Navigating M&A with the One Big Beautiful Bill Act: Key Tax Changes

While the One Big Beautiful Bill Act (“OBBBA” or the “Act”) does not include any provisions that are specifically targeting M&A activity, it introduces several changes that may significantly influence deal structuring and valuation.

This client alert is not intended to provide a comprehensive summary of each provision, but simply to provide a high-level summary of certain tax benefits that businesses and individuals active in the M&A space should consider.

Qualified Small Business Stock

Section 1202 of the Internal Revenue Code (the “Code”) has long offered tax benefits to those who sell qualified small business stock (or “QSBS”). A qualified small business was historically defined as a C Corporation with less than $50 million of gross assets, operating within certain eligible industries. The primary benefit of investing in QSBS was the ability to exclude up to $10 million in gains from the sale of such stock, provided it was held for at least five years.

Under the OBBBA, taxpayers may now exclude up to $15 million in gain from the sale of any QSBS acquired after July 4, 2025.  The Act also introduces a phased exclusion for shorter holding periods: 50% of gain is excludable after three years, 75% after four years, and 100% after five years. Additionally, the gross asset cap for qualifying businesses increases from $50 million to $75 million, expanding eligibility.

The modified rules should permit more businesses to issue QSBS due to the increased gross asset size while also allowing sellers to exit companies sooner without losing the benefit of tax-advantaged cash flow.

Bonus Depreciation

Code Section 168(k) provides bonus depreciation for Qualified Property. Under prior law, taxpayers could qualify for 40% bonus depreciation in 2025, with the rate phasing out entirely by 2027. The Act permanently sets Code Section 168(k) bonus depreciation at 100%.

Additionally, Code Section 179 permitted immediate expensing of up to $1.25 million in 2025, with a phase down of expensing when total Code Section 179 property placed in service during the year exceeded a $2.5 million threshold amount.  The Act increases both the Section 179 deduction cap to $2.5 million and the phase down threshold to $4 million.

The ability to immediately expense the cost of certain acquisitions will increase tax benefits to acquirers of asset-heavy target companies and incentivize them to structure the transactions as asset purchases.

R&D Expensing

Under changes made under the 2017 tax act, taxpayers were required to capitalize research and development (R&D) expenses and depreciate them over five years. The OBBBA reverses this rule, restoring immediate expensing for certain R&D costs.

This change should result in improved after-tax returns for businesses with significant R&D expenses, potentially driving increased deal activity and higher valuations in innovation-driven sectors.

Business Interest Deduction

Prior to the enactment of the OBBBA, businesses faced a cap on the amount of deductible interest expense, which was essentially equal to 30% of EBIT. The Act now permits taxpayers to deduct interest expense up to an amount equal to 30% of EBITDA. Adding back depreciation and amortization before calculating the interest cap will permit taxpayers to deduct more interest going forward.

As many acquisitions are financed with debt, this increase in the interest deduction limitation should increase buyers’ after-tax returns.

Opportunity Zones

Previously, taxpayers could defer capital gains by reinvesting them into Qualified Opportunity Zones (QOZs) by December 31, 2026. The main benefit was the potential to exclude gains from federal income tax if the investment was held for 10 years.

The OBBBA makes the QOZ program permanent—investments are no longer subject to the 2026 deadline—and enhances the associated tax benefits. Starting in 2027, taxpayers who reinvest realized capital gains into a QOZ will be able to defer taxation on those gains for five years. If the investment is held for at least five years, the taxpayer will receive a 10% basis increase. If the QOZ investment is in a rural area, taxpayers will receive a 30% basis increase. After holding the investment for 10 years, the taxpayer can liquidate their investment in a transaction free from federal income tax.

The Act’s rebooting of Qualified Opportunity Zones provides sellers an opportunity to obtain tax benefits after realizing a large capital gain from the sales of their businesses. To learn more, read our prior client alert discussing the rebooted Qualified Opportunity Zone program in further detail.