Posted by Jon Williamson and Stephen Fisher
On July 4, 2025, President Trump signed the One Big Beautiful Bill Act (OBBBA) into law, altering the tax landscape for the near and long-term. Much like the 2017 Tax Cuts and Jobs Act (TCJA), the impact of the OBBBA is dependent on each taxpayer’s individual circumstances. That said, generally, investors and managers of a variety of investment fund types will likely be positively impacted by the tax provisions included and/or will indirectly benefit by those excluded from the final Act.
Below is a look into the provisions most impactful to private equity fund investors and managers, as well as registered investment companies (RICs).
Below are key business provisions from the OBBBA that will not only impact private equity funds, but could in some cases help reduce ordinary investment income:
>> Our Take: These changes have the potential to reduce a fund’s share of ordinary taxable income from investments, whether they are pass-through or corporate. The reduction or elimination of ordinary income can positively impact private equity funds by potentially converting ordinary income to capital gains and delaying income recognition until investment realization events. These changes to taxation of earnings can have an impact on investors’ rates of return and overall fund performance.
It is imperative for funds to ensure both investments and portfolio companies are identifying and adopting these provisions appropriately. Several of the changes have options as to how they are applied, that, depending on which option is chosen, could significantly impact a fund and its investors. For example, certain paths could lead to amended return requirements or could make certain irrevocable elections that come with negative consequences. Additionally, it will be important to update current and future year modeling to reflect these changes to appropriately budget for expenditures such as tax distributions and federal and state taxes, when applicable.
For more information on business provisions, read “One Big Beautiful Bill Up Close: Tax Impact for Private Companies”
Exclusion of gains on the sale of QSBS under Sec. 1202 can provide significant tax savings for fund investors and managers alike. This type of investment is typical within a venture capital platform, as eligible businesses generally include early stage technology and start-up corporations.
Under previous rules, investors were required to hold QSBS for at least five years before being eligible for gain exclusion. This has been changed under the OBBBA to allow for partial exclusions on three-year (50%) and four-year (75%) holding periods, in addition to 100% after five years. The law additionally increases the limitation on assets, which restricts QSBS designation, meaning a wider range of investments may qualify.
>> Our Take: Sec. 1202 eligibility is dependent on meeting strict original issue and asset-based testing requirements. While expansions of the exclusion may be beneficial, careful planning and monitoring is required to ensure eligibility requirements are met and maintained. Funds should be familiar with general QSBS requirements and work with their tax teams to identify investments with the potential of meeting those requirements.
A common planning tool to consider is to convert a previously ineligible investment type into an eligible corporation prior to investment to qualify for Sec. 1202 benefits. When considering such conversions, it is imperative to consider all possible tax and economic consequences of a conversion — from inception, throughout the life of the investment and upon disposition.
The Qualified Opportunity Zone (QOZ) provisions included in the TCJA encouraged investment into low-income census tracts by providing investors with a deferral of taxes on capital gains if the proceeds were used to fund qualified investments in those areas. The QOZ provisions, however, began to sunset within a few years of the TCJA, limiting their benefit and longevity as capital gain planning tools.
QOZ benefits have been permanently renewed and enhanced under OBBBA. There are several updates to the provisions, however, the key takeaway is that investors can rely on exclusions being available on qualified investments moving forward.
>> Our Take: The extension and modification of QOZ investment benefits is impactful for fund investors and managers in a couple of ways. First, investors and managers with capital gains from fund investments should already be familiar with QOZ investments as an income deferral tool. Additionally, fund managers may want to explore working with their tax advisers to create a Qualified Opportunity Fund (QOF) to facilitate the investment of capital gain dollars into eligible investments — both for themselves as well as fund investors.
For more information on QOZs, read “One Big Beautiful Bill Up Close: Tax Impact for Real Estate”
While certain provisions in the OBBBA may benefit or burden private equity funds, it is important to note pieces that were absent or removed before the bill’s passage:
Many RICs establish wholly owned subsidiaries in foreign jurisdictions to “block” nonqualified investments that would otherwise generate nonqualified income and/or consist of nonqualified assets under the RIC income and asset qualification tests, respectively. These wholly owned corporations (and certain other closely held foreign corporations) are treated as controlled foreign corporations (CFCs) for tax purposes. Certain CFC shareholders generally must include income from CFCs on a flow-through basis in the year in which the CFC’s taxable year ends.
Special rules apply to a subset of CFCs, known as specified foreign corporations, with a single U.S. shareholder that owns 50% or more of the voting power or value of all classes of the CFC’s stock (as is the case when a RIC has a wholly owned foreign subsidiary). A specified foreign corporation generally must adopt the taxable year of its majority U.S. shareholder. However, this type of corporation historically has been allowed to elect a taxable year beginning one month earlier than its majority U.S. shareholder’s taxable year. RICs sometimes make this election for their wholly owned subsidiaries to ensure they have adequate time to determine the subsidiary’s income for purposes of making year-end distributions.
