TaxJourney®

The United States tax system does not treat U.S. branches of foreign banks as separate legal entities for tax purposes. Instead, the foreign bank itself is considered the taxpayer.

Foreign banks engaged in a trade or business in the U.S. are taxed on taxable income that is effectively connected income (“ECI”) with the conduct of that U.S. trade or business. Further, while the foreign corporation remains the taxpayer, certain provisions of the Internal Revenue Code (“IRC”) and Treasury Regulations treat U.S. branches as if they were separate entities for specific purposes.

• Reg. § 1.882-5 provides rules for determining deductible interest expense of a foreign bank by treating interest as attributable to the U.S. trade or business.

• The Branch Profits Tax (“BPT”) and Branch-Level Interest Tax (“BLIT”) impose additional taxes at the branch level.

• Most income tax treaties rely on the permanent establishment principle, allocating to the U.S. branch the profits the branch would have earned if it were an independent and separate enterprise.

This article will concentrate on selective, but central topics, such as:

• The notion/definition of ECI as it applies to foreign banks.

• The provisions of Reg. § 1.882-5 for the deduction of a foreign bank’s interest expense.

• The relationship between interest allocation under § 1.882-5, the BPT, and the BLIT.

• More general implications of such rules and provisions given the increasing complexity of cross-border banking.

Effectively Connected Income (ECI)

Effectively Connected Income – The Basics

A foreign corporation with a branch located in the United States is almost always classified as being engaged in a trade or business in the United States; therefore, such a corporation is subject to U.S. federal income tax on taxable income that is considered to be “effectively connected” with the conduct of that United States trade or business.

If the foreign corporation is eligible for treaty benefits, it is subject to U.S. taxation only to the extent that the U.S. income is “attributable” to a permanent establishment in the United States. Although “effectively connected” and “attributable” do not mean the same thing, in practice they are sufficiently similar to produce the same results, with specific exceptions noted in the review (e.g., differences with respect to the “residual force of attraction” rule in IRC § 864(c)(3)).

Foreign bank’s ECI is taxed in much the same way as income for a domestic bank. Such income is subject to the corporate tax rate (21% federal as of November, 2025) in accordance with IRC §11 and 882(a).

The “All-Or-Nothing” Rule

A key aspect of the ECI regime is the “all-or-nothing” treatment of a specific income item: the item is either completely treated as ECI or completely excluded from ECI. No pro-rata allocation is allowed between different bank branches regardless of the fact that different bank locations contributed economically to the transaction. This would mean U.S. tax could be assessed on more (or sometimes less) than the branch’s actual economic share of the income.

Interbranch Transactions Disregarded

Another basic principle is that interbranch transactions are not respected under U.S. tax law. Because a branch is part of the same legal entity, a loan or swap with a U.S. branch and its foreign home office (or another branch) is simply ignored for U.S. tax purposes. Interbranch transactions may matter for regulatory purposes or for financial reporting, or for tax purposes in some foreign jurisdictions but not for U.S. federal tax purposes.

These features create a risk of double taxation. The U.S. may tax ECI using broad, all-or-nothing attribution rules. A foreign jurisdiction may tax the same income at the same time especially if it respects interbranch dealings that the U.S. disregards.

Therefore, foreign banks must plan accordingly while also relying on treaties for cross-border transactions with U.S. counterparts.

Specific Categories of Income

1. Interest Income & Gains on Debt Securities

• Banks are governed by a special ECI rule in Reg. § 1.864-4(c)(5). This rule is available to banks if they are regulated by the U.S. and deal with determining whether or not the interest or gain on debt securities is effectively connected income.

• The core test for this purpose is as follows: A debt security is attributable to a U.S. branch if that branch actively and materially participates in the solicitation, negotiation or performance of activities necessary to acquire the security.
  • Participating in loan negotiations, credit analysis, collateral assessment or approval of terms would fall within this category.
  • A bank would not meet this participation standard through merely passive activities such as recordkeeping, clerical processing or mere signatory approvals.

• In terms of the attribution principle, once a security has been attributed to a U.S. branch at acquisition, it remains attributable to the branch during the holding period. This is referred to as the “once attributed, always attributed” rule.

Special cases:

• Typically, securities bought by the home office and later recorded in the U.S. branch are not ECI because the branch did not participate in the acquisition.

• Revenue Ruling 86-154, Situation 3, confirmed that even though the home office negotiated a global credit line, it still held that a U.S. branch loan could be appropriately attributable to such branch as long as the branch did the following:
  • Negotiated collateral;
  • Performed an independent credit analysis;
  • Funded the loan; and
  • Recorded it on the books of the branch.

This ruling confirmed that the home office, and the U.S. branch, could each participate actively and materially in the loan acquisition, making the portion attributable to the U.S. branch as ECI.

2. Dividends and Gains on Stock

• The exception to ECI rules for banks applies to certain stock, but only in certain circumstances. Stock is considered attributable to a branch (and thus generates ECI) only when:
  • It is received as additional consideration for making a loan.
  • It is pledged as collateral and later acquired through foreclosure.
  • It is acquired in the process of distributing securities to the public.

• In practice, stock holdings are rarely considered attributable to the U.S. branch unless closely associated with some loan or distribution.

• Moreover, stocks of a banking subsidiary cannot be considered attributable to the branch, and stocks of banking subsidiaries almost never generate ECI.

3. Fee Income

• Bank fee income arises in conjunction with lending franchise and advisory activities. Common examples of fee income include loan commitment fees, origination fees, servicing fees, placement fees, and financial advisory fees.

• Source rule: These fees are U.S.-source income if the services are performed in the United States.

• Treatment: Generally fees are treated as compensation for services and not interest.

• Exception: Fees can be recharacterized as interest or original issue discount if fees are unreasonable or not contingent on actual services rendered.

4. Letters of Credit and Guaranty Fees

• Commissions received on letters of credit, confirmations, acceptances, or other credit guarantees are not treated as interest but the IRS often analogizes them to interest for sourcing purposes.

• If the person whose credit is guaranteed is a U.S. person, the commission is U.S. source and ECI if the U.S. branch participated materially in issuing the guarantee.

• If the credit guarantee relates to a foreign person, the income is foreign-source and not ECI, even if the U.S. branch issued or processed the guarantee.

• Without a treaty, such fees may otherwise be subject to 30% withholding tax if classified as U.S.-source FDAP.

5. Foreign Currency Transactions, Swaps, Options, Forward Contracts, and Other Derivatives

• Contemporary international banks are directly engaged in active trading in the forex, swaps, options, forwards, and derivatives market.

• The trading model often employs many branches of the bank in a single transaction, commonly referred to as global trading.

• ECI test: Income is ECI if the U.S. branch’s business activities are a material factor in realizing the income. This is a broader test than the “active and material participation” test for securities, and, therefore, typically captures a broader range of activity as ECI.

Problem Areas

• Interbranch transactions do not receive tax recognition. A U.S. branch cannot recognize hedges or swaps with its home office.

• This creates the “split hedge problem” a U.S. branch recognizes gains from a position despite home office or another branch creating a corresponding loss and offsetting the risk.

An example: A New York branch quotes and executes a dollar interest rate swap with a U.K. customer; however, negotiations are handled by London personnel.

Result: The entire income is taxed as ECI in the U.S. despite significant involvement from London.

Consequences: These rules lead to over-inclusion of income into the U.S. tax base and the risk of double taxation since other jurisdictions will want to tax their perceived share.

Expenses and Losses of the Branch

A. Expenses and Losses Other Than Interest

Expenses that are allocable to the bank’s U.S. trade or business are factored in for determining effectively connected taxable income (ECTI). These deductions are meant to put a foreign bank’s U.S. branch on a substantially equal footing with a domestic bank to ensure that the tax base reflects the branch’s true net income.

• Personnel costs: Salaries, wages, and employee benefits for employees working at or for the U.S. branch.

• Occupancy costs: Rent, lease payments, utilities, and maintenance of office premises.

• Operating costs: Professional fees, supplies, and other general and administrative costs of the U.S. trade or business.

• Depreciation and amortization: For tangible assets (e.g., office equipment, computer systems) used in the conduct of the U.S. trade or business.

• Losses: Write-offs or other operating losses that are properly allocated to the branch’s U.S. activities.

B. Interest Expense

Dealing with interest expense is one of the least straightforward and most debated issues of taxing U.S. branches of foreign banks. Because interest expense is often the largest expense of a banking operation, the allocation or proportionality of interest expense can dramatically change the U.S. taxable income of the branch.

1. Statutory Basis : IRC § 882(c) and Treas. Reg. § 1.882-5 govern the manner in which a foreign bank calculates the amount of interest expense that is deductible against the bank’s effectively connected income (ECI). The general rule: A foreign bank may deduct a reasonable proportion of interest expense to the extent that it is properly allocable to U.S. activities.

2. Formula-Based Allocation : The regulations apply a formula method, as opposed to a direct tracing of borrowings and loans to U.S. operations:

• Step1: Calculate the ratio of U.S. assets to worldwide assets.
• Step2: Multiply this ratio by the bank’s worldwide interest expense.
• Step3: The resulting amount is treated as deductible U.S. interest expense for the branch.

Example: If a bank has $100 million of worldwide assets, $20 million of which are in the U.S., and $10 million of worldwide interest expense, the bank would allocate $2 million (20%) to the U.S. branch as deductible interest.

3. Policy Reasoning: This formula seeks to limit the occurrence of earnings stripping; that is, foreign banks attempting to over-allocate interest expense to their U.S. branch (to decrease U.S. tax income) while retaining its income abroad. It embodies a neutrality principle, in that the U.S. branches are to be taxed in the same manner as domestic banks that incur genuine funding costs in the U.S. In practice, however, the rules often stray from economic reality, as they do not track actual borrowing and lending flows.

4. Critique and Practical Challenges : The formula may seriously over-allocate or under-allocate interest compared to the true economics of the bank’s funding.

For example:

• A branch may fund itself primarily with U.S. deposits but is nonetheless forced under the formula to deduct interest on a worldwide ratios basis.
• On the contrary, if the majority of the U.S. assets were funded abroad, the formula may allocate excessive interest expense to the branch, creating an inflated deduction.

These discrepancies create uncertainty and difficulties with compliance, but they are particularly challenging for banks that have intricate cross-border structures.

5. Excess Interest and BLIT : If the allocation under Reg. § 1.882-5 results in the branch having “excess interest” (the branch is considered to have more U.S. liabilities than supported by U.S. assets), it will be subject to Branch-Level Interest Tax (BLIT) under IRC § 884. BLIT is levied at a rate of 30% on the excess interest, which is treated like a deemed dividend repatriated out of the U.S. So, interest allocation impacts more than just deductions.

The Branch Profits Tax (BPT) and Branch-Level Interest Tax (BLIT)

A. Overview

The U.S. tax system imposes additional taxes on foreign banks’ U.S. branch operations using two methods: Branch Profits Tax (BPT) and Branch-Level Interest Tax (BLIT). The relevant statute is IRC § 884, which aims to ensure that foreign banks are treated the same as U.S. subsidiaries of foreign corporations.

1. Branch Profits Tax (BPT): Branch profits tax is assessed at the rate of 30% on the “dividend equivalent amount” from a foreign corporation’s effectively connected earnings and profits (ECEP) from a U.S. trade or business not reinvested in the trade or business in the U.S. The BPT conceptually functions similar to the withholding tax that would be applied where a U.S. subsidiary of a foreign parent were to remit dividends overseas. The calculation follows the steps below.

• Step1: Effectively connected taxable income (ECTI).
• Step2: Adjust for increases and decreases (positive and negative) in the branch’s net equity in the U.S.
• Step3: The amount that is not reinvested (ECEP less reinvestment) is the dividend equivalent amount subject to the 30% BPT tax.

Taxing BPT serves to disincentivize foreign banks from treating income from U.S. branch profits as tax-free repatriations to the home office.

2. Branch-Level Interest Tax (BLIT) : The BLIT is applied to excess interest that is regarded as paid by the U.S. branch to either its affiliated lenders or its foreign home office. Excess interest comes into play under the interest allocation regulations found in Reg. § 1.882-5, when the branch’s allocable liabilities (hence deemed interest expense) exceed its U.S. assets. This excess interest is treated as if it was interest paid to parties outside the United States and is subject to a 30% tax (or a treaty rate, if applicable). The BLIT is designed to deter foreign banks from avoiding withholding tax simply by shifting funding structures into and through their branch offices.

