How the One Big Beautiful Bill Act Could Affect Alternative Investments

In the early hours of May 22, 2025, the House passed H.R. 1, dubbed the “One Big Beautiful Bill Act” (the Bill), after making last-minute amendments to the draft legislation first released on May 13, 2025. The Bill spans well over 1,000 pages and includes almost 400 pages of tax provisions. It would raise the federal deficit by $3.8 trillion over the next decade, despite slashing federal funding to Medicaid, food stamps, and other services by $1 trillion.

The Bill includes some extensions of TCJA provisions slated to expire at the end of 2025. It also repeals several energy credits and includes other tax-related revenue raisers.

While the Bill leaves the carried interest tax treatment untouched, it does contain several tax provisions relevant to the alternative investment industry and its stakeholders.

Provisions Directly Affecting Alternative Investments

Qualified Opportunity Zone Incentives

H.R. 1 expands the Qualified Opportunity Zone (QOZ) program by designating additional areas as opportunity zones, modifying the definition of low-income communities, and modifying the opportunity zone incentives. Initial qualified opportunity zones will lose their designation on Dec. 31, 2026, rather than Dec. 31, 2028, as provided under current law. The Bill would allow for the designation of additional opportunity zones, to be in effect from Jan. 1, 2027, through Dec. 31, 2033.

As a result, the gain deferral for investments in current opportunity zones would not be available after Dec. 31, 2026, which may lead to a pause in investments in opportunity zones through Jan. 1, 2027, when new opportunity zones can be designated.

The gain reduction percentage would change from 15% to 10% for new opportunity zones if the taxpayer held the investment for at least five years, but it would increase to 30% for investments in qualified rural opportunity funds. Further, the Bill would allow taxpayers to elect to invest up to $10,000 of ordinary income.

Sec. 899 Increase in Tax Rates on Certain Foreign Taxpayers

Proposed Section 899, according to the administration, is intended as a countermeasure to “unfair foreign taxes” imposed by foreign jurisdictions, such as an undertaxed profits rule (UTPR), digital services tax (DST), diverted profits tax, or any other tax enacted “with a public or stated purpose that the tax be economically born, directly or indirectly, disproportionately by U.S. persons”.

The proposal would increase the U.S. tax on foreign persons resident in such jurisdictions by an applicable number of percentage points, starting at 5% for the first year beginning on the applicable date, and increasing annually by five percentage points thereafter, but no higher than 20 percentage points. The applicable date means the first day of the calendar year beginning on or after the latest of (i) 90 days after the date of enactment of the Bill, (ii) 180 days after the date of enactment of the unfair foreign tax, or (iii) the first date that an unfair foreign tax begins to apply.

The Sec. 899 surcharge would also apply to reduced rates available under an income tax treaty with the “discriminatory foreign country”.

Taxes that are affected by the Sec. 899 surcharge include the following taxes and related withholding rates:

• Tax on fixed and determinable, annual, or periodic (FDAP) income
• Tax on a foreign corporation’s (but not an individual’s) income effectively connected with a trade or business (ECI) in the U.S.
• Tax on the gains from the disposition of a U.S. real property interest under FIRPTA
• Tax imposed on U.S.-source gross investment income of a foreign private foundation

The proposal also would remove the gross income exclusion in Sec. 892(a), which exempts foreign governments from tax on certain U.S.-source investment income, including bank deposit interest.

The new Sec. 899 would be effective on the date of enactment of the Bill.

It raises serious questions about investment fund managers’ ability to monitor the designation of foreign jurisdictions as “discriminatory” and the resulting impact on withholding rates applicable to the fund’s foreign investors. As the tax costs of investing in the U.S. would rise significantly for investors from such countries, funds may want to consider implementing alternative holding structures to mitigate the impact on investors’ after-tax returns.

REIT Subsidiary Asset Test Changes

The Bill would amend Sec. 856(c) to increase the limitation on investments in securities of taxable REIT subsidiaries from 20% to 25% for tax years beginning after Dec. 31, 2025.

Disguised Sales Rules Not Dependent on Regulations

The Bill includes an amendment to Sec. 707(a)(2), which deals with disguised payments to partners for services and disguised sales of partnerships. The amendment, added after passage of the Bill by the Rules Committee, just prior to passage by the full House, specifies that the statute is applicable “Except as provided by the Secretary”. Previously, Sec. 707(a)(2) required “Under regulations prescribed by the Secretary”; however, finalized regulations have never been issued.

Provisions Impacting Portfolio Companies

The Bill includes a number of temporary provisions that would help portfolio companies accelerate deductions, including the expensing of domestic research or experimental costs, reverting the interest expense limitation under Sec. 163(j) back to EBITDA, and bonus depreciation. The proposal would also establish limitations on the deductibility of charitable contributions by corporations, but leaves the state and local tax deduction of corporations intact.

Domestic Research and Experimental Expenditures

Domestic research or experimental expenditures incurred in tax years beginning after Dec. 31, 2024, and before Jan. 1, 2030, would not be subject to the capitalization requirement under Sec. 174, but can currently be deducted. Taxpayers would have the option to elect to capitalize and amortize these costs. Foreign research and experimental expenditures would remain subject to capitalization and amortization over 15 years. Notably, expenditures capitalized for domestic research and experimentation may be recovered upon disposition, retirement or abandonment of the project with respect to which they were incurred. The proposal would prohibit the same for foreign research and experimental expenditures that were capitalized.

