• The new law preserves SALT workarounds and Section 199A, but limits itemized deductions and expands QSB stock eligibility. 

• Asset managers must reassess their investment structures, energy projects, and carried interest planning. 

• Portfolio companies gain bonus depreciation and interest deduction flexibility but face new limits in 2026. 

—

The enactment of the One Big Beautiful Bill Act (OBBB) on July 4 will have a significant impact on tax planning for the investment and asset management industry. 

The act has mostly favorable provisions for asset management, with varying implications for asset managers, portfolio company investments, and investors. With the legislation now final, investors and funds should focus on assessing its impact and identifying planning opportunities and challenges. 

Several key provisions offer different options for implementation. The effective dates will be important, and there may be time-sensitive planning considerations. The act could immediately affect decisions on how to structure new investments in tax efficient ways. 

This Alert highlights key provisions of the OBBB affecting the asset management industry. For a broader discussion of the act, see BDO’s Tax Alert: “Republicans Complete Sweeping Reconciliation Bill.” Also available are a table of major provisions, a recording of a July 10 webcast on the act, and discussions of the financial accounting implications, international tax provisions, and real estate implications.  

Key Implications for Asset Managers 

Preservation of SALT Cap Workarounds and Section 199A 

The act makes permanent the Section 199A deduction for pass-through business income. The deduction will still generally not be available for financial services, brokerage services, investing or investment management, trading, or dealing in securities. It will remain available for real estate investment trusts (REITs), banking, and some portfolio company operating businesses structured as pass-throughs. 

The OBBB makes the state and local tax (SALT) cap permanent while raising the threshold for five years and then reverting it to $10,000 in 2030. The cap is set at $40,000 for 2025 but phases down to $10,000 once income exceeds $500,000. Both thresholds will increase by 1% for each year through 2029. More importantly, lawmakers struck a provision that would have shut down SALT cap workarounds offered by states with pass-through entity tax (PTET) regimes.  

Takeaway 

Most states have now enacted PTET regimes that allow pass-through businesses to elect to be taxed at the entity level, where a deduction is allowed without regard to the individual SALT cap. The regimes can offer a valuable benefit to both managers and investors, particularly in years when a transaction will create significant state taxes. The elections can also have complex ramifications and should be modeled first.  

IRA Energy Credits Phaseout and Repeal 

The OBBB raises approximately $500 billion by repealing, restricting, and phasing out many of the energy credits enacted under the Biden administration as part of the Inflation Reduction Act (IRA). The effective dates for the phaseouts and new restrictions are staggered depending on the specific credit. The act does not affect the transferability or refundability of the credits. 

Takeaway 

Funds involved in energy investments or projects should carefully assess the impact of the rules. It may be prudent to accelerate some near-term projects while reassessing the economic viability of projects that are less shovel ready. The credit transfer market and tax equity financing market should remain robust for the next several years.   

Changing the Regulatory Mandate for Disguised Sales or Payments for Services 

The act changes a reference to regulations under Section 707(a)(2) that could affect fund managers. It essentially clarifies that the rules are effective even in the absence of regulations. 

Section 707(a)(2) allows the IRS to recharacterize certain transactions involving partners and partnerships. For example, Section 707(a)(2) can be used to treat the exchange of partnership interests for waived management fees or carried interests as a disguised payment for services. If applicable, this can result in fund managers or carry partners recognizing ordinary income rather than capital gains. Additionally, certain contributions of cash to a partnership followed by a distribution to the partners may be recharacterized as a purchase of partnership interests from the selling partners. This recharacterization could result in the recognition of additional taxable gain by the “selling” partner.  

The statute was previously drafted to provide that Section 707(a)(2) operates “under regulations prescribed by the Secretary.” To date, no regulations have been finalized addressing disguised sales of partnership interests. Further, only proposed regulations have been issued addressing disguised payment for services. The act modifies the statute to provide that Section 707(a)(2) operates “except as provided by the Secretary.” This appears to clarify that the statute operates even in the absence of regulations. Further, the amendment delegates significant authority to the IRS to provide operational rules. 

Takeaway 

The IRS has long argued that the prior statute is still operative even in the absence of regulations, and the legislation provides that it should not be “construed to create any inference with respect to the proper treatment under Section 707(a)” before the date of enactment. But there may be some question as to whether taxpayers can argue that the rules do not apply to prior transactions because of the lack of regulations. The provision is effective for services performed and property transferred after July 4, 2025. 

Pro-Rata Rules Under GILTI and Subpart F  

The act changes the pro-rata share rules to require a U.S. shareholder of a controlled foreign corporation (CFC) to include its pro-rata share of Subpart F or Net CFC Tested Income (formerly GILTI) if it owned stock in the CFC at any time during the foreign corporation’s tax year in which it was a CFC. It removes the requirement that the U.S. shareholder own the CFC’s stock on the last day the foreign corporation was a CFC. Treasury is given the authority to issue regulations allowing taxpayers to make a closing of the tax year election if there is a disposition of a CFC. 

Takeaway 

Managers will need to analyze current investments to understand the impact of this change. Managers will need to closely monitor the investor makeup of offshore funds, especially in the initial launch/fundraising phase. 

Active Business Losses Under Section 461(l) 

The OBBB makes the active loss limit under Section 461(l) permanent, while reducing the threshold at which it applies beginning in 2026. Lawmakers struck from the act a provision that would have changed how disallowed losses under Section 461(l) are treated. 

Takeaway 

A disallowed loss under Section 461(l) will still be converted to a net operating loss (NOL) in subsequent years. This allows investors to use an NOL created by Section 461(l) against other sources of income in future years. 

Repeal of Itemized Deductions 

The act makes permanent the repeal of most itemized deductions, including those for investment expenses (apart from investment interest) incurred for the production of income under Section 212. 

Takeaway 

Consistent with the treatment since 2018 under the Tax Cuts and Jobs Act, investment expenses will generally only be deductible to the extent they are considered ordinary and necessary expenses of an activity that rises to the level of a trade or business under Section 162. This will continue to impact investors in private equity, venture capital, and other investment funds where items such as management fees generally are not deductible at the individual level. 

Limit on Value of Itemized Deductions 

The OBBB creates a new limit on itemized deductions, including investment interest. The provision would essentially cap the value of itemized deductions so that the maximum benefit achievable is equivalent to offsetting income taxed at a top rate of 35% rather than offsetting income taxed at the higher individual marginal rate of 37%. 

