As the end of 2025 draws near, private equity funds have important tax items to consider both for year-end planning and in looking ahead to 2026. From provisions in the One Big Beautiful Bill Act (OBBBA) to recurring considerations, such as state and local tax and the impact of income and losses, spending time now on projections and planning can go a long way in setting up the coming year for success.
The OBBBA passed in July 2025 contains provisions that prudent fund managers should consider for the upcoming year.
The 20% qualified business income deduction (often referred to as Section 199A) for income from certain pass-through entities and REIT dividends has been permanently extended. The deduction limit phase-in amount also increased from $50,000/$75,000 to $100,000/$150,000 (single/married filing jointly). The OBBBA also eased limitations applied to specified service trades or businesses (SSTBs) and to entities affected by the wage and investment limitation.
The 100% bonus depreciation deduction is available for qualified assets placed in service after January 19, 2025. Unlike the bonus depreciation deduction in the 2017 Tax Cuts and Jobs Act (TCJA), the OBBBA provision does not sunset.
The reinstatement of 100% bonus came with a caveat, however, for 2025. The provision does not apply to assets with a written and binding contract entered into before January 19, 2025. For this reason, portfolio companies must clearly document bonus-eligible assets to ensure compliance.
Bonus depreciation in the short-term is tax efficient, but fund managers should also consider their long-term strategy. If losses in the current year cannot be used, taking bonus depreciation may not be worth the state tax complexities or potential depreciation recapture requirements.
The OBBBA made permanent the modified calculation for the limitation of business interest expense to 30% of business income before interest, depreciation and amortization. Depreciation and amortization had previously not been added back, which means going forward more interest may be deductible, and prior interest expense limitations may be freed up and considered deductible.
The OBBBA allows for partial exclusions of qualified small business stock (outlined in Sec. 1202) sold before the previous five-year required holding period. Sec. 1202 stock sold that was held for four years will qualify for 75% exclusion; stock held three years will qualify for 50% exclusion.
Fund managers should keep in mind Sec. 1202 eligibility requires meeting strict original issue and asset-based testing requirements. Careful planning and monitoring is essential to ensure these requirements are maintained. Know the QSBS requirements and consult your tax adviser to identify assets that may qualify.
The OBBBA permanently renewed and enhanced the Qualified Opportunity Zone (QOZ) Program, which offers deferred taxes on capital gains if reinvested into qualified property.
Funds expecting a realization event may want to consider establishing a Qualified Opportunity Fund (QOF) to assist investors or fund managers with capital gain deferral. QOFs come with restrictions and reporting requirements, but there is often still a significant benefit. A taxpayer can delay recognizing capital gain for up to five years, and after that they will receive a 10% basis step up, effectively reducing gain and tax paid.
In addition to provisions from the OBBBA, there are evergreen tax planning items fund managers should consider annually. Below summarizes these areas, with additional detail in “Key Year-End Tax Areas for Real Estate and Private Equity Funds.”
Characterization and Timing of Gains and Losses
When providing investors with estimates of taxable gain or loss at year-end, determining the character of that gain and the realistic timing is just as important as the amount. Additionally, consider differences between tax and book investment basis, and communicate to investors how those differences may impact a recognition event.
Allocation of Taxable Income (Loss) and Tax Distribution Needs
If a fund is in a substantial income position, preparing an estimate of tax allocations at year-end will provide value to management and investors. A good estimate of taxable income enables your fund to pay tax distributions to fund your partners’ tax obligations.
State Tax Obligations
Allocations of taxable income also help understand state withholding requirements to calculate holdbacks when distributing proceeds from taxable events. When reviewing investor address changes, consider state residency filing requirements and any additional returns to file for 2025. Much like the fund, your investors may have similar filing obligations with state and local jurisdictions, educating them of their state filing obligations helps ensure they avoid notices, penalties and interest.
Pass-Through Entity Tax (PTET)
Year-end is a good time to revisit making any available PTET elections. If there are substantial changes to your investor base or large recognition events, a PTET election could make sense in 2025, even if such elections were not previously beneficial.
Pass-Through Withholding and Composite Filings
Many states require pass-through entities to remit tax on behalf of their nonresident investors for income recognized in the state. If a fund did not execute a PTET filing, states use either the flow-through withholding or composite filings to make these payments.
Work with your tax adviser to evaluate whether PTET, nonresident withholding or composite filing will be the most cost-effective pass-through filing.
Ongoing Maintenance
If there are any changes to partner information, including address changes, transfers of interest or partner deaths, let your tax team know. There may be additional information, such as amendments to the limited partnership agreement or transfer of interest calculations, you need to complete. Additionally, a transfer of interest could trigger an adjustment requiring more information.
Foreign Partners
Foreign partners may require additional reporting, separate tax filings or have withholding requirements. Several factors can affect these requirements: entity type, country of residency and applicable treaties. Use this time to ensure you have any required information, resulting in a clear picture of how to meet the requirements of your foreign partners.
Fund managers in the process of launching a new fund should consider consulting with a tax adviser when setting up the structure of the entities. Proper tax planning can take the form of creating depreciable basis adjustments, allowing for a preferable allocation methodology and blocking undesirable tax attributes.
Read “Certain Partnership Transactions May Benefit from a ‘Hidden Bonus’ in Bonus Depreciation”
Execution of Management Fee Waivers
Fund advisers can use fee waivers to waive the access to management fee income to defer income and/or recharacterize ordinary income as preferable capital gains. To be effective, generally a management fee waiver must be in place prior to the end of the year, and it should specify the period and amount of the management fee being waived.
Read “Management Fee Waivers: Potential and Pitfalls for Fund Advisers”
Expenses incurred by the fund are often nondeductible portfolio deductions for individuals. As a result, these expenses provide most investors with no value while reducing their basis. There are potential scenarios where it may be advantageous to capitalize such expenses on the balance sheet rather than deducting them. However, capitalization is only available for certain expenses; for instance, when those expenses are due diligence costs related to making a new investment, they are considered organizational or fund syndication costs.
Holding planning meetings for your portfolio company and external tax teams can be incredibly beneficial. Below are items for consideration:
Consider the items above with your tax advisers before the year is out to identify opportunities to position your fund in the best light for both investors and fund managers — and to position your fund for a successful 2026.
Contact Jonathan Williamson, Andrew Evans or a member of your service team to discuss this topic further.
In this blog Cohen & Co is not rendering legal, accounting, investment, tax or other professional advice. Rather, the information contained in this blog is for general informational purposes only. Any decisions or actions based on the general information contained in this blog should be made or taken only after a detailed review of the specific facts, circumstances and current law with your professional advisers.