3. Policy Rationale : Both the BPT and BLIT were enacted to provide parity between U.S. branches of foreign banks and U.S. subsidiaries of foreign entities.

• Absent the BPT and BLIT, a U.S. branch could effectively remit profits or interest back to their home office without any withholding requirements.
• These tax regimes ensure that branch operations do not create a loophole to avoid withholding tax.

B. Coordination of the BPT, BLIT, and Interest Allocation Rules

The functioning of the branch profits tax (BPT) and the branch-level interest tax (BLIT) is closely tied to the interest allocation rules at Reg. § 1.882-5. The tax provisions operate based on the concepts of branch equity, branch liabilities, and deductible interest. This overlap of concepts can create complex, and at times, adverse, situations for foreign banks.

Interconnecting Mechanisms: Net equity impact: The BPT operates based on an increase in a branch’s U.S. net equity. If the interest allocation rules attribute unjustifiable U.S. branch liabilities, that leads to a decrease in the branch’s U.S. net equity. A lower level of U.S. net equity increases the dividend equivalent amount and, correspondingly, the Branch Profits Tax (BPT). Excess interest impact, while that occurs, the excess U.S. branch liabilities can create excess interest in the allocation rules.

In turn, the BLIT leads to an additional tax of 30% on any excess interest deemed to have been paid outside of the U.S. In short, one imbalance from the allocation rules can create an increase in both BPT and BLIT taxes.

Concluding Remarks

The U.S. tax regime for foreign bank branches can be viewed as still disordered, outdated and ill-suited for the modern environment of banking around the world. The Code and regulations intend to equalize the treatment of foreign bank branches with domestic banks, but the regulations often do not fulfill this goal.

Disorder and Risk of Double Taxation

The rules governing effectively connected income, allocating expenses (typical of interest), and the branch profits tax and branch-level interest tax do not provide consistent and logical interaction.

Although interbranch transactions are disregarded, branch equity and liabilities are incorporated into the BPT and BLIT rules, so banks can be expected to pay tax on amounts that may not reflect their underlying economic income.

As a result, income is frequently over-included in the U.S. tax base which often results in double taxation when foreign jurisdictions assert taxing rights.

Disconnect with Global Banking Activity

These rules were promulgated long before modern global trading, derivatives activity and complex financial products existed. The all-or-nothing attribution rules ignore that branches often combine to create a single transaction. The forced exclusion of interbranch transactions (e.g. loans, swaps, hedges) creates a serious distortion since those transactions tend, at a minimum, to receive respect under regulatory purposes, accounting purposes and foreign tax purposes.

Areas Requiring Reform

• Reforms should provide recognition of the economic substance of dealings between a U.S. branch and its foreign home office or other branches.
• Any reforms must utilize ECI rules, interest allocation, and branch-level taxes (BPT/BLIT) in a coherent way, such that the same structural choices should not give rise to multiple overlapping taxes.
• Reforms must provide clearer and more fair rules for global trading operations that align taxation with the true contribution of each branch.

Interim Measures

Until there are reforms enacted, Advance Pricing Agreements (APAs) provide a practical, though imperfect, way to lessen exposure. Borrowing transfer pricing methodologies under IRC § 482 for interbranch allocations might assist inter-branch allocations for the U.S. to align with economic substance. Although these efforts help alleviate the current risk, the suggested stop-gap solutions are not proper substitutes for systemic reform, and could likely lead to greater inconsistency if some taxpayers use a “private law” path.

If no significant reforms are adopted, the tax rules governing foreign bank branches will continue to lead to outcomes that may be both inequitable and economically distorted, thus placing significant compliance costs on banks and risking inappropriate double taxation. Finding a way to tax foreign branches in line with the realities of global business is important both to promote fairness and to promote the integrity of the U.S. tax system.

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The information contained in this post is merely for informative purposes and does not constitute tax advice. For more information, feel free to reach us at [email protected]

Copyright 2025 Small World Business Advisors LLC www.swbadvisors.com

Each year, the IRS publishes inflation adjustments to a number of tax provisions to reflect the rising costs. For tax year 2026, the inflation adjustments are especially noteworthy because of certain amendments in the One Big Beautiful Bill Act (“OBBBA”). The amendments affect standard deductions, income tax marginal tax brackets, estate and gift tax exclusion amounts, some of the employer benefits credits, and more. It is vital for business leaders, advisors, and taxpayers to be aware of benefit of these provisions and changes.

Key Adjustments for Tax Year 2026

1. Standard Deduction Increases

• Married-Joint: $32,200 (up from $31,500)
• Single / Married-Separately: $16,100
• Head of Household: $24,150
• The increases provide some minor relief and accounts for inflationary pressure.

2. Marginal Tax Bracket Updates

• Top rate of 37% continues for incomes over $640,600 (single) and $768,700 (married-joint).
• Other brackets (35%, 32%, 24%, 22%, 12%, and 10% rates) are raised, which reduces “bracket creep.”
• The minimum tax rate is 10% for single filers with an income of $12,400 or less ($24,800 for married joint filers).

3. Alternative Minimum Tax (AMT) & Exemptions

• AMT exemption for unmarried individuals is $90,100 (phasing out at 500,000).
• For Married Filing Jointly, the phase out threshold is $1,000,000.

4. Estate & Gift Tax Exclusions

• The basic estate tax exclusion amount increased to $15,000,000 (up from $13,990,000).
• Annual gift exclusion remains $19,000 and the special exclusion for non-citizen spouses increases to $194,000.

5. Adoption Credits

• The maximum credit permitted for adoptions for the tax year 2026 is the adoption-related qualified expenses up to $17,670 which is an increase from $17,280 for 2025.
• For tax year 2026, the maximum refundable credit is $5,120.

6. Employer-Provided Childcare Tax Credit Boost

• OBBB significantly enhanced this:
• The cap for the childcare credit increased from $150,000 to $500,000 ($600,000 for eligible small business).

7. Other Adjusted Items

• Earned Income Tax Credit (EITC) maximum for qualifying taxpayers is now $8,231.
• Qualified Transportation Fringe Benefit/parking limit is now $340/month.
• Health Flexible Spending Arrangements (FSAs): salary reduction limit is now $3,400 and carryover limit is $680.
• Medical Savings Accounts: deductible/out-of-pocket limits adjustments.
• Foreign Earned Income Exclusion is now $132,900 (up from $130,000).

Implications & Takeaways for Businesses & Founders

• These inflation adjustments help mitigate tax drag created from rising nominal income, but do not affect the core tax structure.
• High net worth or pass-through entities will be more relieved with an increased exemption from estate and gift tax limits for planning and legacy purposes.
• The increased employer childcare credit could specifically help businesses that already offer generous benefits.
• Higher exemption thresholds (AMT, standard deduction) eliminated moving taxpayers into higher marginal burdens.

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The information contained in this post is merely for informative purposes and does not constitute tax advice. For more information, feel free to reach us at [email protected]

Copyright 2025 Small World Business Advisors LLC www.swbadvisors.com

Federal legislation enacted on July 4, 2025, has expanded the gain exclusion available for sales of qualified small business stock (QSBS) under Section 1202. The revised law increases tax savings for shareholders in eligible domestic corporations, and government estimates show that taxpayer savings will rise by approximately $4.5 billion each year once all changes are in effect. This update marks the most significant change to Section 1202 since the exclusion was increased to 100% in 2010. The new provisions only apply to QSBS issued after July 4, 2025. Stock issued before this date remains governed by the previous rules.

Recent Amendments to Section 1202 Provisions

The recent legislation introduces three fundamental changes aimed at broadening the accessibility and enhancing the value of qualified small business stock (QSBS) under Section 1202:

• Revised Holding Period Requirements for Gain Exclusion: The rigid five-year requirement has been replaced with a phased exclusion system. Investors now receive 50% gain exclusion after three years, 75% after four years, and 100% after five years. This eliminates the previous cliff effect that created market distortions and provides immediate incentives for patient capital.
• Increased Maximum Exclusion Limit: Prior to recent legislative changes, Section 1202 provided a gain exclusion capped at the greater of $10 million or ten times the taxpayer’s adjusted stock basis. This $10 million minimum limit was established in 1993 and has remained fixed since then, without any inflation adjustments. The One Big Beautiful Bill Act (OBBBA) increases this exclusion floor to $15 million for stock issued after July 4, 2025. Additionally, it introduces annual inflation adjustments starting in 2026 to maintain the exclusion’s real value over time. As a result, eligible taxpayers, including individuals, estates, and trusts, can now exclude at least $15 million of taxable gains from QSBS sales. The provision’s multiplier factor of ten times the stock basis, however, remains unchanged under this update.
• Expanded Gross Asset Limits: Qualifying small businesses can now maintain up to $75 million in aggregate gross assets, up from $50 million. Combined with ongoing inflation adjustments, this expansion significantly increases the pool of eligible companies and extends qualification windows for growing enterprises.

These enhancements apply exclusively to stock issued after July 4, 2025, creating distinct treatment between existing holdings and new issuances.

Implications of OBBB Revisions on Investors and Corporations

The One Big Beautiful Bill Act (OBBBA) introduces important changes to Section 1202, increasing the tax advantages available to investors and the companies in which they invest through qualified small business stock (QSBS).

• Restored Eligibility for Corporations Under Revised Asset Thresholds: Corporations that once exceeded the previous $50 million gross asset limit but now fall below the updated $75 million cap may become eligible once again to issue qualified small business stock (QSBS). These companies should assess the potential impact of this change on their financing and exit strategies. Furthermore, investors who may not meet the newly introduced three to five year holding period requirement might still benefit, as increases in the 10-times basis exclusion can enhance the amount of tax-exempt gain associated with recently issued stock.
• Extended Qualification Periods for Corporations: Several OBBBA provisions tend to reduce the tax basis of corporate assets, which directly affects eligibility for QSBS issuance because the asset thresholds are measured on a tax basis. Key provisions include full bonus depreciation, expanded Section 179 deductions, the ability to expense certain qualified manufacturing real estate, and renewed deductibility for domestic research expenses. Together, these can prolong a corporation’s ability to meet QSBS requirements.
• Increased Accessibility for Later-Stage Investors: Previously, investors involved in later stage funding faced challenges in qualifying for QSBS gain exclusions due to the strict five year holding requirement and asset limitations. The new phased gain exclusion, permitting a 50% exclusion after three years, coupled with the increased gross asset ceiling of $75 million (subject to inflation adjustments), significantly reduces these barriers. This update supports companies that pursue multi-round growth strategies by providing more accessible tax incentives to a wider range of investors.
• Refreshing Previously Issued Stock Under New QSBS Rules: Under the updated regulations, stock issued previously generally cannot be reclassified to benefit from the revised Section 1202 rules if it originally qualified only under the older standards such as the $10 million gain exclusion cap and the five year holding period or if it did not qualify as QSBS at all. However, an exception may exist for corporations recently formed with initial assets exceeding the previous $50 million threshold. Such entities might consider a taxable liquidation followed by reincorporation to issue new stock that satisfies the updated QSBS qualifications. This approach is most effective when the business has experienced limited appreciation since its formation and requires careful structuring to ensure compliance and intended tax outcomes.
• Incorporating a Partnership to Access Section 1202 Benefits: Converting a partnership into a C corporation can offer considerable tax advantages under Section 1202. With the recent increase in the gross asset threshold to $75 million and the implementation of a shorter three year holding period, this conversion option becomes more appealing than before. These changes expand eligibility, allowing a greater number of partnerships to take advantage of the tax benefits available through qualified small business stock (QSBS).

Strategic Planning for S Corporations

Direct Conversion Limitations

Simply revoking S election provides minimal benefits since existing S corporation stock cannot qualify as QSBS retroactively. This approach only benefits future stock issuances, making it generally inadvisable without additional restructuring. Similarly, merging an S corporation into a C corporation fails to create QSBS treatment for exchanged stock. Federal court decisions confirm that stock for stock exchanges disqualify QSBS treatment under Section 1202(c)(1)(B).

