Inside the OBBBA’s Tax Provisions

Diving deeper into the implications of the One Big Beautiful Bill Act, Forvis Mazars’ Donald Rawe, partner, and Howard Wagner, managing director, join the podcast to talk through the most impactful tax provisions, from 1202 changes to bonus depreciation and more.

This episode is brought to you by Forvis Mazars, a leading global professional services network.

Read a transcript of the conversation below.

Middle Market Growth: Welcome to Middle Market Growth Conversations, a podcast for dealmakers discussing the trends shaping the middle market. I’m your host, Carolyn Vallejo, and this is a production of the Association for Corporate Growth. Today we continue our coverage of the One Big Beautiful Bill and its impact on private equity with Donald Rawe and Howard Wagner of Forvis Mazars, who join us to dive into the tax implications of the legislation. Donald and Howard, welcome to the podcast.

Howard Wagner: Thank you.

Donald Rawe: Thanks.

MMG: As always, we’re going to get to know you each a little bit first before we dive into the interview. So let’s take a few moments to talk about your professional background. Donald, can you tell us about your role at Forvis Mazars first?

DR: Sure, and thanks again for having us. I started at the predecessors to Forvis Mazars back in 2008 and with a Big Four Firm before that. And you know, big picture, I’ve been in private equity both in the Big Four and at Forvis Mazars since I started straight out of college. It’s all I’ve ever done. And so that’s been both tax compliance and then tax structuring and assistance with deals, but not actually in diligence.

MMG: And Howard, how about you?

HW: I recently joined Forvis Mazars. Prior to that, I led the Washington national tax office for another national firm. Within our national tax office, I’m focusing on sub chapter CM and A transactional items as well as the domestic aspects of the One Big Beautiful Bill.

MMG: We also like to ask our guests at the top what your first job was and whether there was any lesson you took away from it. So, Donald, let’s start with you again. What was your first job?

DR: Wow, this is long ago. I think I was the cart pusher at Target where I’d have to collect all the carts out in the parking lot. And I think that the lesson I take away from it can both be sarcastic and real at the same time. I think I learned what I didn’t want to do, and that pushed me harder to excel at college and work hard to get out of college and into a professional career.

MMG: Yeah, that’s a great point. Howard, how about you? What was your first job?

HW: My first job, if you don’t count a paper route, was I worked at Marco’s Pizza in Toledo, Ohio, and delivered pizza until there was an unfortunate incident in a snowstorm involving my mother’s 1981 Dodge Colt. And that was the end of my pizza delivery career.

MMG: Any lessons that you took away from that experience?

HW: You don’t want to be a pizza delivery guy.

DR: Don’t slam on your brakes in the snow, Howard.

HW: That too. Yeah. I didn’t want to be a pizza delivery guy for the rest of my life.

MMG: You know what? It’s a fair point to say these jobs gave you each an experience of learning what you don’t want to do to move forward. I think that’s fair to say. All right, let’s dive into the interview. So turning to the One Big Beautiful Bill, there is a lot to unpack from the legislation, particularly in terms of the tax implications for private equity. So let’s go through some of its provisions one by one, starting with interest limitations. Donald, can you kick us off and talk about that for a minute.

DR: Thanks, Carolyn. Yeah, absolutely. I think, you know, interest is a big component of private equity in the sense that through leverage they’re allowed to do bigger and better things than if it was just pure equity. So interest limitations that came in with the original TCJA Act in 2017 that was effective for 2018 gave us a limit on domestic deduction of interest we hadn’t seen before. And originally it was limited to a percentage of tax basis EBITDA. And so, you’d start with taxable income and back into a tax version of EBITDA. And then in 2022, it went down to 30% of tax EBIT, which started to really eat into those that need a lot of leverage. But then also those with a lot of, you know, CapEx, so think heavy equipment or equipment-heavy businesses where they have a lot of depreciation expense that really bites into their ability to deduct interest, and often that equipment’s expensive, so you borrow it to acquire it. So long story short there, in 2022, 2023 and 2024, we saw a lot of our clients, especially in private equity, get squeezed a bit on how much interest they could deduct, so were becoming taxable, even though they were spending all this money on interest. With the OBBB, we see that it’s a return to 30% of tax EBITDA, so this kind of levels the playing field for those businesses that have a significant amount of depreciation expense or amortization expense compared to those who don’t have that. And it becomes a true almost cashflow measure again, which is, you know, the underlying idea of EBITDA. But, Howard, did you have anything in there to add that I left out?