Sec. 163(j) Interest Expense Deduction Limitation

The interest expense deduction limitation under Sec. 163(j) was originally implemented as part of the Tax Cuts and Jobs Act (TCJA) and imposes a limitation on the deduction of business interest expense to 30% of “adjusted taxable income” (ATI). Through 2021, ATI generally corresponded with EBITDA, but beginning with 2022, it was reduced to EBIT. This resulted in a reduction in deductible interest for businesses with meaningful depreciation and amortization deductions. The proposal would revert ATI back to EBITDA for tax years beginning after Dec. 31, 2024, and before Jan. 1, 2030.

Bonus Depreciation

The proposal also brings back 100 percent bonus depreciation for qualified property placed in service after Jan. 19, 2025, and before Jan. 1, 2030 (Jan. 31, 2031, for longer production period property and certain aircraft). The proposal also includes 100% bonus depreciation for qualified production property, which is defined to include the portion of any nonresidential real property located in the U.S. that is

• Subject to depreciation under Sec. 168,
• Used by the taxpayer as an integral part of a qualified production activity,
• Being constructed after Jan. 19, 2025, but before Jan. 1, 2029, and
• Originally placed in service by the taxpayer after the date of enactment but before Jan. 1, 2033.

Charitable Contribution Limitations for Corporations

The Bill would introduce limitations on the deductibility of charitable contributions by corporations by establishing a threshold of 1% of taxable income and a limit of 10% of taxable income. Any charitable contributions disallowed for a tax year under this proposed rule would be subject to a five-year carryforward period.

Provisions Affecting Investors and Individuals

Excess business loss deductions

Noncorporate taxpayers may not deduct business losses from a trade or business in excess of a certain threshold, currently set at $626,000 for joint filers. Any losses in excess of this threshold are considered excess business losses (EBL) and are carried forward as a net operating loss to future years. The provision, first established under TCJA, was set to expire at the end of 2025. The Bill would make the EBL limitation permanent, but also adjust it to treat EBLs included in net operating loss carryovers as business losses to be included in the computation of the current year EBL. This could result in some business losses effectively being disallowed permanently.

Sec. 199A Qualified Business Income and BDC Dividends

The Bill would make the Sec. 199A Qualified Business Income (QBI) deduction permanent and increase the deduction percentage from 20% to 23%. It also replaces the current limitation computation with a new two-step process that would allow high-income taxpayers to potentially receive a partial deduction, rather than no deduction at all. It achieves this by adding a second limitation calculation that permits taxpayers a deduction equal to 23% of QBI, reduced by 75% of the excess of taxable income over the income threshold amount.

In addition, the amended Sec. 899A would allow a partial deduction to taxpayers engaged in specified services trades or business (SSTB) because the newly added second step refers to QBI from all trades or businesses, not only qualified trades or businesses.

Finally, Sec. 199A would be expanded to include QBI dividend interest earned from Business Development Corporations (BDCs). This could be helpful in fundraising as it provides investors with an additional incentive to invest in such vehicles, as it would increase their after-tax returns.

Changes Impacting Tax-Exempt Investors

The Bill contains several tax provisions impacting tax-exempt organizations. Certain private colleges and universities investing in alternative investment funds would be most impacted by the modification of the endowment excise tax rate for investment income. The tax rate on such income would be tied to the “student adjusted endowment” amount and could rise as high as 21% if that amount exceeds $2 million. An institution’s student-adjusted endowment would equal the aggregate fair market value of the institution’s assets (other than those assets used directly in carrying out the institution’s exempt purpose), divided by the number of eligible students of the institution. Notably, eligible students would only include U.S. citizens or permanent residents, or those able to provide evidence from the U.S. Immigration and Naturalization Service that they are in the U.S. for other than a temporary purpose with the intention of becoming a citizen or permanent resident.

State colleges or universities, qualified religious institutions, and those with student-adjusted endowments of less than $500,000, among others, would be exempt from this provision.

Certain private foundations, other than exempt operating foundations, would face an increase in their excise tax on net investment income from 1.39% to up to 10% for private foundations with assets of at least $5 billion. Assets would not be reduced by liabilities for purposes of this determination, and the Bill would also include the assets of related organizations if certain common control tests are satisfied.

SALT Cap and Passthrough Entity Tax Deduction

The Bill makes several changes to the state and local tax (SALT) deduction limitation that was enacted with the TCJA. First, it would increase the amount of deductible state and local taxes from $10,000 to $40,000 beginning with the 2025 tax year. The increased deduction cap would be phased down to $10,000 for taxpayers with incomes over $500,000. Beginning in 2026, the SALT cap and income limit would increase by 1% each year for 10 years.  This change helped mollify House Republicans representing high-tax-rate states.

The Bill would also permanently disallow deductions at the individual level for passthrough entity taxes (PTET) paid by partnerships and S corporations carrying on an SSTB, as defined under Sec. 199A, by pulling them into the SALT cap limitation calculation. Such partnerships and S-corporations would no longer reduce ordinary income by those taxes paid or accrued but rather would have to separately state them on Schedules K-1 issued to their owners.

The wording of the Bill would also capture state entity level taxes such as the New York City UBT, Texas Margins tax, or Tennessee Excise Tax in its disallowance and therefore produce quite harsh results. It remains to be seen if this will be subject to amendments in the reconciliation process with the Senate.

Individual Tax Rates

The Bill permanently extends the individual tax rates implemented by TCJA and thus keeps the 37% top tax rate in place. It would make an additional year of inflation adjustments to where the 37% tax bracket begins.

Changes Affecting Trusts, Gifts, and Estates

The Bill also makes the unified gift and estate tax exemption permanent and sets it to an inflation-adjusted amount of $15 million for tax years beginning after Dec. 31, 2025. It does the same for the generation-skipping transfer tax exemption. The current income tax rates and brackets for trusts and estates are also made permanent, with adjustments for inflation.

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