Tax Alert: “Big Beautiful Bill” Highlights for Fund Managers

July 9, 2025

On July 4, 2025, President Trump signed into law the One Big Beautiful Bill Act (“Big Beautiful Bill” or “BBB”). The BBB makes permanent some of the changes introduced by the 2017 Tax Cuts and Jobs Act (the “TCJA”), while introducing other changes. Selected provisions of the BBB relevant to fund managers are highlighted below.

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Permanent Disallowance of Misc. Itemized Deductions.

The BBB makes permanent the TCJA’s disallowance of miscellaneous itemized deductions for noncorporate taxpayers (carving out an exception for unreimbursed educator-related expenses). This means that partners that are individuals (including individual owners of a general partner) will continue to not be able to deduct expenses such as investment advisory fees and tax preparation fees. Prior to the TCJA, deductions for these expenses were allowable to the extent they exceeded 2% of adjusted gross income.

Easing of QSBS Holding Period and Other QSBS Requirements.

Under the BBB, (i) there is a new, partial QSBS gain exclusion for stock held for three and four years, with the full exclusion kicking in (as was true under prior law) for stock held for five years, (ii) the amount of gain that can be excluded is increased from $10 million to $15 million (the 10x basis limitation remains unchanged), and (iii) the aggregate gross asset threshold is increased from $50 million to $75 million. The changes made by the BBB to the QSBS rules apply to QSBS issued after July 4, 2025. This could make it easier for funds investing in C corporations to pass QSBS benefits onto their investors.

Permanent 20% Deduction for “Qualified Business Income.”

The BBB makes permanent the deduction introduced by the TCJA equal to 20% of a taxpayer’s “qualified business income” (subject to certain limitations) from flow-through entities. Accordingly, a US partner in a fund could be eligible for a deduction equal to 20% of such partner’s “qualified business income” attributable to flow-through investments made by the fund.

SALT Cap.

The amount individuals can deduct for state and local income, sales, and property taxes (the “SALT cap”) is increased to $40,000 through 2029, from the current $10,000 deduction limit. The deduction is phased out for individuals earning more than $500,000 per year. The BBB leaves the “pass-thru entity taxes” (“PTET”) deduction unchanged, however, so fund managers still may take advantage of a PTET election to minimize the impact of the SALT cap.

Potential Impact of BBB on Fee Waiver Arrangements and other Payments to Fund Managers.

The BBB revises Code Section 707(a)(2) by replacing “under regulations prescribed” with “except as provided.” The effect of this seemingly innocuous change may be to treat an income allocation to a partner (e.g., a general partner) who performs services for a partnership (e.g., a private fund) as payment for services (i.e., ordinary income) as opposed to the partner’s distributive share of the partnership’s income (which could otherwise be capital gain). Final, or new proposed regulations may be expected under Code Section 707, which could alter the recommended practices for fund managers, particularly those utilizing or seeking to implement fee waiver arrangements.

Opportunity Zones.

The BBB creates a new permanent Opportunity Zone program that applies to investments made after December 31, 2026. The BBB creates rolling, 10-year OZ designations beginning on Jan. 1, 2027. It updates definitions of low-income community (LIC) and eliminates the ability for contiguous tracts that are not LICs to be designated as OZs. The BBB narrows the LIC qualifications, expands the tax benefits and allows investors to receive incremental reduction in gain starting on the first anniversary of the investment.

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