Thoughts
The Big Beautiful Bill – key takeaways for alternatives funds
Lev Shoykhet, Head of Tax, Citco Fund Services (USA) Inc., analyses the impact of the “One Big Beautiful Bill Act” and what it means for the taxation of alternatives funds, investors and portfolio companies.
The “One Big Beautiful Bill Act” (H.R. 1 (OBBA)) was signed into law on July 4th and includes several significant US tax law changes that will have implications for funds, investors, and portfolio companies. Two key takeaways are that the OBBA did not make changes to the current tax rules addressing carried interests, or to the pass-through entity tax (PTET).
Below are the highlights from the OBBA that the Citco group of companies’ (Citco) clients in the alternative investment space need to know.
OBBA update
Key changes
Impact
Section 899 Excluded
- Section 899, which would have imposed additional US taxes on foreign investors and entities from “unfair” tax jurisdictions, was not included.
- The Treasury Secretary noted that this was no longer needed due to agreements reached with G7 countries but also stated that if these agreements were not implemented in a timely fashion, 899 could be revisited through the reconciliation process.
No additional withholding tax on dividends and other income derived by international investors.
Bonus Depreciation Restored
Generally, 100% bonus depreciation is restored for qualifying assets placed in service after January 19, 2025. There are special rules for certain depreciation deduction, specifically for non-residential real property used in domestic production or manufacturing activities
Capital-intensive portfolio companies should revisit investment and financing plans to maximize immediate expensing.
Section 174 (R&D) Fixed
- Immediate expensing is reinstated for US R&D costs. Foreign R&D costs must still be amortized over 15 years.
- All taxpayers that incurred domestic R&D expenses after December 31, 2021, and before January 1, 2025, are permitted to elect to accelerate the remaining deductions for such expenditures over a one- or two-year period. Foreign R&D is unchanged and must continue to be capitalized over a 15-year period. The provision also includes rules to coordinate the immediate deductibility of domestic R&D expenses with the research credit.
This is favorable for startups, technology, and IP-heavy businesses.
Section 163(j)
- Permanently reinstates the EBITDA limitation for the calculation of the deduction after December 31, 2024.
- Contains a new ordering rule whereby the Section 163(j) limitation is calculated prior to any interest capitalization rule. Also, interest capitalized under Section 263(g) or 263A(f) is not business interest under Section 163(j). However, the business interest allowed under Section 163(j) is applied first to the capitalized interest and then to deducted interest. Finally, excludes subpart F and GILTI, along with any associated gross-up under Section 78, from adjusted taxable income for purposes of Section 163(j).
Overall positive impact on leverage structures.
Clean Energy Incentives Rolled Back
Some tax credits from the Inflation Reduction Act (IRA) have been reduced or terminated.
Investors in renewable energy projects should revisit projections and tax equity structures.
PTET Remains Unchanged
The bill did not address the Pass-Through Entity Tax (PTET), so eligible pass-throughs may continue to deduct state and local taxes in full where available.
State and Local Tax (SALT) Deduction Increased
The individual SALT deduction cap increases from $10,000 to $40,000, with phase-outs for taxpayers with adjusted gross income (AGI) exceeding $500,000.
Substantial benefit for partners and principals in high-tax states.
Expanded Qualified Small Business Stock (QSBS)
Section 1202 gain exclusions expanded:
- Partial exclusions available for 3- and 4-year holding periods.
- Full exclusion remains at 5 years.
- Exclusion cap increased from $10 million to $15 million.
- Gross asset cap raised from $50 million to $75 million to qualify as a QSB.
This is a big opportunity for early-stage investors, founders, and funds with eligible portfolio companies.
University Endowment Excise Tax
A new 8% excise tax will apply to large university endowments.
May indirectly affect large institutional investors and endowment LPs.
Business Interest Expense Deduction
Businesses can now deduct interest expense up to 30% of EBITDA, rather than EBIT (which was in effect since 2022).
Positive for leveraged buyouts and highly financed businesses.
CFC Downward Attribution
Section 958(b)(4) reinstated to preclude downward attribution from a foreign person to a US person in determining CFC status; new Section 951B added causing certain foreign controlled foreign corporations to be treated as CFCs.
Significantly reduces the number of potential CFC fillings.
BEAT
BEAT rate increased to 10.5% as of January 1, 2026. Other BEAT proposals are not included.
No significant impact on current BEAT rules.
Section 162(m)
The provision adds an aggregation rule to Section 162(m). Where a specified covered employee is paid by different members of a controlled group, the amounts are combined for purposes of the $1m limit.
GILTI and FDII
The effective tax rate on Global Intangible Low-Taxed Income (GILTI) and Foreign-Derived Intangible Income (FDII) increases to 14%. These regimes have been renamed to Net CFC Tested Income (NCTI) and Foreign-Derived Deduction Eligible Income (FDDEI).