Takeaway 

This limit applies after the deduction is capped based on the amount of net investment income. For individuals taxed at the 37% rate, this is essentially equivalent to imposing a 2% tax on the total amount of otherwise deductible investment interest (and any other itemized deductions).    

Creation of Trump Accounts 

The OBBB establishes new tax-preferred investment accounts for individuals under the age of 18. Contributions are set to begin one year after enactment and are allowable up to $5,000 per year until the calendar year before an individual turns 18. A pilot program will provide a $1,000 tax credit for contributing to an account for every child born from 2025 through 2028. Eligible investments are limited to mutual funds or exchange traded funds that track a qualified index, do not use leverage, and have expenses of less than 0.1%. Qualified indexes include the S&P 500 and other indexes for equity investments primarily in U.S. companies. Industry-specific indexes are prohibited but indexes based on market capitalization are allowed.  

Takeaway 

The automatic $1,000 contribution for children born from 2025-2028 will create millions of potential accounts for the asset management industry to administer.  

Key Implications for Portfolio Company Investments 

Expansion of Qualified Small Business Stock Eligibility 

The act enhances the exclusion of gain for qualified small business (QSB) stock under Section 1202 issued after July 4, 2025: 

• In addition to the existing 100% exclusion for qualified stock held for five years, taxpayers can qualify for a 50% exclusion after three years and a 75% exclusion after four years. 

• The current limit on the exclusion (the greater of $10 million or 10 times basis) is increased to the greater of $15 million or 10 times basis, indexed to inflation beginning in 2027.  

• The limit on gross assets at the time stock is issued is increased from $50 million to $75 million, indexed to inflation beginning in 2027. 

Takeaway 

QSB stock is a powerful tax planning structure that has become increasingly popular with private equity in recent years. The changes make the structure more accessible and increase the size of potential investments. State conformity to both the existing rules and new changes will be important for determining whether the structure is appropriate. Key states such as California do not conform to the federal QSB stock exclusion.  

Section 163(j) Limit on the Interest Deduction 

The OBBB permanently restores the exclusion of amortization, depreciation, and depletion from the calculation of adjusted taxable income (ATI) for purposes of Section 163(j), which generally limits interest deductions to 30% of ATI. The change is effective for tax years beginning after 2024. 

The act makes two unfavorable changes for tax years beginning after 2025. Income from Subpart F and Net CFC Tested Income (formerly GILTI) will be excluded from ATI along with Section 78 gross-up amounts for indirect foreign tax credits. More importantly, the limit will apply to any interest capitalized to other assets, except interest capitalized to straddles under Section 263(g) or to specified production property under Section 263A(f). 

Takeaway 

The changes may allow highly leveraged portfolio companies to deduct suspended interest carryforwards beginning in 2025. Although the act essentially shuts down interest capitalization planning for years beginning in 2026 or later, those strategies remain viable for the 2024 and 2025 tax years. The legislation will not claw back any interest capitalized to other assets in tax years beginning before 2026, even if the capitalized interest has not been fully recovered with the asset. Interest capitalization planning in 2024 and 2025 could help some portfolio companies deduct additional interest more quickly and could be particularly beneficial for companies that may still face the limit even after the favorable change to ATI.  

Bonus Depreciation and Small Business Expensing 

The act permanently restores 100% bonus depreciation for property placed in service after January 19, 2025. The change could affect the Section 743(b) basis adjustment for funds purchasing interests in a partnership. The act also increases the Section 179 deduction to $2.5 million with a phaseout threshold of $4 million for property placed in service after 2024, with both thresholds indexed to inflation in future years. 

Restoration of Limitation on Downward Attribution of Stock Ownership  

The act reinstates Section 958(b)(4), which, prior to the Tax Cuts and Jobs Act (TCJA), prohibited the downward attribution of stock ownership from a foreign person to a U.S. person for purposes of determining CFC and U.S. shareholder status. The repeal of Section 958(b)(4) under the TCJA resulted in many foreign corporations becoming CFCs and created filing obligations for constructive U.S. shareholders. These rules are effective for tax years beginning after December 31, 2025. 

Takeaway 

The restoration of Section 958(b)(4) could simplify reporting obligations for certain taxpayers. Taxpayers that were affected by the repeal of Section 958(b)(4) in the past should carefully review these rules to see if they are impacted by the reinstatement of the section. 

Section 174A Research Expensing 

The act permanently restores the expensing of domestic research costs for tax years beginning after December 31, 2024. The permanent expensing rules are created under new Section 174A, while Section 174 is retained and amended to provide for the continued 15-year amortization of foreign research costs. Taxpayers retain the option of electing to capitalize domestic Section 174A costs and amortize such amounts over 10 years or the useful life of the research (with a 60-month minimum).  

The act will generally require taxpayers to implement the new treatment with an automatic accounting method change on a cut-off basis, but it offers two alternative transition rules. Taxpayers can elect to claim any unamortized amounts incurred in calendar years 2022, 2023, and 2024 in either the first tax year beginning after 2024 or ratably over the first two tax years beginning after 2024. Separate transition rules are available for eligible small business taxpayers meeting the gross receipts test under Section 448 ($31 million in 2025) for the first tax year beginning after 2024, allowing those taxpayers to file amended returns to claim expensing for tax years before 2025. 

Takeaway 

There are important interactions between Section 174 and other tax attributes, especially for portfolio companies that will continue to face a limit on interest deductions even after the OBBB change. Companies should consider modeling out the implementation options and capitalization elections to determine the most favorable treatment. 

Real Estate Investment Trusts   

The OBBB raises the percentage of allowable assets a REIT may have in a taxable REIT subsidiary from 20% to 25% effective for tax years beginning after 2025. The change provides additional structuring flexibility for managers with REITs in their structure.  

Deductions for Overtime Pay and Tip Income 

The act creates a deduction of up to $12,500 (single) and $25,000 (joint) on qualified overtime compensation, as well as a deduction of up to $25,000 on qualified tips reported on Forms W-2, 1099-K, 1099-NEC, or 4317. These deductions are allowed from 2025 through 2028 without regard to whether a taxpayer itemizes deductions.  