HW: Yeah, I think the only thing I would add there is for owners of flow through businesses, especially partnerships, there’s a lot of complexity to the 1 63 J calculation and how you use section 1 63 J carry-forwards. There was potentially an opportunity for them to clean some of that up in this recent legislation, but they didn’t do it. So a lot of the complexity for pass-through entities is still there, pass-through entities being partnerships primarily. S-corps are a little cleaner in this situation.

MMG: Got it. Let’s now turn to bonus depreciation and the taxpayer opportunities here. Howard, could you kick us off here?

HW: Sure. You know, we’ve had a lot of variations in bonus depreciation over the years. It came, it went away, it came again and in TCJA it came, but it was temporary. It was a hundred percent for a while, and then it started phasing down on a schedule until it was eventually going to phase out. Absent any action by Congress, it would’ve been 40% for 2025 with some further phase outs down to zero. There’s probably less of a policy reason for why they did that and more of just some of the fiscal engineering you have to do for tax reconciliation and getting things passed. What they did in OBBB, the One Big Beautiful Bill, is they returned us to a hundred percent bonus depreciation. And unlike prior versions of bonus depreciation, which were temporary and scheduled to expire, this is permanent. So it’s going to be around forever. You can plan on it, you can rely on it. So if you’re buying new property and equipment non-buildings, you can take a hundred percent bonus depreciation in this year and get your deduction for it. One thing you need to be mindful of is there’s something known as a binding contract rule. What that says is, in essence, the incentive is only for businesses that invest in property after the effective date of it, which in this case is the effective date of Trump’s inauguration. If you had what’s known as a binding contract rule, as a binding contract to purchase property prior to that effective date and you place it in service after, it’s still only eligible for the 40% bonus depreciation, not the full hundred percent bonus depreciation. So one of the things that we’re working with our clients on is looking at those additions, you know, earlier in the tax year and trying to make sure that you didn’t have a binding contract to acquire them prior to the effective date of the legislation. The other thing that comes into play here is if you’re acquiring a business in an asset deal, you know, a taxable asset purchase, you’ll be able to take generally the hundred percent bonus depreciation on the qualifying assets and jumpstart some of your deductions right off the bat. One of the new things added by OBBB is bonus depreciation for manufacturing buildings. It’s technically described as something that is non-residential real property for qualified production property. If you build a building and if you’re doing qualifying manufacturing in the building, you can write off a hundred percent of the building’s costs instead of depreciating it over 39 years. It applies if construction started after January 19th of this year and before January 1st, 2029, and you place it in service by January 1st, 2031. So if you’re building a new building to do manufacturing in the portion of the building that would normally be depreciable over 39 years is going to be deductible immediately. The reason I say the portion is you’re only allowed to take it on the manufacturing portion of the building. So if you’ve got office space or research space or sales folks that are operating out of the building, that part of the building doesn’t count. It’s only the part of the building used for manufacturing. Be careful with the definition of manufacturing. It’s a very specific definition that looks to how much transformation you’re doing on the property. If you’re just taking stuff out of multiple boxes, putting them together in a new box and sending it out, that’s likely not going to be manufacturing. But if you can meet the effective dates for this, this can be a powerful immediate tax deduction. There are a few traps to be careful of here. Namely, if you take this deduction upfront and you cease to be engaged in the right manufacturing activities in the facility, you have to recapture the deduction if that happens within 10 years. So that’s just something to be aware of. But all in all, it’s an exciting new opportunity.

DR: And Howard, it’s kind of funny, I don’t know if you remember when 1 68 K, which is the definition of bonus depreciation, came in, do you remember the year abouts that came in or why it came in?

HW: I can’t remember if it first came in in the great recession or if it came in before then and then came back in the great recession.

DR: No, it was 2000. It was the dot com burst, right?

HW: And then it came back in the great recession.

DR: That’s right.

HW: And then it came back in TCJA.

DR: And now it’s here to stay.

MMG: Donald, there is also a provision in the bill that impacts flow-through businesses. What changes here should PE firms be made aware of?

