advocacy efforts for several years were all included in some form in the OBBBA and made permanent. Under current tax law, bonus depreciation was set to fully phase out for assets placed in service after Dec. 31, 2026; the interest expense limitation under Section 163(j) was calculated using earnings before interest and taxes (EBIT), and both domestic and foreign research and experimental (R&E) costs were required to be capitalized and amortized.
The OBBBA provides taxpayer-favorable changes to these major business tax provisions by permanently restoring 100% bonus depreciation, reviving an interest expense limitation based on EBITDA, and restoring immediate expensing of domestic R&E costs. The new law also provides transition relief for bonus depreciation and expensing of unamortized domestic R&E costs. Taxpayers are permitted to use the TCJA phasedown rate for bonus depreciation in the first tax year ending after Jan. 19, 2025, and are allowed to immediately expense unamortized domestic R&E costs over a one- or two-year period starting with the first tax year beginning after Dec. 31, 2024.
Grant Thornton insight:
The restoration of the more favorable provisions and the transition rules provide more flexibility at the portfolio company level for when costs will be deducted. Funds and managers have the opportunity to plan around the timing of these costs and should consider the available transition relief provisions when modeling the impact of these provisions, particularly on cash tax positions.
The favorable changes to Section 163(j) interest expense limitations will have a positive tax impact on leveraged portfolio companies as well as many hedge funds and private credit funds.
Pass-through entity taxes and SALT
Negotiations over the cap on the individual state and local tax (SALT) deduction — which was $10,000 under the TCJA but will temporarily increase to $40,000 this year and then by 1% annually through 2029 before falling back to $10,000 — were a major storyline throughout the OBBBA’s evolution. However, a lesser-discussed issue was the treatment of state-enacted pass-through entity tax (PTET) regimes. While both the original House-passed bill and the initial Senate proposal of the OBBBA substantially limited the utility of these PTET regimes by subjecting the SALT cap rules to PTET payments in broad and complicated ways, the final bill dropped all such provisions, including one that would have restricted the SALT deduction for certain SSTBs, and made no changes to the use of state workarounds.
The OBBBA leaves the PTET deduction unchanged, which allows certain state and local taxes paid by partnerships to be passed through as an ordinary deduction to partners, thereby averting the revised $40,000 SALT cap deduction limitation at the individual partner level. This will provide cash flow stability to asset managers who benefited in prior years from the PTET deduction generated by management companies or carried interest vehicles.
Even with the OBBBA’s increase of the SALT cap, certain modified adjusted gross income (MAGI) limitations decrease the SALT cap for taxpayers with MAGI that exceed certain thresholds ($500,000 for joint filers in 2025) and may limit the ability of asset managers and hedge fund founders to benefit from the increased SALT cap. This may make the ability to use a PTET regime even more important. Consideration should be given to the benefits of initiating or maintaining (i.e., applying) a PTET regime at the investment level.
Grant Thornton insight:
For PTET regimes already being applied, consideration should be given to the need to recalculate state tax payments for 2025 or make adjustments to third- and fourth-quarter state tax payments by taking into account the taxpayer-favorable provisions in the OBBBA.
Miscellaneous itemized deduction
The TCJA suspended miscellaneous itemized deductions, including Section 212 expenses, which include portfolio deductions such as management fees, professional fees and organization costs. The suspension of miscellaneous itemized deductions under the TCJA was due to sunset after 2025, but the OBBBA makes the disallowance permanent, leaving investors and managers of certain investment funds such as private equity and venture capital funds generally unable to deduct miscellaneous expenses at the individual level.
Grant Thornton insight:
Investors in hedge funds that have “trader” tax status will still generally be able to deduct management fees and other expenses.
Qualified small business stock benefits
The OBBBA modified Section 1202 for qualified small business stock (QSBS) to provide further benefits to owners of small businesses, and it may allow more shareholders to take advantage of the gain exclusion on the sale of QSBS. Certain gains from the sale of QSBS issued after July 4, 2025, may be eligible for at least a 50% exclusion up to the greater of $15 million or 10 times the taxpayer’s adjusted basis in the stock. This is an increase from the limit of $10 million under the previous law.