Takeaway 

These new deductions will carry certain reporting requirements and compliance complexities, impacting portfolio companies with eligible employees. Hospitality companies, in particular, will need to make several determinations at the entity level that could affect whether employees qualify. All companies should consider communicating with employees that receive tips or overtime wages on the withholding considerations.    

Key Implications for Investors 

Endowment Tax Increase  

The OBBB will increase the 1.4% tax on net investment income of private colleges and universities, but it will limit the application of the tax to universities with at least 3,000 tuition-paying students (up from 500). The OBBB imposes a new rate structure with excise taxes up to 8%.  For institutions with a student adjusted endowment over $500,000 and not exceeding $750,000, the rate remains 1.4%.  For institutions with a student adjusted endowment over $750,000 and not exceeding $ 2 million, the rate is 4%. For institutions with a student adjusted endowment over $2 million, the top rate is 8%. The changes are effective for tax years beginning after 2025. 

Takeaway 

Affected universities have some runway before the change takes effect, particularly those with fiscal years ending on June 30. There may be planning opportunities to accelerate income or trigger gains at lower rates.  

Written by Shawn McKenna, Joe Pacello and Dustin Stamper. Copyright © 2025 BDO USA, P.C. All rights reserved. www.bdo.com 

How MGO Can Provide Strategic Tax Guidance for Asset Managers Facing OBBB Changes 

MGO works with asset managers, private equity funds, and investors to turn policy shifts into opportunity. The OBBB introduces a wide array of changes, from enhanced QSB stock benefits and bonus depreciation to stricter rules around disguised sales and interest deductibility. Our tax team help you model scenarios, optimize fund structures, and align tax strategies with evolving rules. Whether you’re rethinking offshore structures, planning around energy credit phaseouts, or managing carried interest treatment, we provide you with the insight and execution you need to keep your investments tax efficient and future ready. Contact us to learn more.  

The post OBBB Is Final: What’s Next for Asset Managers?  appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• IRS downsizing is causing backlogs, misapplied payments, and delayed tax determinations. 

• Fewer auditors mean more correspondence exams, and an increased taxpayer burden on you. 

• Appeals and Advocate Services are overwhelmed, requiring professional tax support. 

—

Recent IRS downsizing efforts have posed challenges for taxpayers attempting to resolve issues with the agency. Over recent months, thousands of IRS employees have left the IRS through the administration’s deferred resignation programs, comprehensive layoffs of probationary employees, and retirements. Reductions not only affect processing and service centers but also impact personnel who are part of the IRS’s Taxpayer Experience Office, Taxpayer Advocate Service, IRS Office of Appeals, and IT modernization staff — all departments that exist to assist taxpayers with navigating complex U.S. tax compliance issues and IRS controversies. As of the current date, it remains unclear whether the IRS will be safe from further staffing cuts. What’s more, IRS employees are voluntarily resigning, often as a result of increasing uncertainty within the agency.  

While the ultimate goal of the downsizing is to enhance the IRS’s efficiency through automation and streamlined operations, taxpayers should be prepared to encounter administrative and logistical challenges when dealing with the agency as it settles into new processes with fewer personnel. These challenges include: 

•     Processing backlogs  

•     Unapplied tax payments 

•     More correspondence exams 

•     Appeals resolution issues 

•     Delayed determination letters 

•     Taxpayer Advocate Service delays 

Routine processing backlogs.

 Processing of routine tax filings such as original and amended returns, refund claims, and requests for appeals consideration may be delayed due to fewer IRS staff. These backlogs may also lead to delays in the IRS issuing much needed tax refunds to taxpayers.  

Longer processing times may also expose certain taxpayers to operational disruptions. The IRS may, for example, delay the processing of a business taxpayer’s request to change its legal entity name by several months. As a result, the taxpayer’s customers and vendors might be reluctant to remit payment to the newly named entity because its entity name for legal purposes does not match IRS records. 

Unapplied tax payments and payments made by consolidated subsidiaries. 

In certain cases, the IRS is failing to apply or is misapplying taxpayers’ payments. A taxpayer may, for example, remit payment to the IRS to offset its 2024 income tax liability, then later determine the IRS never withdrew the funds from its account or applied the payment to the wrong year. The IRS may fail to apply or misapply a taxpayer’s payment without notification to the taxpayer, causing late payment penalties and interest to accrue without the taxpayer’s knowledge.   

Recently, tax payments made by a consolidated subsidiary on behalf of its parent corporation have triggered automatic notices from the IRS demanding the associated tax return. In these cases, the IRS apparently has not associated the payment with the parent’s consolidated return, even though the subsidiary and the payment are properly reported on Form 851. As a result, consolidated filers must dedicate resources to clearing IRS requests for income tax returns from subsidiaries with no filing requirements. 

More correspondence exams. 

As part of the agency’s recent downsizing, the IRS has lost approximately one-third of its auditors. Although fewer auditors may lead to fewer in-person audits, it also may mean more audits are conducted entirely via computer system and by mail, with taxpayers unable to speak directly to a live revenue agent. This type of audit, known as a correspondence exam, often leads to a lack of clarity for the taxpayer and the IRS incorrectly adjusting items on a taxpayer’s return even when the taxpayer has the relevant documentation to support the return as filed. In these cases, the only resolution may be for the taxpayer to file a petition with the Tax Court, which is expensive and often more costly than the tax adjustment itself. 

Appeals resolution issues. 

The IRS Office of Appeals has lost hundreds of employees in the downsizing, all while dealing with an increasingly complex workload. The number of Appeals cases is expected to further increase due to errors and disputes resulting from the loss of qualified personnel in other areas of the IRS.  

As a result, taxpayers can anticipate the Appeals process will take longer. Unfortunately, this may result in more taxpayers taking issues to litigation, thus burdening the federal court system. Taxpayers that need to take issues to Appeals should consider the benefits of engaging a professional advisor to assist and advocate for them throughout the Appeals process. 

Delayed determination letters

Entities applying for tax-exempt status may have to wait longer periods to receive their IRS determination letters. These entities, which are required to electronically file Form 990, will not be able to properly file Forms 990 until the determination letter is issued, resulting in IRS-assessed late filing penalties.   