Advanced Restructuring Solutions

• Asset Dropdown Strategy: S corporations can transfer operating assets to newly formed C corporation subsidiaries. The parent S corporation holds qualifying stock in the subsidiary, allowing QSBS gain exclusions to flow through to shareholders upon disposition. This approach preserves existing ownership structures while positioning future appreciation for QSBS treatment. Only post contribution appreciation qualifies for exclusion benefits.
• F Reorganization Alternative: Shareholders contribute S corporation stock to a new holding company, which elects qualified subchapter S subsidiary (QSUB) status for the original entity. After converting the QSUB to a disregarded LLC, the holding company contributes business assets to a new C corporation subsidiary. This structure offers two key advantages: no asset title transfers required and potential retention of the original employer identification number.
• Section 269 Compliance: Both strategies require careful analysis of anti-avoidance provisions. While Section 1202 represents deliberate congressional incentive, taxpayers must demonstrate legitimate business purposes beyond tax reduction.

Risk Management Considerations

• Step Transaction Doctrine: The F reorganization approach faces potential IRS challenge under liquidation reincorporation principles if transactions appear orchestrated solely for tax benefits.
• Divisive Merger Alternative: In jurisdictions with divisive merger statutes (Texas, Delaware), S corporations can split assets into separate entities through statutory merger, achieving similar results with reduced step-transaction risk.

Investment and Corporate Opportunities

• Later-Stage Investment Accessibility: The combination of reduced holding periods and expanded asset limits removes traditional barriers facing later round investors. Growth equity and private equity funds can now meaningfully incorporate QSBS benefits into investment strategies.
• Partnership Conversion Benefits: The expanded framework makes C corporation conversion increasingly attractive for partnerships and LLCs. The higher asset threshold accommodates larger enterprises while the three year holding period reduces timing pressures for partners.
• Requalification Potential: Companies that previously exceeded the $50 million asset threshold but remain below $75 million can issue fresh QSBS. This creates immediate planning opportunities for Growth-stage companies approaching traditional size limits, buy-and-build strategies seeking investor attraction and portfolio companies considering recapitalization events
• Stock Refresh Strategies: While existing stock generally cannot benefit from new rules, specific fact patterns may support taxable liquidation followed by reincorporation. This approach works best for recently formed companies with limited appreciation since original formation.

Implementation Best Practices

• Timing Considerations: All enhanced benefits apply only to stock issued after July 4, 2025. Existing stockholders should evaluate whether restructuring creates new qualifying issuances while managing potential tax consequences.
• Documentation Requirements: The graduated exclusion system creates tracking complexity across multiple stock tranches with different acquisition dates and applicable exclusion percentages. Robust documentation systems become essential for compliance and optimization.
• State Tax Coordination: QSBS benefits apply exclusively for federal purposes. State tax implications of restructuring and ongoing operations require separate analysis, particularly in high tax jurisdictions lacking federal conformity.

Actionable Planning Steps

Tax professionals should immediately assess client situations for QSBS optimization:

• Portfolio Assessment: Review existing investments for restructuring potential under expanded thresholds and reduced holding periods.
• Entity Analysis: Evaluate S corporations and partnerships for conversion opportunities, weighing QSBS benefits against other tax considerations including state implications.
• Investment Integration: Incorporate QSBS considerations into due diligence for new investments, particularly those approaching expanded asset thresholds.
• Systems Enhancement: Implement tracking capabilities for complex holding period and exclusion percentage requirements across multiple stock issuances.

Conclusion

The expanded QSBS framework creates generational wealth building opportunities through sophisticated tax planning. Success requires balancing immediate benefits with long term strategic objectives while maintaining strict regulatory compliance.

Professional advisors who master these provisions will deliver substantial client value while positioning practices at the forefront of advanced tax planning in the evolving regulatory landscape.

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The information contained in this post is merely for informative purposes and does not constitute tax advice. For more information, feel free to reach us at [email protected]

Copyright 2025 Small World Business Advisors LLC www.swbadvisors.com

The federal government shutdown, initiated on October 1, 2025, resulted from a legislative impasse in Congress over the approval of budget appropriations for the 2026 fiscal year. Despite extensive negotiations, Congress was unable to enact the necessary funding legislation to maintain full government operations. Adding complexity to this deadlock is the executive branch’s selective withholding of funds previously authorized by Congress, creating significant uncertainty around the timely distribution and utilization of appropriated resources across federal agencies. This withholding has generated legal challenges concerning the scope of executive authority in managing congressional appropriations, with a definitive resolution pending before the Supreme Court. 
 
While political in nature, the consequences extend far beyond government corridors, affecting businesses, taxpayers, and community organizations. Agencies dependent on federal approvals, grants, or data often face immediate operational disruptions, making proactive planning essential. 

Impact on Taxpayers and Businesses

Even during a shutdown, the Internal Revenue Service continues to collect taxes. However, its responsiveness can be significantly reduced. Refund processing, audit resolutions, and taxpayer assistance services may experience delays, and credit applications or access to financial verifications dependent on IRS data can be affected. 

Electronic systems may remain operational, but limited staffing can slow the processing of amended returns and correspondence. Taxpayers should anticipate extended timelines for notices, rulings, and other communications. For businesses, delays in approvals, audits, and regulatory guidance can impact financial reporting and operational decisions. 

Challenges for Not-for-Profits and Community Organizations 

Nonprofits face unique challenges during a shutdown. Many rely on federal grants and contracts to sustain critical programs. Delays in payments or approvals can strain cash flow and complicate operational planning. Pending grant renewals or new applications that require federal sign-offs may be postponed, while the demand for community services often rises in times of economic uncertainty. 

Board oversight and governance play a critical role in navigating this period. Leadership teams must stay informed about funding disruptions, program adjustments, and compliance obligations to maintain organizational stability. Transparent communication with donors and funding partners is essential to preserve trust and demonstrate sound stewardship of resources. 

Operational and Compliance Disruptions 

Shutdowns can disrupt administrative and compliance processes for both nonprofits and private sector entities. Tax-exempt status filings, grant approvals, and federal contract payments may be delayed or suspended. Limited access to federal databases and guidance can slow financial reporting and decision-making. 

Documenting these interruptions is crucial for compliance and potential relief considerations. Organizations should ensure restricted funds are used appropriately and maintain records to demonstrate adherence to regulatory and contractual obligations. 

Financial Management During a Shutdown 

Proactive financial planning is essential. Organizations should assess liquidity and maintain cash reserves sufficient to cover 60 to 90 days of essential operations, including payroll and vendor obligations. Reviewing budgets, prioritizing mission-critical activities, and identifying opportunities to defer non-essential projects can help preserve operational capacity. 

Diversifying revenue streams beyond federal sources reduces reliance on government funding and enhances resilience. Maintaining clear communication with stakeholders, including donors and funding agencies, supports confidence and helps mitigate uncertainty. 

Building Resilience for the Future 

The length and impact of government shutdowns are unpredictable. Organizations that prepare strategically are better positioned to manage disruptions without compromising long-term objectives. Updated contingency plans, flexible operational structures, and transparent communication form the foundation for navigating uncertainty. 

Shutdowns also present opportunities to strengthen governance, reassess funding strategies, and enhance financial reserves. By combining prudent financial stewardship with adaptive operational planning, organizations can maintain stability and continue delivering on their mission, even during periods of disruption. 

Summary

Understanding the operational, financial, and compliance implications of a government shutdown allows organizations to act proactively. With foresight and disciplined planning, both taxpayers and nonprofit entities can minimize disruption and maintain confidence with stakeholders.

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The information contained in this post is merely for informative purposes and does not constitute tax advice. For more information, feel free to reach us at [email protected]

Copyright 2025 Small World Business Advisors LLC www.swbadvisors.com

The private equity landscape has reached a critical time period in 2025. Following numerous years of exponential growth rates, dealmakers now experience a very different reality of longer hold periods, tighter liquidity, and changing investor expectations. Many portfolio companies are now being held far beyond when they were originally expected to exit, creating additional pressure from limited partners (LPs) to expedite capital distribution back to investors. Simultaneously, capital formation cycles are lengthening as LPs become more strategic and selective with investments and dealmakers demonstrate capital discipline and efficient capital distributions.

This landscape presents a broader challenge for CFOs, deal teams, and LPs as they strive to navigate a complex scenario, reconciling the near-term focus of monetizing value versus the long-term focus of creating sustainable value. And to add to the complexity, the evolving tax reform (think One Big Beautiful Bill Act (OBBBA)), increased scrutiny on management’s compliance with regulations, and demands for better valuation transparency are all increasing the scrutiny on dealmakers.

This edition of TaxJourney® highlights deal-making trends that continue to shape U.S. private equity in 2025. From holding periods to liquidity considerations, this edition uncovers realities that can help navigate today’s reality while presenting tomorrow’s opportunities.

Deal Activity & Exit Environment

The recovery in private equity dealmaking has not progressed consistently in the first half of 2025. Transaction volume overall is subdued, and firms are still grappling with valuation gaps, high interest rates, and low availability of credit. Most managers have still withheld capital deployment pending clearer pricing and macroeconomic stability.

However, within this relatively flat landscape, exits ramped up in selected segments. In the first half of 2025, industry data shows firms announced 215 large exit transaction, a total value of $308 billion, representing the strongest mid-year proceeds in three years. Strategic buyers were the leaders in supporting these transactions, while IPO activity was muted, and results dwindled due to declining secondary buyouts (-9%) year-over-year. These selective exits show assets with reasonable preparedness and quality can still receive competitive bidder attention despite wider pressures.

One of the key trends is the lengthening of holding periods. Data shows that 35% of portfolio assets have now been held in excess of six years, which has led to substantial NAV being tied up and growing concerns by LPs regarding liquidity levels. With the mounting pressure, many firms are moving in the direction of more flexible valuations: 40% of managers indicated they would accept 5-10% discounts against their original underwriting in order to release liquidity; another 24% indicated they would accept larger haircuts between 10-20%.

In turn, market data shows firms are focusing on being exit ready much earlier in the cycle. 93% of private equity professionals indicate that being prepared to exit prior to the sale process will maximize valuations. Almost half of all professionals now begin their exit planning 12-24 months prior to sale, as being aligned around tax implications, buyer positioning, and valuation strategy much earlier in the sale process is an emerging competitive differentiator for deal teams.

Implication:

Although aggregate deal volumes continue to remain low, controlled exits are creating opportunities for value creation as well as liquidity. Managers, who are able to exit portfolios sooner rather than later and manage investor expectations while still applying discipline to exit processes, will be best positioned to return cash to LPs and maintain investor confidence during challenging times.

Liquidity & NAV Pressure

The dilemma of trapped capital versus investor liquidity is defining the landscape for private equity in 2025, as there remain a large percentage of net asset value (NAV) trapped in aged vintage funds; over 30,000 assets are waiting to be monetized. More than 35% have been held for over 6 years, which is much longer than intended by the original investment process. This creates a challenge for managers in recycling capital for new investments.

Limited partners (LPs) are moving away from traditional measures (i.e. internal rate of return (IRR)), and instead, are increasingly focused on distributions to paid-in capital (DPI). While IRR remains an important metric especially for mid to late cycle funds, the current situation is more about realized cash. In fact, 40% of GPs said they would accept a 5 to 10% discount to their original underwriting for immediate liquidity, and a further 24% said they would agree to a bigger discount of 10 to 20% to get distributions to their LPs.

Fund managers are turning to creative liquidity solutions such as GP-led continuation funds, secondary sales, and structured deals. These approaches provide partial distributions to LPs while preserving long-term ownership of high-quality assets, avoiding forced liquidations at weak valuations.

Implication:

Liquidity planning has become a strategy. Firms that can balance prolonged holding periods with innovative solutions will not only ease LP pressure, but will also become pressure tested in a capital formation constrained environment.

Fundraising Environment

Fundraising has become one of the top concerns for private equity managers in 2025. With fewer exits and delayed distributions, limited partners are pressing harder for realized returns before committing fresh capital. The result is a fundraising cycle that is more selective and far more competitive.

Recently published figures from the market demonstrate that closed fund values are nearly $223 billion for the first half of 2025 and are projected to be down 20% this year. Large funds continue to dominate inflows while mid-market and emerging managers face more challenges.