Cross-border structures and effective tax rates may need to be reviewed. Treasury is expected to issue clarifying guidance.
OBBA update
Section 899 Excluded
Key changes
- Section 899, which would have imposed additional US taxes on foreign investors and entities from “unfair” tax jurisdictions, was not included.
- The Treasury Secretary noted that this was no longer needed due to agreements reached with G7 countries but also stated that if these agreements were not implemented in a timely fashion, 899 could be revisited through the reconciliation process.
Impact
No additional withholding tax on dividends and other income derived by international investors.
OBBA update
Bonus Depreciation Restored
Key changes
Generally, 100% bonus depreciation is restored for qualifying assets placed in service after January 19, 2025. There are special rules for certain depreciation deduction, specifically for non-residential real property used in domestic production or manufacturing activities
Impact
Capital-intensive portfolio companies should revisit investment and financing plans to maximize immediate expensing.
OBBA update
Section 174 (R&D) Fixed
Key changes
- Immediate expensing is reinstated for US R&D costs. Foreign R&D costs must still be amortized over 15 years.
- All taxpayers that incurred domestic R&D expenses after December 31, 2021, and before January 1, 2025, are permitted to elect to accelerate the remaining deductions for such expenditures over a one- or two-year period. Foreign R&D is unchanged and must continue to be capitalized over a 15-year period. The provision also includes rules to coordinate the immediate deductibility of domestic R&D expenses with the research credit.
Impact
This is favorable for startups, technology, and IP-heavy businesses.
OBBA update
Section 163(j)
Key changes
- Permanently reinstates the EBITDA limitation for the calculation of the deduction after December 31, 2024.
- Contains a new ordering rule whereby the Section 163(j) limitation is calculated prior to any interest capitalization rule. Also, interest capitalized under Section 263(g) or 263A(f) is not business interest under Section 163(j). However, the business interest allowed under Section 163(j) is applied first to the capitalized interest and then to deducted interest. Finally, excludes subpart F and GILTI, along with any associated gross-up under Section 78, from adjusted taxable income for purposes of Section 163(j).
Impact
Overall positive impact on leverage structures.
OBBA update
Clean Energy Incentives Rolled Back
Key changes
Some tax credits from the Inflation Reduction Act (IRA) have been reduced or terminated.
Impact
Investors in renewable energy projects should revisit projections and tax equity structures.
OBBA update
PTET Remains Unchanged
Key changes
The bill did not address the Pass-Through Entity Tax (PTET), so eligible pass-throughs may continue to deduct state and local taxes in full where available.
Impact
OBBA update
State and Local Tax (SALT) Deduction Increased
Key changes
The individual SALT deduction cap increases from $10,000 to $40,000, with phase-outs for taxpayers with adjusted gross income (AGI) exceeding $500,000.
Impact
Substantial benefit for partners and principals in high-tax states.
OBBA update
Expanded Qualified Small Business Stock (QSBS)
Key changes
Section 1202 gain exclusions expanded:
- Partial exclusions available for 3- and 4-year holding periods.
- Full exclusion remains at 5 years.
- Exclusion cap increased from $10 million to $15 million.
- Gross asset cap raised from $50 million to $75 million to qualify as a QSB.
Impact
This is a big opportunity for early-stage investors, founders, and funds with eligible portfolio companies.
OBBA update
University Endowment Excise Tax
Key changes
A new 8% excise tax will apply to large university endowments.
Impact
May indirectly affect large institutional investors and endowment LPs.
OBBA update
Business Interest Expense Deduction
Key changes
Businesses can now deduct interest expense up to 30% of EBITDA, rather than EBIT (which was in effect since 2022).
Impact
Positive for leveraged buyouts and highly financed businesses.
OBBA update
CFC Downward Attribution
Key changes
Section 958(b)(4) reinstated to preclude downward attribution from a foreign person to a US person in determining CFC status; new Section 951B added causing certain foreign controlled foreign corporations to be treated as CFCs.
Impact
Significantly reduces the number of potential CFC fillings.
OBBA update
BEAT
Key changes
BEAT rate increased to 10.5% as of January 1, 2026. Other BEAT proposals are not included.
Impact
No significant impact on current BEAT rules.
OBBA update
Section 162(m)
Key changes
The provision adds an aggregation rule to Section 162(m). Where a specified covered employee is paid by different members of a controlled group, the amounts are combined for purposes of the $1m limit.
Impact
OBBA update
GILTI and FDII
Key changes
The effective tax rate on Global Intangible Low-Taxed Income (GILTI) and Foreign-Derived Intangible Income (FDII) increases to 14%. These regimes have been renamed to Net CFC Tested Income (NCTI) and Foreign-Derived Deduction Eligible Income (FDDEI).
Impact
Cross-border structures and effective tax rates may need to be reviewed. Treasury is expected to issue clarifying guidance.
If you would like more information or to speak to Citco about the expected impact of the bill, please get in touch with your relationship manager.