Contacting the Taxpayer Advocate Service. The Taxpayer Advocate Service (TAS) is also dealing with the separation of hundreds of employees. TAS is an independent office within the IRS that helps taxpayers resolve errors the IRS processing centers cannot or will not resolve on their own. An increase in errors made by the IRS due to the downsizing has also led to an increase in taxpayer assistance requests of TAS. Although traditionally effective at expediting the resolution of errors, TAS representatives may become increasingly difficult to reach due to the recent reduction in qualified personnel along with the increase in requests for assistance. This may mean issues require more time to resolve or even go unaddressed, with taxpayers potentially requiring assistance from professional advisors to reach a resolution.  

Written by Todd Simmens, Kate Pascuzzi and Nicolas Read. Copyright © 2025 BDO USA, P.C. All rights reserved. www.bdo.com 

Proactive Support for a Changing IRS Landscape 

At MGO, we help clients proactively manage the evolving IRS landscape. As taxpayer services become slower and more complex, our tax advisors offer strategic guidance and hands-on support to resolve IRS disputes, appeal unfavorable outcomes, and minimize compliance risks. Whether you’re facing delays, audits, or misapplied payments, we advocate on your behalf to bring clarity and resolution. With deep experience navigating federal tax bureaucracy, we ensure your case is handled efficiently — even as IRS resources shrink. Contact us to learn more.

The post The IRS is Downsizing — What Taxpayers Can Expect  appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• Your board should boost tech literacy and structure to oversee innovation, risk, and digital transformation effectively. 

• Staying current on AI, cybersecurity, and data privacy laws is essential for strong technology governance. 

• If you want strong, effective tech oversight, it’ll require cultural alignment, workforce readiness, and smart investment strategies.  

—

Technology is no longer just an operational tool; it is a core driver of strategy, risk, and opportunity. For boards, the imperative to innovate is matched only by the responsibility to govern technology effectively. As organizations harness emerging technologies, the boardroom must be equipped to navigate complex issues ranging from regulatory compliance and risk management to cultural alignment and investment prioritization.  

Here we explore the top five boardroom conversations shaping technology governance for directors seeking to foster innovation while safeguarding organizational integrity and value. 

1. Assessing the board’s technological literacy and access to expertise  

• Determine whether the board, as a whole, has the appropriate knowledge and experience with technological innovation and implementation to provide strategic oversight.  

• Assess the board’s familiarity with the company’s technology debt when considering opportunities to implement emerging technologies.  

• Consider whether the circumstances of the company indicate the need to appoint a member with specific and relevant technology expertise. 

• Discuss whether the current board structure supports the strategic technology goals, objectives, and identified risks.   

• Weigh potential decisions for a dedicated technology committee, assigning technology to a specific existing committee, or keeping responsibility with the full board.   

2. Remaining apprised on a shifting regulatory landscape 

• Given the fast-evolving nature of data privacy, cybersecurity, and AI regulations, consider the board’s ability to confirm compliance with all laws and regulations.  

• Request continuing education and updated thought leadership from counsel and other advisors, subscriptions to emerging legislative trackers, etc.  

3. Engagement with management to understand risk management effectiveness  

• Consider whether management has adopted a viable framework that provides accountability and instills trust in its use and deployment of AI. 

• Assess whether the underlying data hygiene of the organization – including data integrity, access and privacy rights protections, effective internal controls, and system security – will enable technology to provide usable and ethical outputs. 

• Evaluate management’s use case identification in prioritizing the opportunity/problem being addressed versus the risk exposure to the organization. 

• Assess how human supervision and continuous monitoring are built into the process to identify and mitigate issues promptly. 

4. Cultural alignment and workforce preparation 

• As technology is being integrated and implemented, consider the appropriateness of training and upskilling the workforce to use and monitor new tools, identify and remedy associated risks, and comply with internal policies, procedures, and external rules and regulations.  

• Determine the existence and robustness of cross-disciplinary change management to foster a cultural of innovation acceptance and empowerment.  

• Discuss management strategies in place to address cultural and operational challenges to widespread adoption and use.  

• Assess the quality and effectiveness of communication throughout the organization to drive employee understanding of the use cases being deployed, changes to workflows, and how their roles may continue to evolve. 

5. Prioritizing technology investment 

• Consider the process applied by management for evaluating use cases against the mission, values, and agreed upon strategy of the organization. 

• Determine whether management’s technology strategy focuses not only on the investment in specific tools and their implementation but includes adequate investments in security and risk management.  

• When planning to deploy AI technology, consider whether critical input is being provided by others responsible for related risks such as cybersecurity teams, general counsel, finance, human resources, and operations.   

Stay Engaged 

Directors are encouraged to stay educated, informed, and in constant contact with management when integrating and utilizing new and complex technologies. The BDO Center for Corporate Governance endeavors to support directors in engaging in effective governance by providing insights, learning, and networking opportunities in collaboration with BDO subject matter specialists, advisors, and peer networks designed specifically for boards of directors. 

Written by Amy Rojik, Rachel Moran and Lee Sentnor. Copyright © 2025 BDO USA, P.C. All rights reserved. www.bdo.com 

How MGO Supports Boards in Technology Oversight 

As technology becomes central to strategy and risk, MGO helps boards elevate their governance capabilities. From assessing board tech literacy to advising on AI risk frameworks and regulatory compliance, MGO offers tailored insights that empower directors to make informed decisions. Our team supports board and committee structures, provides continuing education on emerging tech, and helps align technology investments with organizational values. With deep experience in cybersecurity, data governance, and digital transformation, we work with you to navigate the complexities of modern technology oversight as it continues to evolve. Contact us to learn more.  

The post Top 5 Boardroom Conversations on Technology Governance  appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• Sweeping tax changes enacted through the reconciliation bill include permanent TCJA cuts and major reforms to business, individual, and international tax rules. 

• Taxpayers should begin modeling changes now, especially for bonus depreciation, research expensing, Section 163(j), and Opportunity Zones, to identify planning windows. 

• A wide range of industries including manufacturing, real estate, energy, and financial services will be affected, with varying opportunities and risks across sectors 

—

The president signed into law a sweeping reconciliation tax bill in a July 4 signing ceremony, capping a furious sprint to finish the legislation before the self-imposed holiday deadline. The Senate approved the bill in a 51-50 vote on July 1 after making a number of last-minute changes following intense bicameral negotiations. The House voted 218-214 on July 3 to send the bill to the president’s desk. 