LPs also are conducting more oversight and favoring those firms with real experience, operational resiliency, and cash distributions (DPI) as opposed to just paper returns (IRR). This reinforces the importance of managing liquidity as a differentiator in fundraising.

Looking forward, fundraising conditions are likely to be tight until late 2025, and the pace of exits and realizations will be an important leading indicator for capital formation in 2026.

Dynamics of the Secondary Market

The secondary market has emerged as an important outlet for liquidity concerns within the private equity universe. GP-led funds continue to grow in popularity allowing for a mechanism for managers to continue owning quality portfolio companies while providing partial cash returns to their LPs as well. It is representative of a realignment of the exit strategy, firms are less often forced to sell as exits are more muted in the M&A space, and are leveraging continuation vehicles to maintain their value and optionality.

Similarly, secondaries are becoming a more traditional alternative to IPOs and traditional trades. A secondary allows one PE fund to sell its stake in a company to another PE fund, providing liquidity for the selling fund while maintaining an asset that continues to be part of the an ecosystem of private equity.

The market is not only increasing in use but also in scale. 2024 was an all-time high for secondaries fundraising at over $90 billion raised and just for H1 of 2025, there has been another $60 billion since then, without factoring full 2025 data, and we are already on track to surpass previous highs in 2025. However, despite all the record fundraising, the market is still described as undercapitalized expeditious deal flow continues to outpace capital. Roughly half of H1 2025 fund inflows were in one large fund is indicative of considerable supply and demand imbalance present in Fundraising Markets.

All of these developments combined are changing the expectation of capital in the industry. For investors, secondaries mean more creative exit pathways; for fund managers, they provide the tools to balance portfolio management while meeting LP expectations for distributions.

Sector & Geographic Trends

Private equity deal activity is experiencing significant sector divergence in 2025 instead of being evenly distributed. Technology and healthcare, for example, continue to garner strong investor interest, as a result of structural growth drivers like digital adoption, AI-enabled efficiencies, and demand resiliency in healthcare. In contrast, the industrials and consumer-facing sectors are lagging due to slower demand growth, higher input costs and more conservative consumer spending.

Geographic allocation trends are also illustrating this divergence. For instance, according to market data UK institutions are currently allocating an average of 7% to private equity assets while Nordic investors are allocating closer to 12%. Among the Nordics, Finland’s insurers are still allocating to tech, while Denmark’s banks and pensions are allocating to healthcare, co-investments, and secondaries. Sweden’s sovereign investors are holding firm, but leaning toward ESG and GP-led secondaries, while Norway’s sovereign wealth fund has largely stepped away from private equity. Macroeconomic risks are compounding these divergences. Existing tariff disputes, trade friction, and inflationary pressures are burdening supply chains and increasing volatility in valuations.

Takeaways for PE CFOs & Deal Teams

The private equity environment in 2025 is forcing CFOs, deal teams, and fund managers to revisit the leading fundamentals of portfolio and transaction management. Preparation, liquidity planning, and tightening-up the fundraising narrative as the new metrics for success.

• Plan Exits Early – Exit preparation can no longer just be a last minute exercise. Firms should commence war-gaming in a 12 to 24 month cycle to line up earlier on valuations, buyer positioning and any potential tax triggers. Early planning mitigates the risk of execution and enhances the ability to characterize flexibility when the markets clear.
• Focus on Liquidity Tools – With a large amount of NAV remaining trapped in older vintages, CFOs should take advantage of continuation funds and secondary sales and other imaginative liquidity paths to create distributions without distress exits. Modeling distributions strategically will position CFOs to meet portfolio time horizons of liquidity and expectations of LPs.
• Balance IRR vs DPI – LPs are placing a heightened emphasis on the tangible cash returns (DPI) versus the paper returns (IRR). This can cause CFOs to remain focused on strategy in the near term versus in the longer time. It is also advisable to communicate distribution options with LPs.
• Adapt Fundraising Conversations – As mentioned before, fundraising in a capital-rich market, focus on the differentiation. While its practically impossible for mid-tier and smaller firms to compete with larger firms dominating the fundraising process, distinguishing any operational finesse, specialization or intellectual capital; historical investment drawdowns; and advanced approaches to tax efficient planning should create the impression of separation.
• Observe Macro Risks – Unresolved geopolitical risk, tariff regimes, and tax reform measures in the U.S. like OBBBA complicate deal structuring. CFOs should incorporate scenario modelling and stress testing into their planning for greater robustness.

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The information contained in this post is merely for informative purposes and does not constitute tax advice. For more information, feel free to reach us at [email protected]

Copyright 2025 Small World Business Advisors LLC www.swbadvisors.com

Cross-border M&A remains a significant growth area for U.S. based businesses, providing market, technology, and capital opportunities. However, the tax consequences of cross-border transactions have become significantly complicated due to multiple jurisdictions, evolving treaty interpretations, and overlapping or even contradictory compliance requirements, which pose increased challenges for deal teams and CFOs.

TaxJourney® offers a U.S. focused framework to help dealmakers, tax professionals, and investors navigate cross-border M&A tax complexities. This edition covers key issues like withholding mismatches, treaty documentation, FTC planning, and state compliance, providing strategic insights to structure deals and mitigate risk.

• Cross-Border Growth – Expanding into new markets requires careful tax planning.
• Treaty Benefits – Tax treaties can reduce or eliminate double taxation.
• Foreign Tax Credits – Proper use of FTCs lowers effective tax exposure.
• Compliance – Multi-jurisdictional reporting demands robust systems.
• Risk Mitigation – Anticipating risks protects value and smooths integration.

Cross-Border M&A Tax Complexity – Current Challenges?

Cross-border M&A provides new avenues for growth, but the IRS has made negative changes that have a large impact on deal structuring. Companies and deal teams also face various challenges, including:

• Increasing Compliance Complexity for Multi-Jurisdictional Deals – With every foreign jurisdiction involved in the cross-border transition comes its own reported standards, filing requirements, and tax laws, all of which need to be sorted through at the same time, putting massive pressure on compliance teams.

• Debated Tax Regimes, Tax Treaty Related Claims & Reporting Obligations – Tax treaties are agreements between jurisdictions to minimize double taxation. However, it still may be challenging to properly interpret the tax treaties or to properly apply the treaty benefits. Generally speaking, dealing with tax treaties will often have inadvertent consequences for our clients that may unnecessarily expose them to more tax than was originally intended, while at the same time extending the closing timeline.

• IRS Increasingly Watching Certain Cross-Border Tax Transaction Structures – With the IRS expanding their watching eyes on cross-border transactions, they are not only focused on related party transfers pricing but also on foreign tax credits, and treaty-based positions. The best deal teams can do is max out their documentation and maintain it in a defensible structure to avoid operational challenges or disputes or penalties.

Key Compliance Pillars

Robust U.S. tax knowledge is essential to the viability of cross-border M&A. Four fundamental pillars have significant implications for deal planning and execution:

• Permanent Establishment (PE) Rules – Understanding the PE rules and when a U.S. taxing jurisdiction may emerge from business being conducted, U.S. taxpayers often do not scrutinize the foreign activity sufficiently to detect that they have created a PE, and vice versa for foreign taxpayers tax, authorities, will promote optimal structuring during deal capture and allow for the mitigation of best tax practice for the target.

• Foreign Tax Credits (FTC) – The appropriate claim of FTC is necessary for any company or MNE to mitigate double taxation in the U.S. by claims for foreign tax paid. Optimal handling of the FTC calculation during deal planning will lead to improved valuation modelling and potentially assist in negotiations.

• GILTI and BEAT Exposure – For a U.S. MNE, GILTI and BEAT have a very significant influence on outbound and inbound M&A structuring. Deciding on deal structuring at the front end to ensure certainty and to minimize unintended tax leakage is essential to deal success.

• Treaty Interpretation to Optimize Tax Performance – U.S. tax treaties provide scope to mitigate withholding tax, seek treaty benefits, and optimize tax efficiency of deals. Successful application of treaty provisions require making sure that appropriate supporting documentation is progressed, and due diligence becomes crucial.

Navigating Cross-Border Deal Tax Challenges

Cross-border M&A deals require multiple tax systems to be effectively addressed and, oftentimes, even minor blunders can result in unanticipated liabilities, extended deal timelines, and/or a shrinking deal value. Two of the paramount areas to plan around are jurisdictional differences in tax and treaty-based planning.

Jurisdictional Differences

Tax rules vary greatly across countries, with the failure to reconcile jurisdictional tax rules potentially affecting the results of the transaction as follows:

• Withholding Taxes on Cross-Border Payments – Dividends, interest, and royalties paid between jurisdictions are often subject to withholding taxes. Erroneously applying treaty rates or planning for these obligations can increase overall tax cost and reduce after tax returns on the deal.
• Capital Gains Tax Variation – Variety in capital gains taxes applied in different jurisdictions exists based on different rates and different events being taxable. Without a coordinated plan there’s a risk the buyer or seller have unexpected exposure that has an impact on the negotiations and price of the deal.
• Foreign Exchange (FX) Impacts – Currency fluctuations and foreign exchange (FX) gain or loss tax treatment can complicate valuation models. Advance planning can help protect the economics of the deal and maintain forecasts.
• Transfer Pricing Rules across Jurisdictions – Arm’s length prices must be established for cross-border transactions. Transfer pricing policies are regularly applied inconsistently resulting in scrutiny, audits, and dual taxation unless they are carefully aligned with local and U.S. requirements.

Jurisdictional Factor	Risk / Challenge	Impact on Deal
Withholding Taxes	Incorrect treaty application	Higher tax costs & reduced after-tax returns
Capital Gains Variation	Different rates & taxable events	Unexpected exposure affects pricing & negotiations
FX Impacts	Currency fluctuations & tax treatment	Distorted valuations & unreliable forecasts
Transfer Pricing	Misaligned policies	Audits, disputes & potential double taxation

Treaty Considerations

Tax treaties are essential to alleviating cross-border tax burdens, but they are not always simple to use, especially on the fly as part of a multi jurisdictional deal:

Why Treaties and Taxes Matter?

U.S. tax treaties are a valuable feature that will often lower withholding rates, remove double taxation and offer some specific relief from taxation relating to the cross-border transactions. Structuring deals with efficient tax treaty treatments in mind will often lead to much increased cash flows and returns once the deal is completed.

Why You Should Prepare Documentation?

To get treaty benefits, you need documentation IRS Form W-8BEN/E or residency certificates. Any missing or misfiled documentation could lead to denied relief, unwanted leakage of tax, could lead to denied relief and unwanted tax leakage.

Leveraging Tax Treaties in Cross-Border M&A

Efficient treaty planning unlocks tax savings and maximizes deal returns.

Why Treaties Matter?

• U.S. tax treaties can lower withholding rates.
• Prevent double taxation across jurisdictions.
• Enable smoother cross-border deal structuring.
• Drive higher cash flows and post-deal returns.

Why Documentation Matters?

• Submit IRS Form W-8BEN/E or residency certificates to claim treaty benefits.
• Missing or misfiled documents can deny treaty relief.
• Documentation gaps can cause unexpected tax leakage.
• Proper filing prevents disputes and delays in deal closings.

Proactive treaty planning + accurate documentation = smoother closings and optimized tax outcomes.

M&A Structuring Considerations

A good framework for cross-border M&A deals is imperative to minimizing tax exposure, maximizing value post-deal and is subject to some situation, which may comprise citizenship or residence of the parties in the deal, relevant tax treaties, and overall business plan considerations.

Outbound vs Inbound Tax Implications

Tax implications of cross-border deals are quite different, depending on whether the deal is inbound or outbound deal.

Inbound Transactions (Foreign acquirors purchasing U.S. companies):

The specific focus areas in this kind of transaction will be, withholding taxes, treaties application, IRS Form 5472 reporting requirements on foreign-owned U.S. entities. Additionally, the buyers will need to look at exposures at the state and local level, which might not reflect federal treatment.

Outbound Transactions (U.S. buyers purchasing foreign companies):

The emphasis usually tends to be on foreign tax credits (FTC), local taxation management, and repatriation of profit from abroad earned. In cross-border deals outbound, it is necessary to appreciate GILTI and BEAT exposure, U.S. acquiror considerations.