The OBBBA repeals the one-month-deferral election effective for taxable years of specified foreign corporations beginning after November 30, 2025. These corporations as of November 30 must adopt the taxable year of its majority U.S. shareholder for its first taxable year beginning after November 30, 2025. For example, assume a RIC with a December 31 year-end has a wholly owned foreign subsidiary with a November 30 year-end. Due to the OBBBA, the subsidiary will have a short taxable year from December 1, 2025, to December 31, 2025, and thereafter will have a calendar taxable year. The mandatory change in taxable year is considered to be initiated by the specified foreign corporation and consented to by the IRS.
>> Our Take: A specified foreign corporation’s revocation of the one-month-deferral election generally is eligible for automatic approval by the IRS under Revenue Procedure 2006-45. The Revenue Procedure provides that in lieu of filing IRS Form 1128 (Application to Adopt, Change or Retain a Tax Year), the corporation’s controlling domestic shareholders must indicate the change in taxable year on IRS Form 5471 (Information Return of U.S. Person With Respect to Certain Foreign Corporations) filed with respect to the CFC's first effective year. Absent further guidance, it isn’t clear if this requirement applies to the OBBBA-mandated tax year changes. RIC complexes will need to consider whether to follow the Revenue Procedure, file Form 1128 and/or include information about the tax-year change in the Form 1120-F that a specified foreign corporation files.
Revenue Procedure 2006-45 also provides that a specified foreign corporation that revokes its one-month deferral election is not eligible to make another change in taxable year for a period of 48 months following the first day of the first effective year. It currently is unclear if this rule applies to the change in taxable year mandated by the OBBBA.
The OBBBA creates a new type of tax-deferred account called the Trump Account. The federal government will automatically enroll children born from 2025 to 2028 in a Trump Account and contribute $1,000 to each.
Once established, a maximum of $5,000 per year (indexed for inflation) may be contributed to the account for a child under 18; these contributions are non-deductible. Income and gains in the account are taxed until withdrawal, which is not allowed until age 18. Withdrawals net of contributions used for qualified expenses are taxed at long-term capital gain rates; other withdrawals net of contributions are taxed at ordinary income rates.
>> Our Take: Trump Accounts provide a potential business opportunity for fund complexes, because the OBBBA stipulates that the only permissible investments in Trump Accounts are mutual funds and ETFs that meet certain requirements. More specifically, a mutual fund or ETF must track a “qualified index,” must not use leverage and must not have annual fees and expenses exceeding 0.10 of the balance of fund investments. A “qualified index” is the S&P 500 or any other index that is comprised primarily of U.S. companies and for which regulated futures contracts are traded on a qualified board or exchange. A qualified index does not include any industry or sector-specific index but may include an index based on market capitalization.
Under Sec. 199A, the TCJA created a 20% deduction for non-corporate taxpayers on qualified business income, which includes real estate investment trust (REIT) dividends (other than capital gain dividends and dividends taxable as qualified dividend income). As a corporation, a RIC is ineligible for this deduction. Treasury guidance, however, allows RICs that receive such REIT dividends to pass through the deduction to their shareholders. The deduction, which is subject to reduction when a taxpayer’s income exceeds a certain threshold, was scheduled to expire for tax years beginning after December 31, 2025.
The OBBBA makes the QBID permanent. It also modifies the way the deduction is reduced so that taxpayers whose income exceeds the threshold may see a smaller reduction than they would have under prior law. Some earlier versions of the legislation increased the QBID to 23% and extended it to business development company interest-related dividends. The OBBBA, however, contains neither of these provisions.
>> Our Take: Making the QBID permanent is a welcome benefit for shareholders of RICs holding REIT shares.
Open-end RICs generally do not incur debt directly but may establish blocker corporations that do. Also, business development companies (BDCs) and some closed-end funds incur debt. The TCJA generally limited the deductibility of net business interest expense to 30% of adjusted taxable income (ATI). The TCJA provided that for taxable years before January 1, 2022, ATI is not reduced by deductions for depreciation, amortization and depletion. The OBBBA reinstates this rule for tax years beginning after December 31, 2024, potentially increasing the amount of deductible interest.
>> Our Take: The expansion of the business interest expense limitation will most likely impact RICs that see these limitations through their pass-through investments and/or BDCs. The addback of these deduction increases the income that drives the limitation analysis; therefore, RICs may see fewer limitations than the last few years.
>> Read our related blog "One Big Beautiful Bill Up Close: Tax Impact for High-Net-Worth Individuals"
Changes from the OBBBA may significantly alter tax projections and/or establish new or enhanced planning opportunities for investment funds to carefully consider. Your tax advisers can be a knowledgeable resource regarding these changes to help you forecast options both funds and investors can use to be in the best position for the current taxation landscape.
Contact Jon Williamson, Stephen Fisher, Rob Meiner 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.