Notable late changes to the version of the tax title released by the Senate Finance Committee on June 16 include: 

• Cutting Section 899 from the bill after reaching an agreement on Pillar Two with G-7 countries; 

• Significantly amending the provisions on global intangible low-taxed income (GILTI), foreign-derived intangible income (FDII), and the base erosion and anti-abuse tax (BEAT); 

• Modifying the energy credits provisions; 

• Removing the shutdown of state pass-through entity workarounds to the cap on deducting state and local tax (SALT); 

• Removing an unfavorable expansion of the loss limit under Section 461(l); 

• Reducing the new tax on remittances; 

• Changing the opportunity zone provisions; 

• Expanding to all residential construction an exception to the long-term contract rules; and  

• Removing a new excise tax on litigation financing. 

Also, President Donald Trump reportedly promised House conservatives that he would strictly enforce the beginning of construction rules for wind and solar projects and potentially make the permitting process more difficult. 

With the legislation now final, taxpayers should focus on assessing its impact and identifying planning opportunities and challenges. The bill offers both tax cuts and increases that would affect nearly all businesses and investors. The Joint Committee on Taxation (JCT) scored the bill as a net tax cut of $4.5 trillion over 10 years using traditional scoring. Under the current policy baseline the Senate used for purposes of the reconciliation rules, that cost drops to just $715 billion. The Senate scored the provisions against a baseline that assumes temporary provisions have already been extended, essentially wiping out the cost of extending the tax cuts in the Tax Cuts and Jobs Act (TCJA). 

The bill not only makes the TCJA tax cuts permanent but amends them in important ways. The legislation also offers a mix of favorable and unfavorable new provisions. Key aspects of the bill include: 

• Making 100% bonus depreciation permanent while temporarily adding production facilities;  

• Permanently restoring domestic research expensing with optional transition rules; 

• Permanently restoring amortization and depreciation to the calculation of adjusted taxable income (ATI) under Section 163(j) while shutting down interest capitalization planning; 

• Increasing the FDII effective rate while changing the deduction allocations and other rules;  

• Increasing the GILTI effective rate while changing the foreign tax credit (FTC) haircut and expense allocation rules;  

• Increasing the effective rate on BEAT; 

• Phasing out many Inflation Reduction Act energy credits early and imposing new sourcing restrictions;  

• Creating new deductions for overtime, tips, seniors, and auto loan interest; 

• Imposing a 1% excise tax on remittances;  

• Increasing filing thresholds for Forms 1099-K, 1099-NEC, and 1099-MISC; 

• Extending opportunity zones with modifications; 

• Increasing transfer tax exemption thresholds; and 

• Increasing the endowment tax to a top rate of 8%. 

Takeaway

Now that the legislation is final, taxpayers should assess its impact carefully and consider planning opportunities. Several key provisions offer different options for implementation. The effective dates will be important, and there may be time-sensitive planning considerations.  

The following offers a more detailed discussion of the provisions. For a comparison of the tax provisions to current law and the campaign platform see BDO’s table. Join BDO July 10 for a webcast discussing the bill and its impact. 

Business Provisions 

Bonus Depreciation 

The bill permanently restores 100% bonus depreciation for property acquired and placed in service after January 19, 2025.  

The legislation also creates a new elective 100% depreciation allowance under Section 168(n) for any portion of nonresidential real property that is considered “qualified production property.” The election is available if construction on the property begins after January 19, 2025, and before January 1, 2029, and the property is placed in service by the end of 2030. 

A qualified production activity includes the manufacturing of tangible personal property, agricultural production, chemical production, or refining. Qualified production property does not include any portion of building property that is used for offices, administrative services, lodging, parking, sales activities, research activities, software engineering activities, or other functions unrelated to qualified production activities.  

There is an exception from the original use requirement if acquired property was not used in a qualified production activity between January 1, 2021, and May 12, 2025. Special recapture rules apply if the property is disposed of within 10 years after it is placed in service.  

The bill also increases the Section 179 deduction to $2.5 million with a phaseout threshold of $4 million for property placed in service after 2024, with both thresholds indexed to inflation in future years. 

Takeaway 

Allowing producers, refiners, and manufacturers to fully expense buildings rather than depreciate them over 39 or 15 years offers a significant benefit. The definition of “production” will be important, and generally requires “a substantial transformation of the property comprising the product.” Taxpayers with buildings that house both qualified production activities and other administrative, office, or research functions will also likely need to perform an analysis to allocate costs between functions. 

Section 174 Research Expensing 

The bill permanently restores the expensing of domestic research costs for tax years beginning after December 31, 2024. The permanent expensing rules are created under new Section 174A, while Section 174 is retained and amended to provide for the continued 15-year amortization of foreign research costs. Software development is statutorily included in the definition of research for purposes of Section 174A. Taxpayers retain the option of electing to capitalize domestic research costs and amortize such amounts over either 10 years or the useful life of the research (with a 60-month minimum).  

The bill will generally require taxpayers to implement the new treatment with an automatic accounting method change on a cut-off basis, but it offers two alternative transition rules. Taxpayers can elect to claim any unamortized amounts incurred in calendar years 2022, 2023, and 2024 in either the first tax year beginning after 2024 or ratably over the first two tax years beginning after 2024. Separate transition rules are available for eligible small business taxpayers meeting the gross receipts test under Section 448 ($31 million in 2025) for the first tax year beginning after 2024, allowing those taxpayers to file amended returns to claim expensing for tax years before 2025. Retroactivity is not available to small business taxpayers that are tax shelters, such as pass-throughs that allocate more than 35% of their losses to limited partners or limited entrepreneurs. 

The bill also amends Section 280C to again require taxpayers to reduce their deduction for research costs under Section 174A by the amount of any research credit (or reduce their credit by an equivalent amount), effective for tax years beginning after 2024. Under changes made by the TCJA, taxpayers were generally required to reduce their Section 174 capital account only to the extent the research credit exceeded their current-year amortization deduction. For most taxpayers, that meant that the amortization deductions and research credits were both allowed in full.  

Takeaway 

The restoration of domestic research expensing is somewhat retroactive, and taxpayers will have several options for recognizing unused research amortization and for recovering future research costs. Businesses should consider modeling their options to identify beneficial strategies because the timing of deductions can affect other calculations, including those for Section 163(j), net operating losses, FDII, and GILTI. 