Key Takeaway:

Cross-border M&A deals structuring involves balancing the U.S. federal jurisdiction rules, a foreign jurisdictions taxation, and any application of treaty relief to achieve the maximum tax efficiency for the two parties involved.

Strategic Vehicle Selection

Selecting the right vehicle will determine the tax result and compliance requirements extensively:

• Subsidiaries – A preferred method when assessing tax treaties and limiting liability. Accessing preferential withholding tax rates under U.S. or foreign tax treaty agreements.
• Branches – Easier to establish a branch, but direct exposure to foreign tax may arise. Often if operational presence is needed immediately in a target country.
• Hybrid Entities – Hybrid entities are structured to allow for regulatory tax flexibility, allowing companies to take reporting deductions, withholding minimizations, or dual treatment for income tax in other jurisdictions. Hybrid entities are effective when you’re aligning U.S. tax and foreign tax in the combined tax reporting.

Key Takeaway:

The best vehicle will depend on the transaction, country of transaction, and the long term operational plan. Planning your tax early will allow you to ensure the structure is conducive to compliance and operational effectiveness and efficiency in cost containment.

Choosing the Right Vehicle for Cross-Border M&A

Strategic Vehicle Selection: Impacts tax outcomes, and operational efficiency

Subsidiaries:

• Preferred for treaty benefits
• Reduces liability exposure

Branches

• Quick to establish, faster market entry
• Direct exposure to foreign taxes

Hybrid Entities

• Offers tax flexibility across jurisdictions
• Allows dual tax treatment benefits

Key Takeaway:

The optimal structure depends on the transaction type, jurisdiction, and long term operational strategy. Early planning ensures compliance and cost efficiency.

Practical Steps – Checklist for Deal Teams

To execute an effective cross-border M&A transaction, a systematic, phased approach is essential. Each phase of the transaction contains tax implications and integrated across each phase will influence value and compliance.

Pre-Deal Phase

The groundwork for a successful crossing-border deal is laid before deal negotiations commence. Proactively thinking through pre-deal tax planning has the potential to minimize any unplanned tax exposures as you advance your transaction with your target within cross-border interpretations:

• Confirm Treaty Benefits → Review relevant applicable U.S. and foreign treaties to take advantage of cross-border withholding tax rates and minimize the double taxation of income.

• Model Foreign Tax Credits (FTCs) → Model FTCs to determine amounts that limit or eliminate tax leakages that impact transaction valuations and prevent deals from closing due to tax principles.

• Review GILTI and BEAT Impacts → Evaluate a U.S. multinationals’ exposure regarding GILTI and BEAT when they enter or exit from a foreign jurisdiction.

During the Deal

Tax diligence during the transaction is critical to efficient deal structure and avoiding unpleasant last minute surprises:

• Confirm Withholding Tax Requirements → Based on a review of residency certificates from all parties for all cross-border payments to ensure the appropriate treaty withholding tax rates are all applied correctly.

• Structure Asset vs. Stock Purchase → Ultimately the preferred structure will vary based on tax efficiency, desired liability exposure and integration strategies post acquisition.

• Consider Transfer Pricing Compliance → Intercompany pricing policies will need to also be structured to abide by U.S. tax requirements and foreign localized tax requirements. Maintain a low audit risk profile by managing tax compliance policies between the related each entities.

Post-Deal Phase

When the deal closes, ensuring compliance and optimizing long term tax efficiencies as priorities:

• Plan for Repatriation Strategies → Identify the optimal tax efficient mechanism to repatriate profits back to parent entities, whilst minimizing additional tax exposure.

• Track Foreign Reporting Obligations → Ensure timely completion of filings such as for Form 5471 and other jurisdictional requirements, to avoid penalties.

• Maintain Treaty Compliance → Review the treaty based positions and supporting documents to ensure ongoing eligibility for reduced withholding rates and relief based on treaty.

Key Takeaway:

By establishing transaction phases ensures the deal team can address tax exposures much earlier in the transaction phase, structure transaction tax efficiently, and ensure compliance post-closing and during integration. Proactive planning is the difference between value being created and costs, in cross-border M&A.

Key Takeaways and Strategic Insights

Cross-border M&A can create an enormous number of opportunities for growth, international expansion, and shareholder value creation. But organizations must recognize that in an environment of changing U.S. and global tax rules, complicated treaty implications, and increased regulatory scrutiny, proactive tax planning is a must.

To create maximum value and mitigate risk, CFOs, dealmakers and tax leaders can:

• Plan for tax risks earlier so structures are developed with respect to timelines associated with the transaction.
• Optimize structures and transaction placement, to ensure operationalization of treaty benefits while increasing tax efficiency.
• Use phased tax diligence to monitor disclosures and develop an integration strategy.
• Leverage the use of technology and AI enabled insights to improve accuracy, speed, and reduce risk.

Organizations can create tax efficiencies, mitigate risk and drive sustainable value from cross border M&A activity through planning and structure.

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The information contained in this post is merely for informative purposes and does not constitute tax advice. For more information, feel free to reach us at [email protected]

Copyright 2025 Small World Business Advisors LLC www.swbadvisors.com

The One Big Beautiful Bill Act of July 4, 2025, implements comprehensive tax changes that seek to encourage business expansion, spur private investment, and increase the competitiveness of the U.S. economy. Although the legislation affects various industries, its consequence on the Private Equity (PE) sector is especially noteworthy.

This presentation provides an overview of the One Big Beautiful Bill Act (OBBBA) and its legislative purpose, along with an overview of main tax provisions important to the private equity sector. It cites what has changed, i.e., interest deductibility and QSBS improvements, and what has been left alone, such as carried interest treatment. The deck discusses how these reforms affect the fund level and the level of portfolio companies and presents new structuring and planning opportunities on the horizon. Collectively, these findings provide a strategic perspective on how OBBBA is transforming private equity investment, operations, and exit planning.

Key Highlights of OBBB –

• Signed into law on July 4, 2025.
• Reinstates full expensing for qualified property via 100% bonus depreciation.
• Raises the expensing cap under IRC Section 179 to $2.5 million.
• Returns to EBITDA-based limitation for interest deductions under Section 163(j).
• Expands QSBS exclusion threshold and introduces tiered holding period benefits.
• Leaves carried interest and long-term capital gains rates unchanged.
• Omits proposed foreign investor withholding tax (Section 899).

These provisions significantly influence fund strategy, capital structure, and tax modeling.

Carried Interest – What didn’t Change

• OBBBA preserves the current tax treatment for carried interest.
• Gains remain eligible for long-term capital gains rates if held for three or more years.
• This is a key win for general partners (GPs):
  • Maintains incentive alignment
  • Supports fundraising confidence
  • Avoids disruption to fee structures
• Limited partners (LPs) also benefit:
  • Ensures predictable fund economics
  • Preserves net-of-fee return consistency

Interest Expense Deduction – IRC Section 163(j)

OBBBA resurrects the EBITDA-based restriction on interest expense deductions in place of the more constrictive EBIT-based rule. This amendment is especially helpful for leveraged buyouts, infrastructure transactions, and capital-intensive industries. It maximizes permissible deductions, better preserves free cash flow, and offers increased flexibility in structuring debt. PE companies can now manage optimal debt levels across portfolio companies without suffering compressed tax shields.

Metric	EBIT Limitation (Pre-OBBBA)	EBITDA Limitation (Post-OBBBA)
Deduction base	Earnings Before Interest & Tax	Earnings Before Interest, Tax, Depreciation, Amortization
Impact	Lower deductions	Higher deductions
Effect	Tighter leverage limits	More flexibility for LBOs

Bonus Depreciation & Section 179 Expensing

OBBBA permanently reinstates 100% bonus depreciation for eligible property that goes into service after January 19, 2025. This enables instant full expensing of capital expenditures, which is especially helpful to manufacturers, logistics companies, and energy producers. Also, the Section 179 expensing limitation has been increased to $2.5 million, promoting small and middle-market companies to invest more boldly in equipment, technology, and fixed assets, with quicker payback.

Tax Provision	Pre-OBBBA	Post-OBBBA
Bonus Depreciation	80%	100%
§179 Expensing Cap	$1.05 Million	$2.5 Million

QSBS Expansion – IRC Section 1202

• Exclusion cap increased to greater of $15M or 10× basis (up from $10M).
• Gross asset limit raised from $50M to $75M.
• Excess gains taxed at ~28% collectibles rate.
• Encourages private equity investment in startups & high-growth sectors.
• Supports earlier exits and C-corporation structuring flexibility.
• Tiered exclusions by holding period:

Foreign Investor Relief – Section 899 Removed

• Proposed Section 899, which would have imposed withholding taxes on foreign investors, was excluded from the final OBBBA legislation.
• This preserves the structural integrity of cross-border fund vehicles.
• Ensures the continued attractiveness of U.S. private equity to global limited partners (LPs).
• International fundraising efforts remain unaffected.
• Protects foreign investor participation without new compliance burdens.
• Reinforces the U.S. as a stable jurisdiction for inbound private capital.

Portfolio Company – Level Impact

The tax reforms enhance financial performance and operating efficiency for portfolio companies. Expensing of R&D and capital expenditures on an immediate basis, enhanced deductibility of interest, and depreciation recovery contribute to increased after-tax cash flows. This facilitates quicker reinvestment in growth, enhanced EBITDA margins, and better enterprise valuation. Tax savings also offer debt repayment or financing of new projects flexibility.

• Increased Cash Flow
• Accelerated Write-offs
• Immediate Deduction
• Enhanced Capital Allocation
• Increased Valuations

Fund – Level Planning Opportunities

OBBBA produces greater structuring flexibility and tax planning. GPs can now consider electing C-corporation status on selected entities to optimize QSBS incentives or align more with exit horizons. Greater interest deductibility allows for more leverage and refinanced capital structures. Exit projections and IRR modeling can be maximized by applying new depreciation schedules and staggered QSBS exclusions, producing greater returns to both GPs and LPs.

Unchanged Tax Provisions under OBBBA

These unchanged provisions provide a sense of regulatory certainty amid broader tax reforms. By keeping the existing rules for carried interest and long-term capital gains, OBBBA supports the core financial structure of private equity funds. Allowing PTET workarounds helps funds manage state taxes efficiently; while avoiding new taxes on BDCs and private credit protects alternative investment strategies. This stability gives GPs and LPs the confidence to move ahead with structuring, fundraising, and long-term planning.

Area	Status	Implication
Carried Interest	Unchanged	Retains GP economics
Long-Term CG Rate	Unchanged	Exit tax planning stable
SALT Cap Workaround	Preserved	PTET strategies valid
Foreign LP Tax	Removed	Global fundraising protected

Strategic Takeaways for Private Equity Sponsors

• OBBBA enhances the strategic tax levers of private equity firms.
• Increased accelerated depreciation and broadened QSBS benefits enhance value creation potential.
• Improved interest deductibility enables more effective leverage and capital structuring.
• Long-term capital gains stability and carried interest maintain predictable fund economics.
• Simplified rules and exemptions kept in place diminish uncertainty in fundraising and LP communications.
• Private equity firms are well-positioned to match exit strategies with tax-effective timelines.
• The Act establishes a stable, pro-growth tax climate for investors and funds.

Summary and Outlook

The One Big Beautiful Bill Act provides focused tax relief to private equity without upsetting bedrock aspects of the business. It increases tax planning, structuring of funds, and valuation levers without losing the established long-term incentives that inspire investor trust. In the short term, companies can take advantage of these changes to fine-tune models, sharpen strategies, and drive outcomes throughout fund lifecycles.

• Private equity Tax Relief: Focused and targeted; preserves core tax rules.
• Future Outlook: Use this window to optimize models and lifecycle planning.
• Strategic Advantage: Enables better fund structuring and valuation.

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The information contained in this post is merely for informative purposes and does not constitute tax advice. For more information, feel free to reach us at [email protected]

Copyright 2025 Small World Business Advisors LLC www.swbadvisors.com

The One Big Beautiful Bill Act (OBBBA) delivers transformative enhancements to Qualified Small Business Stock (QSBS) under Section 1202, redefining how founders, investors, and PE funds approach exit planning and valuation.
These reforms aren’t just incremental, they’re reshaping the economics of startup investing and M&A structuring.