Additionally, shareholders historically had to hold QSBS for five years in order to be eligible for gain exclusion under Section 1202. The changes under OBBBA now provide that a shareholder is eligible for a 50% exclusion of gain after QSBS is held for three years, a 75% gain exclusion after four years, and a 100% exclusion if the QSBS is held for five years or longer. The new law also raised the gross asset ceiling for a corporation to be classified as a qualified small business (QSB) from $50 million to $75 million. A more detailed discussion on the Section 1202 changes and potential opportunities can be found here.
Grant Thornton insight:
With the expansion of QSBS benefits, asset managers may consider investing more heavily in QSBS-qualifying portfolio companies to receive preferential treatment on gain upon the sale of the qualifying stock.
Certain planning and structuring strategies may be available for carried interest partners to benefit from QSBS gain exclusion. Note that the new benefit for QSBS held for three years aligns with the holding period rules for carried interests under Section 1061.
Section 199A qualified business income
Section 199A, created as part of TCJA, provides a 20% deduction for qualified business income (QBI) of certain pass-through entities. Section 199A was set to expire on Dec. 31, 2025; however, this benefit was permanently extended under the OBBBA. Additionally, the OBBBA provided an increased income limitation phase-in from $50,000 to $75,000 for individual taxpayers and added a new $400 minimum deduction. The modified phase-in limitation and new minimum deduction will each be adjusted annually for inflation beginning in 2027.
Grant Thornton insight:
Individual investors now have tax certainty with respect to Section 199A, and there are planning opportunities to consider that could increase an investor’s Section 199A deduction, including aggregating qualified trades or businesses (QTBs), identifying income from a specified services trade or business, and restructuring to potentially report certain partner compensation as W-2 wages instead of guaranteed payments.
International tax
There are many changes to international tax provisions that may impact taxpayers in the asset management industry. Changes that may affect partnership-level computations and reporting on Schedules K-1, K-2, or K-3 include:
- Section 958(b)(4) restoration and new Section 951B (downward attribution). The OBBBA reinstates Section 958(b)(4), preventing attribution from a foreign person to a U.S. person when determining controlled foreign corporation (CFC) status. At the same time, it enacts Section 951B, which applies a limited downward attribution rule in certain related-party cases. This dual change eliminates many “accidental” CFCs that were producing extensive Form 5471 and Schedule K-2/K-3 obligations and related inclusions, while still capturing certain foreign-parented groups under Section 951B.
- Modifications to GILTI and FDII. In determining global intangible low-taxed income (GILTI) and the foreign derived intangible income (FDII) deduction, the removal of qualified business asset investment (QBAI) and the change to Section 250 deduction rates could affect many taxpayers. For the asset management industry, particularly highly leveraged portfolio companies, the elimination of interest and R&E apportionment to the net CFC tested income (NCTI) basket under Section 904 may increase the amount of foreign tax credits available to offset NCTI inclusions.
- Modification of the pro rata share rules (removal of “last day” rule). The OBBBA repeals the “last day” requirement in Section 951(a)(2), which previously limited Subpart F and GILTI inclusions to U.S. persons holding stock on the last day of the CFC year. Under the amendment, inclusions are required for any U.S. person that is a shareholder at any time during the CFC’s taxable year, determined under new pro rata allocation rules. Partnerships, open funds with in-and-out investors, and other entities with midyear transfers must now determine the amount of Subpart F and NCTI attributable to each owner.
Grant Thornton insight:
Like the “big three” business tax provisions, the changes to the international tax provisions, while not partnership-specific, do impact computations and reporting at the partnership level. Partnerships with foreign ownership or foreign investments should be familiar with the changes and the impact on entity-level computations and reporting requirements.
With the last-day rule eliminated, partnerships and funds will need to re-evaluate how to allocate Subpart F and NCTI inclusions when CFC ownership changes during the year. Because the statute does not prescribe a methodology for attributing income among U.S. shareholders in midyear transfer scenarios, regulatory guidance will be necessary. Partnerships should monitor this development closely and assess whether limitations or restrictions on ownership changes may need to be incorporated into fund documents to ease administrative burdens associated with this change.