Section 163(j) Interest Deduction Limit  

The bill permanently restores the exclusion of amortization, depreciation, and depletion from the calculation of ATI for purposes of Section 163(j), which generally limits interest deductions to 30% of ATI. The change is effective for tax years beginning after 2024. 

The bill also makes two unfavorable changes effective for tax years beginning after 2025:  

• Excluding income from Subpart F and GILTI inclusions and excluding Section 78 gross-up from ATI; and 

• Including interest capitalized to other assets in the limit under Section 163(j), except interest capitalized to straddles under Section 263(g) or to specified production property under Section 263A(f).  

The business interest allowed as a deduction up to the Section 163(j) limit will come first from any capitalized interest. Any disallowed capitalized interest exceeding the cap will be incorporated into the Section 163(j) carryforward and will not be treated as capitalized in future years.   

Takeaway

The ability to again exclude amortization and depreciation from ATI will provide welcome relief for many taxpayers, but others will be negatively affected by the changes. The JCT score indicates that the revenue raised from shutting down capitalization planning and excluding new categories of income will save more than one-third of the $60 billion cost of reinstating the exclusion of depreciation and amortization. Taxpayers should model the impact and consider tax attribute and accounting method planning. Although the bill essentially shuts down interest capitalization planning for years beginning in 2026 or later, those strategies remain viable for the 2024 and 2025 tax years. The legislation does not claw back any interest capitalized to other assets in tax years beginning before 2026, even if the capitalized interest has not been fully recovered with the asset.  

Section 199A 

The bill makes permanent the deduction for pass-through income under Section 199A and favorably adjusts the phaseout of the deduction for taxpayers who do not meet the wage expense and capital investment requirements or who participate in a “specified trade or business.” The legislation also creates a minimum deduction of $400 for taxpayers with at least $1,000 of qualifying income.  

Opportunity Zones 

The bill makes permanent the qualified opportunity zone (QOZ) program and updates the rules for investments made after 2026. As in the current program, taxpayers can defer capital gain by investing in a qualified opportunity fund. For investments made after 2026, taxpayers will be required to recognize the deferred gain five years after the date of the investment but will get a 10% increase in basis. Taxpayers can still receive a full basis step up to fair market value (FMV) for property held 10 years, but the bill adds a rule freezing the basis step up at the FMV 30 years after the date of the investment.  

Current QOZ designations will expire early at the end of 2026. New zones will be designated in rolling 10-year designation periods under new criteria that are expected to shrink the number of qualifying zones. A new category of rural opportunity zones is created. The 10% basis increase is tripled to 30% for investments in rural opportunity zones and the threshold for establishing the substantial improvement of qualifying property would be lowered to 50%. 

Both qualified opportunity funds (QOFs) and qualified opportunity zone businesses (QOZBs) will be required to comply with substantial new reporting requirements. 

Takeaway

The bill does not extend the mandatory recognition date of December 31, 2026, for investment made before 2027, as many taxpayers had hoped. But the program’s extension preserves one of the most powerful tax incentives ever offered by lawmakers. The timing of capital gains transactions may be particularly important. Delaying a capital gain transaction could allow taxpayers to make a deferral election in 2027 and defer recognizing the gain until well after the current 2026 recognition date. On the other hand, QOZ designations are likely to change in 2027. Taxpayers planning investments in geographic areas that are unlikely to be redesignated may need to make the investments before the end of 2026. Existing QOFs and QOZBs should consider their long-term capital needs because it is not clear whether any “grandfathering” relief will allow additional qualified investments into funds operating in QOZs that are not redesignated. The new reporting rules will apply to both new and existing QOZs and QOZBs for tax years beginning after the date of enactment, and those entities will need to collect and report substantial new information that has never before been required. 

Qualified Small Business Stock 

The bill enhances the exclusion of gain for qualified small business (QSB) stock under Section 1202 issued after the date of enactment in the following ways: 

• In addition to the existing 100% exclusion for qualified stock held for five years, taxpayers can qualify for a 50% exclusion after three years and a 75% exclusion after four years;  

• The current limit on the exclusion (the greater of $10 million or 10 times basis) is increased to $15 million, indexed to inflation beginning in 2027; and 

• The limit on gross assets at the time stock is issued is increased from $50 million to $75 million, indexed to inflation beginning in 2027. 

Takeaway

QSB stock is a powerful tax planning tool that can essentially erase gain of up to 10 times the initial basis. The changes make the structure more accessible and increase the size of potential investments. The bill does not change the expansive qualification requirements under Section 1202, and taxpayers should understand the rules clearly and document compliance throughout the holding period. 

Section 162(m) 

The bill amends the aggregation rules for applying the $1 million limit on deducting the compensation of a public company’s covered employees under Section 162(m). The current rules identify covered employees separately for each public entity but calculate compensation subject to the limitation on a controlled group basis. The number of covered employees is set to expand by five for tax years beginning in 2027 or later, and there has been some question whether such employees can come from the entire controlled group or only the public entity. 

The bill creates a new aggregation rule for tax years beginning after 2025 for identifying who is a covered employee and the amount of compensation subject to the limit. The aggregation rules are based on a controlled group as defined under the qualified plan rules in Section 414. The proposal also provides rules for allocating the $1 million deduction among members of a controlled group.   

Takeaway

The provision will have unfavorable consequences for many companies, including requiring the full amount of compensation from a related partnership in the calculation (rather than a pro-rata amount based on ownership percentage). It is estimated to raise almost $16 billion.  

Form 1099 Reporting 

The bill amends Section 6050W to reinstate the 200 transaction and $20,000 threshold for reporting third-party payment network transactions on Form 1099-K. The American Rescue Plan Act of 2021 repealed that threshold and required reporting when aggregate payments exceeded $600, regardless of the number of transactions. The IRS offered transition relief delaying the implementation of the change for two years and then provided a $5,000 threshold for payments made in 2024 and a $2,500 threshold for payments made in 2025. The bill restores the old threshold retroactively so that reporting is required only if aggregate transactions exceeded 200 and aggregate payments exceeded $20,000.  