1. Earlier Liquidity with Tiered Holding Periods
Under the OBBBA 2025 framework, Qualified Small Business Stock (QSBS) issued on or after July 4, 2025 will follow a tiered capital gain exclusion schedule:

• 50% exclusion after 3 years
• 75% exclusion after 4 years
• 100% exclusion after 5 years

This replaces the previous 5-year cliff model, allowing investors to unlock earlier liquidity while still accessing meaningful tax benefits. The change is expected to influence exit planning, especially for founders, angel investors, and private equity funds seeking more flexible timelines.

2. Larger Tax Benefits with Increased Caps

• The lifetime per-issuer cap will raise from $10M → $15M.
• The 10× basis limitation stays the same.
• The new $15M cap is inflation-indexed beginning 2027, which provides long-term flexibility for founders, angels, and fund LP/GP arrangements.

3. Broader Eligibility – More Companies Are Eligible

• Asset limit for the issuer increases from $50M → $75M (also inflation-indexed beginning 2027).
• This update makes more capital-intensive and larger startups, as well as PE-backed portfolio companies, eligible for QSBS.

Private Equity and Startups: Why This Matters

• Faster secondary sales and exits, Investors can realize partial exclusions without waiting five years.
• Because there are additional qualifying companies, there are additional deal opportunities cantered around QSBS benefits.
• More planning, Broader eligibility and greater caps provide for more sophisticated portfolio strategies.

Key Takeaway:

With OBBBA 2025, QSBS is now more powerful, more flexible, and more valuable than ever, enabling tax-efficient exits and unlocking broader investment opportunities for funds and founders alike.

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The information contained in this post is merely for informative purposes and does not constitute tax advice. For more information, feel free to reach us at [email protected]

Copyright 2025 Small World Business Advisors LLC www.swbadvisors.com

The One Big Beautiful Bill Act (P.L. 119-21) marks one of the most consequential tax shifts in recent years, especially for private equity stakeholders.

From deal structuring and investment strategy to cross-border planning and compliance, this legislation introduces reforms that demand a fresh look at how capital is deployed and returns are realized.

Whether you’re a fund manager, family office, or portfolio company, understanding these changes is no longer optional, it’s essential.

Here are the key provisions every private equity stakeholder should be tracking:

1. Business Interest Limitation IRC §163(j): The Act reinstates the EBITDA-based method for calculating Adjusted Taxable Income (ATI), improving interest deductibility on leveraged buyouts and debt-funded deals. Starting in 2026, select foreign income exclusions will apply, further impacting interest deductibility.

2. 100% Bonus Depreciation & R&D Expensing: Portfolio companies can now fully expense capital investments upfront, boosting liquidity and cash flow. Domestic R&D costs are deductible in the same year, supporting innovation-driven businesses.

3. QSBS Expansion: QSBS benefits are significantly enhanced with higher exclusion thresholds and a tiered structure, making early-stage investments more tax-efficient and elevating VC-style strategies within private equity.

4. Carried Interest Treatment Remains Unchanged: Carried interest retains its long-term capital gains classification, preserving after-tax returns for fund managers and GP teams.

5. Gift & Estate Tax Exemption Increases: Higher exemption thresholds allow HNW LPs and fund principals to transfer wealth more efficiently, offering greater flexibility in estate planning.

6. International Tax Updates: OBBBA aligns U.S. international tax rules with global standards, streamlining treaty benefit claims and improving clarity for cross-border private equity investments.

7. Disguised Sales & Partnership Rules: The Act broadens the scope of taxable disguised sales, requiring LPs to reassess partnership allocations and exit strategies to avoid unintended tax exposure.

8. Excess Business Loss (EBL) Limitations: EBL limitations are now permanent, standardizing how portfolio-level losses are offset and enabling more confident long-term tax planning.

These reforms are more than technical, they’re strategic. They influence how capital is deployed, how returns are realized, and how tax impacts the private equity lifecycle.

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The information contained in this post is merely for informative purposes and does not constitute tax advice. For more information, feel free to reach us at [email protected]

Copyright 2025 Small World Business Advisors LLC www.swbadvisors.com

The One Big Beautiful Bill Act (OBBBA) represents a turning point in American tax policy, moving theoretical reform into legislation. Its measures revive and improve key tax incentives, such as 100% bonus depreciation, permanent Section 179 expensing, reinstated EBITDA-based interest deductibility, and enhanced Qualified Small Business Stock (QSBS) exclusions, that business buyers and sellers are now forced to factor into deals. These developments rebalance purchase price allocations, priorities for due diligence, and valuation models, especially in asset-heavy or pass-through deals common in M&A. What were once tax tailwinds or modest adjustments are now core drivers of deal economics.

In a post-OBBBA environment, M&A planning needs sophisticated tax planning throughout the board, from term sheet negotiation to integration and exit modelling. Buyers must project how leveraged finance and accelerated expensing affect cash flow and return projections; sellers may need to change structures to exploit QSBS benefits or preserve pass-through deductions. Cross-border investors now face new challenges to navigate with the impact of updated GILTI rules and reevaluated FTC structures. Simply put, tax expertise incorporated into valuation, financing, and structuring is now a critical part of successful deal execution, not an afterthought, but a foundational element of M&A strategy.

Quick Takeaways

• 100% Bonus Depreciation → Immediate asset expensing
• Section 179 Expensing → Increases capital investment efficiency
• EBITDA-Based Interest Caps → Impacts financing models
• QSBS Benefits → Tax-free gains optimization

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Evolving Tax Landscape Under ‘One Big Beautiful Bill’ – A Snapshot of Structural Tax Changes

Key Tax Changes Relevant to M&A

• 100% Bonus Depreciation & Section 179 Expansion: OBBBA reinstates 100% bonus depreciation for qualifying properties acquired in after January 19, 2025 (with a transitional 40%/60% election available for the first tax year ending after that date), and doubles the Section 179 expensing cap to $2.5M (phase-out begins at $4M). M&A Implication: Buyers of asset-heavy businesses can now front-load tax deductions, enhancing post-deal cash flow—but these benefits can create tension during purchase price allocation, as sellers may seek to minimize depreciation recapture.
• State & Local Tax (SALT) Cap Relief and PTET Preservation: The SALT cap increase to $40,000 is temporary (2025–2029), with a phase-down for incomes above $500,000 and potential reversion to $10,000 afterward, and pass-through entity tax (PTET) workarounds remain intact. M&A Implication: Sellers structured as pass-throughs in high-tax states retain valuable tax efficiency, aiding negotiation and valuation in asset sale structures.
• Permanent QBI Deduction (Section 199A): The 20% Qualified Business Income deduction for pass-through entities is now permanent. M&A Implication: Reduces effective tax exposure for seller entities, smoothing structural discussions and potentially enhancing seller net proceeds.
• Immediate Expensing of R&D Costs: Domestic R&D costs are fully deductible in the year incurred (no longer amortized over five years), effective for tax years starting after 2024. M&A Implication: Targets in innovation-driven sectors become more attractive to buyers due to improved after-tax earnings projections.
• Interest Deductibility Based on EBITDA: The more generous EBITDA-based limit is restored for business interest deductions (as opposed to the narrower EBIT test). M&A Implication: Enables higher leverage capacity within deals-especially for PE-backed acquisitions by expanding interest deductibility.
• Cross-Border and FTC/NCTI Changes: While not M&A-specific, the revamp of GILTI to Net CFC Tested Income (NCTI), enhanced Foreign Tax Credit mechanics, and revised treatment for mid-year CFC dispositions. M&A Implication: Affects deal structuring considerations for cross-border transactions, particularly for global fund or multinational entity buyers.

How These Reforms Reshape Transactions

M&A Impact Area	Key Tax Change	Deal-Level Implication
Purchase Price Allocation	Bonus depreciation & R&D expensing	Buyers may request asset-heavy allocations; seller recapture risk must be managed
Valuation Modelling	R&D, EBIDTA deduction shifts	Buyers must revisit DCF models to incorporate tax-boosted cash flows
Financing Flexibility	EBITDA vs EBIT limits	PE buyers gain increased leverage capacity and improved interest smoothing
Target Pool Attractiveness	QBI, R&D, depreciation tools	Innovation-rich and capital-intensive targets become more attractive
Cross-Border Strategy	NCTI/FTC revisions	Global M&A stakeholders need to reassess entity structuring to optimize tax

Increased Compliance & Reporting Focus

While not as M&A-specific, some measures demand closer attention from advisors:

• Expanded Reporting for Partnerships & Entities: Required disclosures (such as for Qualified Opportunity Funds) and penalty structures are now larger.
• Operational Diligence: Buyers must assess whether targets can support the required tax accounting, reporting, and audit readiness under the new rules.

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Key Impacts of OBBBA on M&A Deals

A. Deal Structuring Adjustments

• Asset Deals Become Even More Attractive – With OBBBA restoring 100% bonus depreciation permanently and increasing the Section 179 expensing limit to $2.5 million, purchasers can hasten tax recovery and enhance cash flow following an acquisition. This tax benefit also shifts deal structures more towards asset acquisitions, as acquiring firms want to “step up” asset bases to maximize deductions.
• Negotiation Dynamics – Price Allocation Tensions – Acquirers prefer asset-biased allocations, whereas sellers prefer to minimize depreciation recapture exposure. This phenomenon increases in OBBBA’s tax regime, introducing intricacies into purchase price allocation (PPA) deal negotiation.

B. Valuation Dynamics

• By bringing back full bonus depreciation, the OBBBA increases the appeal of asset-intensive companies (such as manufacturing or high R&D), whose valuations could be raised. Enhanced depreciation treatment and leverage flexibility can lower purchaser financing costs and enhance returns.
• Impact on Buyers: Improved cash flow expectations after purchase.
• Impact on Sellers: Higher valuations and more buyer competition for targets with high capital bases.

C. Cross-Border Transaction Complexities

Internationally, OBBBA brings important changes that have a direct impact on cross-border M&A:

• GILTI is replaced by Net CFC Tested Income (NCTI), expanding taxable reach of CFC income.
• Improved Foreign Tax Credits (FTC): eliminates previously mandatory allocations of interest & R&E expense, facilitating increased credit availability.
• Pro-rata allocation of income for mid-year CFC sales, adding complexity to deal-year tax planning.
• These changes have an impact on structuring considerations, requiring close tax modelling in cross-border transactions.

D. QSBS Benefits & Exit Strategies

OBBBA strengthens Qualified Small Business Stock (QSBS) provisions, directly influencing deal planning and exit strategies in M&A. These revised benefits apply to stock issued after July 4, 2025; earlier issuances retain the original 5-year/100% rule without partial exclusions. Key Impacts on M&A:

• Higher Tax-Free Gains – The exclusion cap rises from $10M to $15M, making equity exits more lucrative.
• Broader Eligibility – The gross asset threshold increases from $50M to $75M, allowing more companies to qualify for QSBS benefits.
• Faster Exit Opportunities – Partial gain exclusions are now available after 3–4 years, enabling earlier monetization of investments.
• This expansion boosts valuations for high-growth companies, makes startups and mid-sized businesses more attractive acquisition targets, and provides buyers and sellers with greater deal structuring flexibility to optimize returns.

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Due Diligence Imperatives

Enhanced Focus on Tax Due Diligence Under OBBBA:

Under the OBBBA framework, comprehensive tax due diligence has become a critical requirement for securing successful M&A transactions. The permanence of key provisions, such as bonus depreciation, Section 179 expensing, and EBITDA-based interest limitations, introduces new tax planning opportunities but also creates potential areas of risk if not thoroughly evaluated.

Structural tax changes, including the transition from GILTI to NCTI, enhanced availability of foreign tax credits, and accelerated depreciation rules, require rigorous assessment during due diligence. These factors directly influence pricing strategies, deal structuring, indemnity negotiations, and overall transaction viability.

Additionally, reforms to depreciation and financing regulations may significantly affect enterprise valuations. Valuation models now need to be recalibrated to reflect updated cash flow expectations and the integration of new tax mechanisms, underscoring the need for heightened scrutiny when aligning a target’s financial and tax profiles under the OBBBA regime.