DR: Yeah, I think the thing here is pass-through or flow-through, just remembering there’s a little bit of everything in there, just the way folks refer to them. But we were looking at hopefully seeing a 23% flow-through deduction instead of 20%. It never did happen, but the best part of it is, is the flow-through deduction is now permanent as it was part of the TCJA Act, it’s now permanent. So we’re very excited about that. One of the things that is indirectly but directly related to that, I know tax is always direct and indirect I feel like is 4 61, but I know that 4 61 is a passion project for Howard. Howard, do you have anything to add to 4 61 discussion?

HW: Are you trying to trigger me? Section 4 61 L is something that came in TCJA that puts an overall limit on how much you can deduct from trader businesses in a year. So for example, if Don and I put $10 million each into a new business and that was the only business that we invested in, so $20 million went into the business, they give each of us a deduction for $5 million on our tax returns this year. We can take a deduction; each take $600,000 and the remaining 4.4 out of the $5 million is carried forward as an NOL available in the next year. And once you convert it to an NOL under the current rules, it’s subject to an 80% limitation in terms of how much you can use to offset taxable income in the current year. This really causes problems for folks who are expecting to see big deductions for their capital investments that give them deductions. The other thing that comes into play is upon exiting from the business, sometimes there’s traps in here that can cause you to recognize the gain from the sale of the business in the year of the sale, but when you free up suspended losses or other carry-forwards, those might get trapped by this limitation and not deductible until the next year to where you get a mismatch of the income in one year and not being able to use all of the losses.

MMG: Donald, did you have anything to add there?

DR: No, I think it’s a great summary and yeah, we’re just excited that it’s permanent, so now we can plan for more than just a year in advance.

MMG: Yeah. What about the pass-through entity tax, Howard?

HW: So a little background on this, it used to be prior to TCJA that everybody got unlimited deductions for state and local income taxes. You might have some drag on the deduction because of alternative minimum tax, but you know, everybody got the unlimited state and local tax deduction in TCJA. Two things happened. They took away state and local income tax deductions, capped them at $10,000 for itemized deductions and also lowered everybody’s income tax rate. Depending on which side of the fence you’re on, some people are, you know, a lot of people are upset that you used to get these very significant deductions, especially if you’re a business owner with a pass-through entity making a lot of money, you lose the deduction and everybody’s very upset about that. What the proponents of TCJA would tell you is you lost the deduction, your rate went down, you’re still coming out ahead. But needless to say, the state and local tax deduction has generated quite a bit of controversy, for anybody following how the legislation went this year. When the $10,000 cap came about on state and local taxes, states got creative. They came up with regimes where you basically said instead of this partnership or S corp passing out all of its income to its shareholders and the shareholders pay tax on their individual returns and get their deduction for that income capped at $10,000, they got creative and came up with tax regimes that said, the pass-through entity, the partnership or the S corp can elect to pay tax at the corporate level. It’s deductible as a business expense by the partnership and it never hits itemized deductions of the individual. What it effectively does is gets you around the itemized deduction limitation for income from your pass-through entity. If you’re making money, this is obviously the way to go because it gets you a deduction you wouldn’t otherwise get. The one thing you do want to be cautious of is if you go from losing money to making money—say Don and I start that business and it’s a startup and ignoring all of the other limitations, we lose some money in the first couple years, we have net operating losses and in year three we make money. Before you just jump and automatically assume that you want to start paying taxes at the corporate level to get the deduction. In a lot of states, the individuals have a net operating loss deduction that they can use to offset their income. If you go to this elective tax regime, you might not get that net operating loss and might write a check for something that you don’t need to write a check for because of the individual NOL. So as you transition to profitability, just keep an eye on that and understand how you can use your state losses along the way.

DR: And I think that’s pretty important, right? A lot of our private equity portfolio companies start out, that first year is usually a loss. Entering profitability in second or third year is usually the goal, especially now that we have limitations on interest in other items. So it’s a great planning point there, Howard. And then on the flow-through deduction, backing up to the flow-through deduction, only certain businesses qualify for that. And then where you pay the pass-through entity tax in the structure matters. It may not be at the lowest tier, you may have to pay it at a tier that’s much higher up. So providing regular quarterly information to the investors is important so they can start to project when they’re going to run out of, say, that cumulative loss that they’ve accrued in the state or whether they need it paid sooner.