The bill also increases the threshold for reporting payments under Sections 6041 and 6041A on the respective Forms 1099-MISC and 1099-NEC from $600 to $2,000 in 2026, indexing that figure to inflation in future years. 

Remittance Tax 

The bill imposes a new 1% excise tax on remittances of cash, money orders, cashier’s checks, or other similar physical instruments, with an exception for transfers from most financial institution accounts or debit cards. 

Takeaway

The tax in the final version affects a much narrower set of payments than the original 5% tax proposed in the House and the 3.5% tax in earlier House and Senate drafts.  

Exception for Percentage of Completion Method 

The bill expands exceptions to the percentage of completion method under the long-term contract rules under Section 460. The exception for home builders is expanded to include all residential construction. Further, the exception from the uniform capitalization rules for home builders meeting the gross receipts threshold under Section 448(c) ($31 million in 2025) is expanded to include all residential construction, and the allowable construction period is extended from two years to three. 

Employee Retention Credit 

The legislation makes several changes to the employee retention credit (ERC), including: 

• Barring ERC refunds after the date of enactment for claims filed after January 31, 2024; 

• Extending the statute of limitations on ERC claims to six years; and 

• Increasing preparer and promoter penalties on ERC claims.  

Takeaway

The provision presumably will affect only refund claims that have not been paid by the IRS. The legislative language provides that no credit or refund “shall be allowed or made after the date of enactment” unless the claim was filed on or before January 31, 2024. The IRS had been slow to process claims – potentially in anticipation of this provision, which had been included in a failed 2024 tax extenders bill. The provision is now estimated to raise only $1.6 billion, much less than the $77 billion estimated under the 2024 version. The difference may be the result of refunds that have already been paid, although it remains unclear how fast the IRS is processing claims filed after January 31, 2024. 

International Provisions 

Foreign-Derived Intangible Income 

The bill makes significant reforms to FDII, including raising the effective rate while making the calculation of income more generous. 

The bill permanently lowers the Section 250 deduction from 37.5% to 33.34%, still well above the 21.875% deduction rate that would take effect without legislation. The change will increase the FDII effective rate from 13.125% to 14% (compared to 16.4% absent legislation).  

The bill also repeals the reduction in FDII for the deemed return on qualified business asset investment (QBAI) and provides that interest and research and experimental (R&E) costs are not allocated eligible income. The final version modifies a change from an earlier draft that would have narrowed the allocation of deductions only to those “directly related” to such income. The final bill provides that the calculation includes “properly allocable” deductions. 

The changes are effective for tax years beginning after 2025, aside from a new exclusion from FDII-eligible income that would take effect after June 16, 2025. The bill would exclude income or gain from the Section 367(d) disposition of intangible property or property subject to depreciation, amortization, or depletion. The final bill omits a provision from an earlier draft that would have also excluded specified passive income subject to the high-tax kickout. 

Takeaway

The changes could expand the value of the deduction for many taxpayers despite the effective rate increase, particularly for industries with significant fixed assets and R&E costs. Taxpayers should assess the changes for potential planning and arbitrage opportunities, given the change in rates and rules. There may be accounting methods opportunities that could increase the benefit in current and future years. 

Global Intangible Low-Taxed Income 

The bill increases the GILTI effective rate while making both favorable and unfavorable changes to the underlying calculation effective for tax years beginning after 2025.   

The Section 250 deduction for GILTI decreases from 50% to 40%, still higher than the 37.5% deduction rate that would take effect without legislation. The effective rate before the FTC haircut will increase from 10.5% to 12.6% (compared to 13.125% absent legislation). The bill will also reduce the FTC haircut under GILTI from 20% to 10%, resulting in an equivalent top effective rate of 14% (up from the current 13.125% rate and the 16.4% rate that would take effect without legislation). It also provides that 10% of taxes (compared to 20% absent legislation) previously associated with Section 951A taxed earning and profits are not treated as deemed paid for purposes of Section 78. 

The deemed return for QBAI is repealed, increasing the amount of income subject to the tax. The provision also changes the allocation of expenses to GILTI for FTC purposes so that it includes only the Section 250 deduction, taxes, and deductions “directly allocable” to tested income. It also specifically excludes interest and R&E costs.  

Takeaway

The changes are significant and could affect GILTI calculations in both favorable and unfavorable ways. The legislation does not provide a definition of “directly allocable,” and guidance may be important in this area. Taxpayers should assess the impact and consider FTC and other planning strategies.  

Base Erosion and Anti-Abuse Tax 

The bill increases the BEAT rate from 10% to 10.5% for tax years beginning after 2025, lower than both the 14% rate in the previous Senate draft and the 12.5% rate that would take effect without legislation. The legislation also repeals an unfavorable change to the BEAT scheduled to take effect in 2026 that would effectively require taxpayers to increase their liability by the sum of all income tax credits. The final bill omits several provisions from an earlier draft that would have changed the base erosion percentage, created a high-tax exclusion, and shut down interest capitalization planning.  

Takeaway 

The final version removed several favorable changes from an earlier draft but potentially still allows for planning that capitalizes interest to other assets. 

Reciprocal Tax for ‘Unfair Foreign Taxes’ 

The final bill omits proposed Section 899, which would have imposed retaliatory taxes on residents of that impose “unfair foreign taxes.” The provision was removed from the legislation after the Trump administration announced an agreement with the G-7 countries to “exempt” the U.S. from Pillar Two taxes. The G-7 released a statement saying that the countries are committed to working toward an agreement that would create a side-by-side system to fully exclude U.S.-parented groups from the undertaxed profits rule and income inclusion rule while ensuring that risks related to base erosion and a level playing field are addressed. The group also agreed to work toward compliance simplification and consider treating nonrefundable tax credits similarly to refundable tax credits. 

Takeaway

The ability of G-7 countries to drive broader agreements — and the details emerging from any such agreements — will be critical for U.S. multinationals. The current announcements are largely just statements of intent on a common goal. No countries outside the G-7 were party to the commitments, and there may be resistance from some OECD and EU countries.  

Other International Provisions 

The bill includes several other international provisions effective for tax years beginning after December 31, 2025, including: 

• Making permanent the controlled foreign corporation (CFC) look-through under Section 954(c)(6); 

• Restoring the exception from downward attribution rules under Section 958(b)(4) that was repealed under the TCJA while adding a narrower rule under Section 951B that is more closely aligned with the TCJA’s intent; 

• Amending the FTC rules to treat inventory produced in the U.S. and sold through foreign branches as foreign-source income, capped at 50%, likely only for branch category purposes; and 

• Amending the pro-rata rules under GILTI and Subpart F. 