Identifying Hidden Liabilities in Advance to Prevent Post-Deal Disputes:

Reinstated tax provisions by OBBBA may lead to book-tick, tax-whack mismatches, concealed liabilities, or distortions in reported earnings.

Since bonus depreciation and accelerated write-offs of R&E are now available, buy-side teams need to ensure that targets don’t unintentionally misreport deferred tax liabilities or misallocate expenses, which can cause post-close adjustments.

Effective due diligence requires moving beyond surface-level financials to evaluate underlying tax positions, especially when assessing asset-heavy or highly leveraged targets.

AFSI Considerations in Partnership-Based Deal Structuring:

While the term Adjusted Financial Statement Income (AFSI) is not explicitly discussed in many OBBBA-related resources, its relevance in partnership-driven M&A transactions is significant. Under the OBBBA framework, the conversion of GILTI to NCTI and modifications to foreign tax credit rules directly affect multi-tiered structures and foreign-controlled entities.

For purchasers, accurately evaluating AFSI calculations before and after OBBBA implementation is critical to understanding the true tax exposure of the target entity. This becomes especially important in private equity and partnership-based deals, where non-corporate entities may now report materially different taxable income. Such discrepancies can directly impact waterfall models, GP/LP distributions, and projected cash flows, making thorough analysis and modelling a key component of successful deal structuring.

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Risk Mitigation & Strategic Planning

OBBBA has reshaped the tax landscape, increasing the need for deeper due diligence and forward-looking planning. From modeling deal structures to mitigating hidden tax risks, the following strategic priorities outline how buyers and sellers can better navigate complex M&A environments.

Strategic Area	Key Focus	Impact on M&A	Recommended Actions
Deal Model Flexibility	Integrating OBBBA-related variables like depreciation reforms, EBITDA caps, and NCTI adjustments	Shifts taxable income projections and impacts overall deal valuations	Build dynamic deal models with multiple scenarios to assess exposure levels
Tax Optimization Opportunities	Utilizing elections, credits, and structuring options under OBBBA	Potential to minimize tax liabilities and maximize post-deal returns	Evaluate Section 179, bonus depreciation, and FTC provisions during planning stages
Cross-Border Considerations	Adapting to revised foreign tax credits and tax requirements	Impacts financing structures and global effective tax rates	Coordinate early with cross-jurisdictional tax advisors to mitigate compliance risks
Regulatory Monitoring	Ongoing modelling of OBBBA variables and deal-year effects (e.g., interest, depreciation, CFC allocation)	Minimizes risk of unexpected exposures or post-deal disputes	Establish continuous monitoring and update deal documents as guidance evolves
Risk Containment Measures	Identifying hidden tax risks during due diligence	Ensures accurate pricing and reduces potential indemnity claims	Deep tax diligence on bonus depreciation/§179, interest-limit impacts, and cross-border NCTI/FTC modelling.

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Strategic Outlook On M&A In A Changing Tax Landscape

As the One Big Beautiful Bill Act (OBBBA) continues to take shape in practice, its influence on M&A dynamics is set to extend well beyond current deal structures. The permanence of provisions such as accelerated expensing, EBITDA-based interest deduction rules, and enhanced pass-through incentives is already reshaping valuation benchmarks and financing strategies. Dealmakers who anticipate these shifts and proactively adapt their models will be better positioned to achieve competitive valuations, optimize capital structures, and execute transactions designed to withstand evolving tax frameworks.

Moreover, the legislative and regulatory landscape remains fluid, with forthcoming IRS guidance and interpretive updates expected to refine OBBBA’s practical application. This makes continuous tax monitoring and strategic planning integral to successful deal execution. Whether managing layered financing arrangements, structuring cross-border transactions, or modelling complex waterfalls, early integration of tax considerations has become a decisive advantage. Tax planning is no longer a technical formality; it is a strategic differentiator that drives value creation and ensures resilience in an ever-changing M&A environment.

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The information contained in this post is merely for informative purposes and does not constitute tax advice. For more information, feel free to reach us at [email protected]

Copyright 2025 Small World Business Advisors LLC www.swbadvisors.com

The One Big Beautiful Bill Act (OBBBA) introduces targeted modifications that intersect directly with the Corporate Alternative Minimum Tax (CAMT) regime. While several provisions create new planning opportunities for private equity (PE) funds and portfolio companies, the legislation also preserves key tax treatments that support market stability.

For fund managers, these changes require balancing immediate opportunities with longer-term strategic considerations in modeling, structuring, and investor communications. Importantly, many of OBBBA’s favorable “regular” tax provisions may unintentionally increase CAMT exposure. This is because they reduce taxable income without lowering adjusted financial statement income (AFSI). The result: potential CAMT liability even in years when regular tax benefits are available, along with challenges in utilizing CAMT credits under general business credit ordering rules.

CAMT Update Expands Options for Partnerships While Urging Prudence

The Treasury and IRS recently released Notice 2025-28 (the “Notice”), which sets out measures intended to simplify how the CAMT rules apply in the context of partnerships. Although positioned as a compliance-friendly step for corporations with partnership interests, the real-world application is more complex than the initial framing might imply, and the flexibility offered comes with important practical considerations.

In many cases, reliance on the Notice will also require reliance on portions of the CAMT proposed regulations, bringing with them their inherent complexities. Moreover, several of the elections introduced under the Notice are not straightforward to apply and may carry adverse consequences in subsequent years.

To navigate these provisions effectively, taxpayers will need to model the potential effects of making the available elections or otherwise applying the Notice, taking into account both current and future AFSI impacts. Given the binding nature of these elections, a multi-year forecasting approach is essential before making any decisions.

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Approaches to Determining AFSI from Partnership Investments

Following the release of Notice 2025-28, applicable corporations now have multiple possible methods for determining their adjusted financial statement income (AFSI) related to partnership investments, even in situations that do not involve direct contributions to or distributions from the partnership.

These methods can generally be grouped into top-down and bottom-up approaches, each with variations depending on the financial accounting treatment, applicable rules, and elections available.

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Key Considerations for Applying the Notice’s New and Elective Rules

When determining an applicable corporation’s distributive share of AFSI under the partnership rules in Notice 2025-28, several practical points require attention:

• Neither the Top-Down Election nor the Taxable-Income Election can be applied straight from reported financial statement income (FSI) or taxable income. Both require specific modifications to ensure the AFSI amount linked to the partnership is accurately calculated.

• Corporations are allowed to make different elections for different partnerships, even mixing Top-Down and Taxable-Income Elections across their portfolio. While this tailored approach can improve outcomes, it is subject to certain constraints and benefits most from robust modeling.

• Opting for either election means early adoption of the “-5” rules and a binding choice that generally stays in place until updated regulations are released. Given the long-term nature of these elections, multi-year projections and a clear view of the broader -5 rule impacts are essential before making a decision.

• Confirming qualification for this election can be complex, often requiring swift information exchange within a section 52 group or a foreign-parented multinational group. This data may not always be readily available within the short decision window.

• Despite its name, the Reasonable Method provides only limited flexibility. It applies when partnerships, under the -5 rules, calculate and report Modified FSI, and it places the responsibility for allocating those amounts on the partnership. While there is some discretion in setting allocation percentages, the practical range of options is narrower than the name suggests.

1. Top-Down Election

• Includes in AFSI 80% of a top-down amount for a partnership investment, after adjustments.
• Eligibility: Applicable corporation partners.
• Not available to upper-tier partnerships (even if they have applicable corporations as partners).
• Start with the CAMT entity’s FSI from the partnership.
• Adjust for certain items, then reduce by 20%.
• Apply additional adjustments to determine final AFSI.
• Election is made in the partner’s return for the election year, on an investment-by-investment basis.
• Likely requires adoption of the proposed -5 rules.
• More complex than some statutory top-down methods.
• Likely requires use of this method (or Taxable-Income Election / -5 rules) for all partnership investments.
• Could have negative AFSI impact if the partnership interest is sold.
• Loss limitation rules apply.
• Requires tracking the partner’s CAMT basis in the partnership investment.

2. Reasonable Method

• Lets the partnership use any reasonable method to determine each partner’s distributive share percentage of Modified FSI.
• Eligibility: Partnerships that have early adopted the -5 rules and are computing Modified FSI.
• Partnership calculates each partner’s share of Modified FSI.
• Uses a Reasonable Method to set allocation percentages.
• Partnership includes a statement in its return describing the method used.
• Requires partnership adoption of the proposed -5 rules.
• Binding on the partnership until the tax year before revised proposed regulations.
• Allows use of a tax provisions-based ratio instead of a book-based ratio.
• Moves the burden of distributive share calculation from partner to partnership.

3. Taxable-Income Election

• Uses the partnership’s taxable income (with adjustments) to determine AFSI.
• Eligibility: Applicable corporation partners whose CAMT test group:
  • Owns ≤ 20% profits/capital interest, and
  • Has < $200M FMV in the partnership investment.
• Not available to upper-tier partnerships (even with applicable corporations as partners).
• Start with the CAMT entity’s taxable income from the partnership.
• Adjust for specific items to arrive at AFSI.
• Election is made in the partner’s return for the election year, on an investment-by-investment basis.
• Likely requires adoption of proposed -5 rules.
• Binding on the partner until the tax year before revised proposed regulations, or earlier if eligibility ends.
• Simpler than -5 rules.
• Tax-based starting point (rather than book-based) can mean lower AFSI.
• Eligibility testing is complex and must be done each year.
• Likely requires use of this method (or Top-Down / -5 rules) for other partnership investments.
• Negative AFSI impact possible if the partnership interest is sold.
• Loss limitation rules apply.
• Requires tracking the partner’s CAMT basis in the partnership investment.

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Approaches to Partnership Transactions under CAMT

In certain cases, a tax-free contribution to or distribution from a partnership can unexpectedly give rise to adjusted financial statement income (AFSI) for purposes of the Corporate Alternative Minimum Tax (CAMT). Recognizing this, the Treasury and IRS have exercised their regulatory authority to introduce mechanisms aimed at reducing or deferring that impact.

Following the release of Notice 2025-28, taxpayers now have a menu of six distinct approaches to postpone, for CAMT purposes, the financial statement income associated with such transactions. The choice of method often depends on whether the election is made at the partner level, the partnership level, or under specific eligibility conditions.

• An updated take on the proposed rules in Prop. Reg. Sec. 1.56A-20, offering an alternative computation for partnership contributions and distributions when chosen by an applicable corporate partner.
• A partnership-level election, requiring the agreement of all impacted partners, that applies Subchapter K principles for CAMT purposes to mirror conventional partnership tax treatment.
• Available to eligible partners, this option uses the partnership’s taxable income, rather than its financial statement income, as the starting point for calculating the partner’s share of AFSI.
• -20 Rules Without -5 Rules – Implements the original -20 rules in combination with certain designated regulations, but deliberately omits the -5 rules from application.
• -20 Rules With -5 Rules – Integrates the -20 rules, the -5 rules, and the designated regulations into a coordinated approach for determining AFSI.
• Reasonable Statutory Interpretation – Applies a taxpayer’s justified interpretation of the statute, which could support either full recognition of partner-level FSI from a contribution or complete exclusion of such income when contributed property is involved.

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Deferring FSI from Partnership Contributions and Distributions : Key Methods

1. Modified -20 Method

• An election for any CAMT entity partner to apply the proposed -20 rules with targeted modifications, in order to determine AFSI from partnership contributions and distributions.
• Any CAMT entity partner is eligible.
• Include the election in the partner’s tax return for the election year.
• Likely requires adoption of the proposed -20 rules by the electing partner.
• Unclear if adoption of the proposed -5 rules is also necessary.
• Once elected, binding until the tax year before revised proposed regulations take effect.
• Generally simpler than the original proposed -20 rules.
• May offer more favorable treatment in certain areas (e.g., partnership debt, recovery rules, and acceleration events).
• In some cases, could be less favorable than the original -20 rules.
• Uncertainty on how the election affects partnership-level reporting.
• Partnerships may need to maintain multiple CAMT books to track deferred sales property and related gain/loss events.