University endowment excise tax
The TCJA created an endowment tax that imposed a 1.4% excise tax on private college and university net investment income from endowments. While private colleges and universities were spared an increase in the excise tax to as much as 21% (the rate included in the original House-passed bill), the OBBBA did raise the rate to 4% for schools with per-student endowments of more than $750,000 but not more than $2 million, and to 8% for those with a per-student endowment of greater than $2 million. Smaller schools were excluded from the excise tax as the floor on student population for application of the tax increased from 500 to 3,000 students.
Grant Thornton insight:
Private colleges and university endowments are often significant investors in private fund structures, and the increase in the excise tax rate could impact how universities decide to invest their capital. Additionally, private colleges and universities may seek to make changes to their current ownership in asset management structures by selling a portion of their holdings before the excise tax rate increases (tax years ending after Dec. 31, 2025). Private equity, hedge funds and venture capital funds should be aware of the potential implications the increased net investment income excise tax could have on their limited partners. There may also be an increase in secondary transactions by endowments in advance of the effective date.
Estate planning
The increased estate and gift tax exemption introduced by the TCJA was scheduled to sunset and fall to approximately $7 million per individual in 2026. The OBBBA instead permanently increased this exemption to $15 million, indexed for inflation, beginning Jan. 1, 2026.
Grant Thornton insight:
The permanency of the exemption helps remove uncertainty around estate planning that has prevailed since the enactment of TCJA and allows fund founders and investors to better plan for wealth transfers without the pressure of having to execute a transfer within a certain timeframe. Additionally, carried interest owners may find the increased estate and gift tax exemption provides a powerful way to transfer wealth by gifting carried interests.
Opportunity zones
The qualified opportunity zones (OZ) program created in the TCJA — and the associated capital gains benefits — was made permanent, with some modifications. While it is still possible to invest in existing zones (with invested gain deferred until Dec. 31, 2026), an updated set of qualified OZs will be designated for investment commencing in 2027. (States can begin to designate new OZs July 1, 2026.)
In addition to the benefits provided under the TCJA, starting Jan. 1, 2027, investors in OZ projects will have a 10% step-up in basis for investments held in an OZ fund for at least five years and a 30% step-up in basis for investments in rural OZs.
Grant Thornton insight:
In addition to deferring or reducing taxable gains invested in funds for five years, the ability to permanently exclude gain from qualified investments may also provide benefits to individuals holding carried interests.
Outlook
The passage of the OBBBA provides certainty in many areas of the tax law that were not present under the TCJA due to the lack of permanence of many taxpayer-favorable provisions. Private funds, management companies and portfolio companies should consider modeling how changes under the OBBBA could impact investor returns and consider whether a new investment in a QSBS or an opportunity zone may provide a meaningful benefit to the fund and its investors.
Fund investors will continue to benefit from a number of provisions that the OBBBA did not change but should be aware that many of them were hotly debated and negotiated and that future tax legislation may bring changes in these areas. Additionally, in some areas, such as the self-employment tax rules, investors should monitor developments on the judicial front. If the Self-Employed Contributions Act limited partner exception becomes more challenging to apply, it could necessitate consideration of alternative structures, such as using an S corporation.
Contacts:
Partner
Washington National Tax Office
Grant Thornton Advisors LLC
Nancy Langdon is a partner in Grant Thornton’s Washington National Tax Office, where she focuses on partnership transactions.
Wichita, Kansas
National Managing Partner
Head of Private Equity
Grant Thornton Advisors LLC
Marc Chase is a National Managing Partner and the Global Head of Private Equity at Grant Thornton.
Head of Asset Management Industry
Grant Thornton Advisors LLC
Shona is an Advisory partner and the head of Asset Management for Grant Thornton.
Dublin, Ireland
Industries
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Partner, Tax Services
Grant Thornton Advisors LLC
Jay has over sixteen years of experience in public accounting focusing on the Alternative Investment funds space.
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