MMG: Donald, there are also provisions impacting research and development expenditures. What are the key impacts there?

DR: Well, the good news is, and this is my favorite change in the law, at least that I’ve seen so far, it sure got a whole lot easier and we have a lot less hard conversations to have with our client. So, there’s no change on the foreign research and development costs. Those are still capitalized and amortized over 15 years, which is something that came in with TCJA, but was a slow burn for when it actually got implemented. Beginning in 2025, though, we no longer have to capitalize those for domestic purposes. So any domestic R&D that’s done, we can go back to deducting those concurrently on the return, which is a great benefit from the standpoint of having to, you’d either have to capitalize and deduct them over 60 months. Something that used to be deductible upfront. That was really hard for some clients who have a large R&D spend and it was mismatching, you know, the cash again is out the door similar to interest, but the deduction can’t be had. So you end up artificially paying tax sooner than you otherwise would have to, which can strain the business. But starting in 2025, we can now deduct those. Great. We can still do the R&D credit. Great. And for any of those capitalized costs where we began to capitalize them in 2022, 2023 and 2024, those can be deducted all in the first year or you can spread it out over two and I think it’s going to be a really good windfall, if you will, for our clients to get that those tax dollars back and get that deduction up from the artificially increased incomes they’ve seen from the past couple of years.

HW: Yeah, I mean it in essence, they’re giving you a refund of everything you capitalized in 2022 through 2024.

DR: That’s right. And so, you know, one of the harder things that we don’t know, and you know, Treasury will probably answer this by the time we have to file extensions, we’re hoping for the 25 year is when that 1 74 cap applies cost versus what is that? Is that amortization expense or is that ordinary income and it can impact interest limitation, deductions and all that. So that’s one thing, you know, we have high on our radar of what to expect. We don’t have a final answer, but you know, Howard, do you want to add any commentary around that?

HW: I think the good news is everybody’s going back to at least the way we used to be on domestic R&D. I think the practical aspect here is you had a lot of startup businesses that were spending heavily on R&D, maybe only had a nominal amount of revenue, and they were being forced to be taxpayers and that just wasn’t what everybody intended from a policy standpoint. I think what’s interesting is, you know, the mechanics of how you get those refunds, everybody has the option to either deduct everything that’s on their books at December 31, 2024, let’s say you’ve got $2 million of capitalized R&D costs sitting on your books at December 31, 2024. You can take a deduction for them in 2025. You can take a deduction, 1,000,025, 1,000,026, or if you’re a qualified small business, you can go back and file amended returns to get those. That has proven to be maybe more complicated than everybody set out to be because of some of the interesting rules that apply to partnerships.

DR: Oh, and I got one and 4 61 L.

HW: Yeah, I mean that goes into the question of how do you decide if you’re going to take the deduction over two years or take it over one year. So I think, you know, for businesses of all sizes before you just say, Hey, I’m going to deduct it all this year, there’s a lot of modeling and things to consider so you can make the right decision because it’s counterintuitive, but there will be situations where taking it over two years might give you a better tax answer than taking it over one.

DR: Yeah, I could see that definitely in a flow-through scenario versus corporate, right. Not quite as punitive, but could on the 80% NOL limitation.

HW: Yeah.

MMG: Well, finally, let’s turn our attention to 1202 changes and its impact on investors. Howard, I know this is a big one.