2. Full Subchapter K Method

• An election by the partnership (with consent of all relevant partners) to apply Subchapter K principles when determining AFSI for contributions and distributions.
• Only partnerships, not individual partners are eligible.
• Election is made in a partnership’s tax return for the election year.
• Must be applied to all contributions and distributions for the partnership.
• Once made, binding until the tax year before revised proposed regulations take effect.
• In certain situations, more favorable than both the original -20 rules and the Modified -20 Method.
• Creates a complex, parallel compliance system that may raise additional technical questions (e.g., handling partner-level FSI from contributions).
• Requires significant time and administrative investment.
• In some cases, could be less favorable than the other two methods.

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Further Provisions under Notice 2025-28

In addition to its primary provisions, Notice 2025-28 introduces several clarifications relevant to taxpayers adopting the proposed -5 and/or -20 rules. One significant change allows taxpayers to exclude from AFSI any financial statement income resulting from consolidation, remeasurement, deconsolidation, dilution, or ownership changes involving another partner, so long as the event does not constitute a realization event.

The Notice also extends the reporting timelines for partnerships, providing more time to supply CAMT-related information to partners in accordance with the proposed regulations.

With respect to reliance rules under the proposed regulations, taxpayers are now permitted to adopt either the -5 rules or the -20 rules independently, rather than being required to adopt both—a “decoupling” approach. However, it appears that early adoption of the specified regulations remains a prerequisite.

Finally, for those relying directly on Notice 2025-28, there is an added degree of flexibility: taxpayers may adopt either the -5 rules or the -20 rules, as modified by the Notice, without also adopting the specified regulations or adhering to the test group consistency requirement.

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Positioning for What Comes Next

Given the interaction between the OBBBA provisions and the elections under Notice 2025-28, taxpayers should conduct detailed, multi-year modeling to assess potential CAMT impacts. While certain OBBBA changes are favorable for regular tax purposes, they can also increase CAMT liabilities. Because these elections are binding, a thorough evaluation of their effect on AFSI, timing, and administrative requirements is essential. Strategic selection, based on a company’s specific facts, can offer meaningful advantages.

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The information contained in this post is merely for informative purposes and does not constitute tax advice. For more information, feel free to reach us at [email protected]

Copyright 2025 Small World Business Advisors LLC www.swbadvisors.com

Tax due diligence is a critical process in mergers and acquisitions, aimed at providing a comprehensive evaluation of a company’s tax position. This includes identifying potential exposures, uncovering unpaid tax obligations, and exploring opportunities for reducing tax liabilities, ultimately ensuring clarity and minimizing risks during the transaction.

Traditionally viewed as a buyer-centric activity, tax due diligence also offers significant advantages to sellers. By engaging a specialized sell-side team, sellers can thoroughly review their operations, pinpoint tax related risks, and implement effective remediation plans. This proactive approach allows sellers to address and resolve potential issues ahead of buyer scrutiny, facilitating smoother negotiations and enhancing overall deal value.

Significance of Tax due diligence for Buyers:

• Undisclosed Tax Liabilities: Targets may have hidden obligations such as unpaid corporate taxes, unresolved indirect tax issues, or pending payroll tax liabilities.
• Transfer Pricing Compliance: In cross-border transactions, under-documented or misaligned intercompany pricing can attract regulatory scrutiny and penalties.
• Verification of Tax Incentives: Significant tax incentives such as R&D credits or investment subsidies claimed by the target may later face challenges, leading to clawbacks or penalties if not properly substantiated
• Utilization of Tax Attributes: Valuable tax attributes, like net operating losses (NOLs), can become restricted or less valuable once ownership changes.

Significance of Tax due diligence for Sellers:

• Legacy Tax Disputes: Unresolved or ongoing tax audits and disputes can dissuade potential buyers or force a downward adjustment in deal pricing.
• Exit Taxation Challenges: The sale of a business may trigger significant capital gains or withholding taxes, directly impacting net sale proceeds.
• Indemnity and Warranty Arrangements: Buyers tend to demand robust tax indemnities to protect against post-closing surprises, potentially exposing sellers to extended risk.
• Cross-Jurisdictional Tax Compliance: International transactions may entail diverse tax regimes, which can expose sellers to risks such as unanticipated withholding taxes on repatriated funds.

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Tax Structuring

Tax structuring in mergers and acquisitions (M&A) is a sophisticated process aimed at optimizing the deal architecture to minimize tax liabilities for both buyers and sellers. It involves a comprehensive evaluation of the transaction form, whether it be a stock purchase, asset acquisition, or merger and a thorough assessment of the target’s tax attributes alongside the tax profiles of the parties involved.

• Deciding between a stock purchase, asset purchase, or merger carries distinct tax consequences. For instance, asset acquisitions may allow for a step-up in basis, enabling accelerated depreciation and immediate tax deductions, whereas stock purchases generally preserve existing tax attributes, such as net operating losses, but may also transmit legacy tax issues.
• Evaluating the target’s historical tax attributes, such as net operating losses, tax credits, and depreciation schedules is critical. These factors can significantly affect the overall tax efficiency of the transaction, influencing both the structuring and the valuation of the deal.
• The tax classification of the entities involved plays a crucial role. For example, aligning the deal structure with the buyer’s and seller’s tax status can help mitigate adverse tax consequences, ensuring that the planned benefits, whether through deductions or credits, are fully realized.
• Utilizing pass-through entities, such as LLCs and S corporations, can offer additional layers of tax efficiency. These structures often facilitate the flow-through of income and deductions, thereby avoiding double taxation at the corporate level.

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Post-Merger Integration

Post-Merger Integration (“PMI”) is essential for unifying the disparate strategies and objectives of merging entities under a cohesive long-term vision. By ensuring strategic alignment, PMI harmonizes varying goals to facilitate the realization of synergies, such as increased market share, cost efficiencies, and improved access to innovative technologies that drive value creation. In addition, the process emphasizes operational efficiency by consolidating processes, eliminating redundancies, and establishing a unified operating model.

Recognizing the critical importance of human capital, a robust PMI strategy also prioritizes cultural integration, bridging differences to foster a collaborative and cohesive workplace. Ultimately, effective PMI sustains business momentum and enhances financial performance, thereby delivering significant value to shareholders and ensuring the long-term success of the combined organization.

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Exit Planning

Firms must determine the optimal transaction structure (e.g., whether an asset or share sale) to minimize capital gains and manage deferred tax liabilities. Timing is critical due to shifting tax regulations, and cross-border deals add layers of complexity with varying local tax laws and potential double taxation. Additionally, safeguarding tax attributes like net operating losses or credits is vital to preserving post-exit value. We help by crafting exit strategies that minimize tax burdens while maximizing deal value by evaluating whether an asset or share sale best suits the client’s needs, advise on optimal timing amidst evolving tax laws, and manage cross-border tax complexities. In order to preserve valuable tax attributes (e.g., net operating losses and credits) ensuring that the exit is as tax-efficient as possible.

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Preserving Key Attributes

Preserving key tax attributes (most importantly net operating losses (“NOLs”)) in mergers and acquisitions presents a multifaceted challenge, compounded by evolving tax regulations and cross-border complexities. Below is an enhanced overview of the primary challenges and strategic considerations:

• Change-of-Ownership Limitations: Under Section 382, significant ownership changes cap the annual offset of pre-acquisition NOLs, diminishing their post-transaction value. Careful planning is key to managing this limitation and preserving effective utilization.

• Structural Trade-Offs: Transaction structure is key. Asset sales may trigger a basis reset that risks NOL continuity, while stock sales typically preserve tax benefits but could bring legacy liabilities. Tax-deferred reorganizations often provide a balanced, tax-neutral alternative.

• Emerging Tax Burdens: The dynamic tax landscape marked by global minimum taxes, revised depreciation rules, and intensified compliance requirements demands precise forecasting and innovative structuring strategies to protect and optimize tax benefits established at closing.

• Double Taxation Risks: In cross-border transactions, varying local tax laws can lead to double taxation when NOLs recognized in one jurisdiction are not fully acknowledged in another. Effective tax planning, leveraging tax treaties and aligning domestic treatments is essential to mitigate these risks.

At SWBA, we begin with meticulous due diligence, assessing key tax attributes such as net operating losses, credits, and liabilities to ensure a comprehensive understanding of both risks and opportunities. We assist with selecting the optimal transaction structure, whether that be an asset sale, stock purchase, or tax-deferred reorganization to maximize tax benefits while addressing change-of-ownership limitations and managing legacy liabilities effectively. Through specialized cross-border tax planning, we navigate the complexities of multi jurisdictional regulations, mitigating double taxation risks through strategic use of tax treaties and aligned domestic treatments. Our proactive approach to evolving tax regulations, including global minimum taxes and updated depreciation rules, safeguards your post-transaction tax profile and ensures long-term compliance and financial efficiency.

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Next Wave of Cross-Border Mergers and Acquisitions

Shaping Tomorrow’s Global Deals

Cross-border mergers and acquisitions (M&A) remain a vital element of global business growth, empowering companies to broaden their market presence, strengthen competencies, and achieve cross-border synergies. With the evolving landscape influenced by globalization, changing tax regulations, and dynamic trade policies, businesses must navigate new challenges and seize emerging opportunities to stay ahead. Below is a detailed exploration of the key factors shaping the future of cross-border M&A.

Emerging Markets & Digital M&A

Businesses are increasingly targeting emerging economies, capitalizing on high-growth regions fueled by a rising middle class, accelerated urbanization, and technological advancements. Simultaneously, the rapid proliferation of digital technologies is transforming industries like fintech, e-commerce, and renewable energy, driving global M&A activity and fostering strategic, innovative collaborations.

Global Taxation Challenges

Governments worldwide are enforcing increasingly stringent tax policies through initiatives like Base Erosion and Profit Shifting (“BEPS”) and General Anti-Avoidance Rules (“GAAR”), necessitating precise and strategic tax planning to ensure compliance while protecting value. Cross-border transactions pose challenges in transfer pricing, requiring well-structured strategies to align with international regulations and prevent disputes. The effective utilization of bilateral tax treaties is critical for minimizing withholding taxes and enhancing cash flow efficiency in global operations.

Evolving Trade Patterns and Geopolitical Changes

The rise of protectionism has introduced significant obstacles for cross-border mergers and acquisitions, as heightened scrutiny over foreign investments in strategic industries, often tied to national security concerns, limits deal opportunities. Geopolitical tensions, including trade sanctions, political instability, and economic nationalism, further complicate the landscape requiring businesses to develop agile and adaptive strategies. Additionally, currency volatility presents risks to transaction valuations and financial outcomes, making the implementation of effective hedging strategies an essential aspect of comprehensive transaction planning.

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Industry Focused M&A Tax Solutions

Financial Services

Banking, insurance, and fintech: conduct meticulous due diligence to uncover hidden liabilities, streamline tax compliance, and navigate integration challenges such as aligning regulatory frameworks and mitigating double taxation.

Healthcare

Scrutinize R&D and clinical trial costs to maximize credits while optimizing transfer pricing across entities. This targeted approach uncovers hidden liabilities and streamlines the tax structure for a more efficient post-deal integration.

Manufacturing

Verification of fixed asset records and depreciation schedules to ensure accurate write-offs and valuations by assessing intercompany transactions and supply chain arrangements to uncover hidden liabilities while leveraging incentives like accelerated depreciation and energy efficiency credits, optimizing the deal’s tax structure for a smoother integration.

Technology

In the technology sector, encompassing software, SaaS, and artificial intelligence, we streamline deal value by optimizing R&D credits and structuring IP transactions for tax efficiency all while adapting to rapidly evolving business models. In the technology sector, encompassing software, SaaS, and artificial intelligence, we streamline deal value by optimizing R&D credits and structuring IP transactions for tax efficiency all while adapting to rapidly evolving business models.

Real Estate

From property taxes and depreciation concerns to complex asset structuring. We tackle these issues by conducting precise due diligence to pinpoint exposures like depreciation recapture, advising on optimal transaction structures to maximize tax benefits.

Private Equity & Investment Management

We conduct deep due diligence to uncover hidden liabilities and advise on structuring deals for optimum tax outcomes. Structuring complex tax transactions, capital gains optimization, and cross-border compliance to ensure transactions are tax-efficient while safeguarding investor returns.

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The information contained in this post is merely for informative purposes and does not constitute tax advice. For more information, feel free to reach us at [email protected]

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