OBBBA’s Impact on Investment Partnerships: Strategic Shifts and Planning Opportunities

H.R. 1, commonly known as the One Big Beautiful Bill Act (OBBBA), introduces tax updates including technical revisions and new compliance rules that affect investment partnerships. The most meaningful changes are strategic in nature and open the door to valuable tax planning opportunities.

One of the most impactful changes for investment partnerships introduced by OBBBA is the amendment to IRC Section 1202 governing qualified small business stock (QSBS). The following updates apply to stocks issued after July 4, 2025, under the revised Section 1202 rules:

QSBS issued on or before July 4, 2025, will be governed by the Section 1202 rules that were in effect at the time of issuance.

The original issuance requirement remains unchanged. To emphasize this point, any transfer or exchange of shares intended to restart the holding period will disqualify the stock from the QSBS treatment.

The changes make QSBS benefits more attractive for investment partnerships by shortening the holding period requirement, which provides faster access to gain exclusion benefits. The act also increases the aggregate gross assets threshold, which expands the pool of eligible portfolio companies.

The SALT cap is increased to $40,000 (or $20,000 in the case of a married individual filing a separate return) for tax years beginning after December 31, 2024, through tax years ending on December 31, 2029. The SALT cap reverts to $10,000 ($5,000 in the case of a married individual filing a separate return) in 2030 and thereafter.

Additionally, the new law includes an income-based phase-out of the increased SALT cap starting at $500,000 of modified AGI ($250,000 of a married individual filing a separate return). The phase-out is computed based on 30 percent of the excess of the taxpayer’s income over the indicated threshold. As such, the SALT cap for high-net-worth taxpayers with modified adjusted gross income of $600,000 or higher will decrease to the original $10,000.

Both the $40,000 SALT cap and the $500,000 phase-out threshold increase by 1% each year from 2026 to 2029.

Due to the income-based phase-out, many high net-worth taxpayers may not receive a benefit from the increase in the SALT cap deduction limitation. Sensiba team believes that PTET will continue to offer various planning opportunities.

The OBBBA revises IRC Section 4968 and applies a new rate structure at tiered rates based on the per-student adjusted endowment:

This change primarily influences highly endowed private colleges and universities, potentially affecting their investment strategies. This, ultimately, may have a downstream effect on fundraising for asset managers.

Miscellaneous itemized deductions subject to 2% limitation, which was regulated by IRC Section 67 and suspended for 2018-2025 under the TCJA, has now been permanently eliminated. This means all portfolio-related expenses flowing through investment partnerships to individual taxpayers, including management fees, accounting, legal, and other professional services costs, are now permanently non-deductible for federal tax purposes.

The 20% deduction for qualified business income for pass-through entities (including partnerships and S-corps) is made permanent under the updated IRC Section 199A. The deduction phase-in range is now expanded to $150,000 for married filing jointly and $75,000 for all other returns, making the deduction more accessible .

The OBBBA also delivers long-awaited relief for Section 174 capitalization, a favorable change for many portfolio companies engaged in research and development activities:

If you are interested in learning more on the topic, please refer to our article OBBBA Delivers Section 174 Capitalization Relief: What Businesses Need to Know.

A few changes did not make their way into the final bill.:

The OBBB Act also introduced updates that tighten reporting requirements for investment partnerships. This calls for increased diligence from tax professionals analyzing foreign ownership structures and entity-level events.

The new IRC Section 951B establishes the concept of foreign controlled foreign corporations (FCFC) and potential income inclusions under Subpart F or Net FCFC tested income (formerly known as GILTI) regimes. Section 958(b) revives downward attribution rules that may trigger Form 5471 filing for U.S. shareholders.

For more details, read our article New IRC Section 951B Rules May Trigger Form 5471 Filings.

The OBBBA made updates to IRC Section 707(a)(2) regarding treatment of payments to partners for property or services or disguised sales, clarifying that the provision is self-executing. Under prior law, the same portion of the law applied “under regulations prescribed by the Secretary.” Under the amended law, ownership transfer between partners that are economically linked to distributions may now be recharacterized as taxable disguised sales.

While some taxpayers may have viewed the disguised sales rules as effective only with regulations, many have long viewed the provision as self-executing regardless of the status of regulations. For many taxpayers who have followed such view and treated the provision as self-executing, this likely is not a significant or meaningful change.

Fund managers and venture CFOs should evaluate the implications of the new provisions. Our tax team is here to support you in navigating the rules, minimizing risk, and unlocking the full potential of strategic planning opportunities under the OBBBA.