HW: This one’s huge. This is one of the biggest benefits out there. Section 1202, I think a lot of the ACG listeners are probably going to be savvy on this, but if you’re an individual, a non-corporate taxpayer, you make an investment in a C corp, you acquire the stock at original issuance, it meets a gross assets test, which used to be $50 million. It’s in an active trader business in something that’s not professional services or something like that. The old rule was if the company has less than $50 million in assets, you acquire the stock at original issue, it meets all the other tests. Once you got to five years, you could exclude the greater of 10 times your basis or $10 million. So if your basis in the stock was, you know, 500,000, you could exclude up to $10 million. If your basis in the stock was $12 million, you could exclude up to $120 million. Just a huge powerful benefit here. One of the downsides though, was you had to get to five years, it was all or nothing. They made three changes in OBBB with respect to 1202. The first one raised the asset threshold. Instead of the company having assets of $50 million at the time you bought the stock, it was extended to companies with $75 million in assets. Be careful when you’re measuring assets, it’s tax basis in assets, not book basis, and you have to make certain adjustments to go from basis to fair market value of assets when you do certain corporate transactions. So you really have to dig in and look at the balance sheet and what it looks like on the day you invest. But the key takeaway is the threshold is going from $50 million to $75 million. The second piece of this is the example I gave where it was 10 x or 10 x basis or $10 million, 500,000, I could exclude up to $10 million. That’s now been changed to 10 x basis or 15 million. So, somebody whose basis was 500,000 on something that’s a home run can now exclude up to $15 million of gain. The third change that was made is the holding period. And this is for new stock issued after July 4, the day they actually signed the bill used to be five years, all or nothing. And Don, I know we’ve had a lot of conversations over the years with clients who three and a half years in, they’re very focused on 1202, either the offer of a lifetime that’ll never be replicated, shows up at their door, or they may have some insights on their business and the model that they’re in and realize that their valuation will never be higher. It, you know, two years from now when you’re finally eligible for 1202, changes in the world that you expect might mean your company won’t be worth as much then. Some really tough decisions for companies as they were trying to decide whether to sell or not to sell if they were focused on 1202 benefits. The big change in OBBB is a three year phased-in exception, you get a 50% exception if you hold it for three years, you get a 75% exception if you hold it for four years and then you get the full exclusion if you hold it for five years. Once you get to five years, you’ve get the full exclusion. Anything in excess of the exclusion is taxed at 20%. There’s a quirk in how the gain is taxed for prior to the five year period. For the new stock, it’s taxed at a 14% rate. So when you get the 50% exclusion, you’re paying 14% in year three instead of 20%. When you get the 75% exclusion in year four, you’re paying 7% rather than, you know, 20%. But again, it gives a lot of flexibility to investors to still monetize some of their 1202 benefits if they think the right time to sell is prior to year five.

DR: And Howard, one of the best things we see in private equity, back to your comment on who our listeners probably are here, is we own that stock of the C corp, which is one of the requirements in a partnership. And there may be tiers of partnerships, but when that comes all the way out, each person, that $10 million, which is now $15 million maximum, that’s measured individually, right?

HW: It’s measured with respect to each partner, each individual.

DR: Right. So, on each 10 40 that’s measured, so if you think about this, it’s way more than $10 million or $15 million. When looking at just a company to the example you had, it could be far more gain, could be excluded, it could be a hundred percent of gain on a billion-dollar sale if it’s spread out amongst enough people. So it’s insanely powerful when it goes all the way out and you see how much hits each person’s return.

HW: And for a business owner with children and grandchildren, there’s techniques where you can gift stock and have everybody count for the 10 x or 15 or 10 x or $10 million on each kid and grandchild’s return as well—just a host of planning opportunities.

DR: Yeah. So, I gave the private equity and you’re in the family wealth strategy spectrum there.

HW: I might refer to it as founder rather than family strategy, but yeah, that’s where I was going with it. You know, the thing that’s often overlooked in 1202 is 1202 is very focused on by the founder of the business and how they exit, and in a lot of cases, the private investors or the private equity company and how they exit. What’s often overlooked is employees. If I get stock in the company as compensation, you know, Don thinks I’m doing a great job and to get me to sign onto the company when I come in, Don’s going to give me 500 shares of common stock. And guess what, if on the day I acquire the common stock as an employee, the company is under $50 million or under $75 million, it meets all the tests. I can also qualify for the 1202 exclusion. So don’t just think of it for your founder and your investors in certain situations. Your employees can benefit from it as well. There are stories out there still today of people who were early Facebook investors, early Facebook employees cashing out and 1202 benefits.

MMG: Wow. Okay, a lot to be aware of, a lot of tax changes for private equity, but also it sounds like some certainty built into OBBB for investors. Donald Rawe and Howard Wagner from Forvis Mazars, thank you both so much for joining the Conversations podcast.

DR: Thank you very much.

HW: Thank you. It was a good time.

This transcript was prepared by a transcription service. This version may not be in its final form and may be updated.

The Middle Market Growth Conversations podcast is produced by the Association for Corporate Growth. To hear more interviews with middle-market influencers, subscribe to the Middle Market Growth Conversations podcast on Apple Podcasts, Spotify and Soundcloud.