Takeaway

The changes are generally favorable. The permanent extension of the CFC look-through rule under Section 954(c)(6) preserves an important exception for Subpart F income that is scheduled to sunset at the end of 2025. The restoration of Section 958(b)(4) could simplify reporting obligations for some taxpayers. However, Section 951B gives Treasury the authority to provide guidance on reporting for foreign-controlled U.S. shareholders. The inventory sourcing rule could result in additional foreign-source income for FTC purposes when compared to the current rule, which sources based on production activities. Finally, the pro-rata share rules will require a U.S. shareholder of a CFC to include its pro-rata share of Subpart F or GILTI income if it owned stock in the CFC at any time during the foreign corporation’s tax year in which it was a CFC. That provision removes the requirement that the U.S. shareholder own the CFC’s stock on the last day the foreign corporation was a CFC. The proposal provides Treasury with the authority to issue regulations allowing taxpayers to make a closing of the tax year election if there is a disposition of a CFC.  

Energy Provisions 

Consumer and Vehicle Credits 

The bill repeals the following credits with varying effective dates: 

• Previously owned clean vehicle credit under Section 25E repealed for vehicles acquired after September 30, 2025; 

• Clean vehicle credit under Section 30D repealed for vehicles acquired after September 30, 2025; 

• Commercial clean vehicle credit under Section 45W repealed for vehicles acquired after September 30, 2025; 

• Alternative fuel refueling property credit under Section 30C repealed for property placed in service after June 30, 2026; 

• Energy-efficient home improvement credit under Section 25C repealed for property placed in service after December 31, 2025; 

• Residential clean energy credit under Section 25D repealed for expenditures made after December 31, 2025; and 

• New energy-efficient home credit under Section 45L repealed for property acquired after June 30, 2026. 

Depreciation 

The bill repeals the five-year depreciable life of qualified energy property. The Section 179D deduction is repealed for construction beginning after June 30, 2026.  

Sections 48E and 45Y 

The bill will generally begin to phase out the production tax credit under Section 45Y and the investment tax credit under Section 48E for projects beginning construction after 2033 except for solar and wind projects. Wind and solar projects beginning more than 12 months after the date of enactment must be placed in service by the end of 2027. 

The bill also creates restrictions related to prohibited foreign entities, most significantly adding limits on receiving material assistance from a prohibited entity for facilities that begin construction after December 31, 2025. Material assistance is based on a cost ratio for sourcing eligible components. The bill also tightens domestic sourcing requirements under Section 48E.   

Takeaway 

The final language was softened with a last-minute amendment that allows some continued runway for wind and solar projects. The change angered some House conservatives, who blocked a final vote in the House for hours before reportedly extracting a promise from the administration that it would vigorously enforce the beginning of construction rules. Treasury may have limited ability to change the guidance in this area because the statute itself provides that the beginning of construction for some credit purposes shall be determined under rules similar to existing IRS notices. 

Section 45X 

The advanced manufacturing credit under Section 45X is repealed for wind energy components sold after 2027 but will otherwise be extended to allow a 75% credit for components sold in 2031, 50% for 2032, 25% for 2033, and fully repealed for 2034 or later. The credit is expanded to cover metallurgical coal. Material assistance rules for prohibited foreign entities apply. 

Section 45Z 

The bill extends the Section 45Z clean fuel production credit through 2031 while reinstating a stackable small agri-biodiesel credit under Section 40A. A new restriction under Section 45Z disallows a credit unless the feedstock is produced or grown in the U.S., Mexico, or Canada. The calculation of greenhouse gas emissions is amended to exclude indirect land use changes and new prohibited foreign entity rules are imposed. 

Other Energy Provisions  

The bill makes several other changes, including: 

• Repealing the clean hydrogen production credit under Section 45V for construction beginning after 2027, two years later than earlier versions of the bill would have provided; 

• Increasing the rates for carbon capture under Section 45Q for carbon sequestered as a tertiary injectant or for productive use to provide parity with the rates for permanent geologic storage (also adding foreign entity of concern restrictions); 

• Expanding the publicly traded partnership rules to allow income from carbon capture facilities nuclear energy, hydropower, geothermal energy, and the transportation or storage of sustainable aviation fuel or hydrogen; and 

• Adding new restrictions for foreign entities of concern for the nuclear production credit under Section 45U. 

Tax-Exempt Entities 

The bill replaces the 1.4% endowment tax rate with graduated brackets based on the size of the endowment per student up to a top rate of 8%. The tax applies only to universities with at least 3,000 students, up from 500.   

The bill also expands the excise tax on executive compensation exceeding $1 million to include all current employees, as well as former employees employed in tax years beginning after 2016. 

Takeaway 

The final version of the bill removed provisions that would have increased the excise tax on private foundations and resurrected the “parking tax,” which included the value of transportation in fringe benefits in unrelated business taxable income.  

Individual Provisions 

Deduction for Tip Income 

The bill creates an annual deduction of up to $25,000 for qualified tips reported on Forms W-2, 1099-K, 1099-NEC, or 4317 for tax years 2025 through 2028. The deduction is available without regard to whether a taxpayer itemized deductions but begins to phase out once modified adjusted gross income exceeds $150,000 for single filers and $300,000 for joint filers. 

For tips to be deductible, they must be paid voluntarily in an occupation that “traditionally and customarily” received tips before 2025, as provided by the Secretary. The business in which the tips are earned cannot be a specified trade or business under Section 199A, and self-employed taxpayers, independent contractors, and business owners face additional limitations.  

Employers will be required to report qualifying tips to employees on Form W-2. The provision applies only to income taxes and generally does not affect the employer’s FICA tip credit except to extend it to specified beauty services businesses.   

The bill gives Treasury several explicit grants of authority to provide regulations on specific issues. The IRS is required to adjust withholding tables and provide guidance within 90 days to define which occupations “traditionally and customarily” received tips in the past. The IRS will also need to provide rules for determining when a tip is voluntary.   

Takeaway 

The provision will affect employers in important ways. Hospitality companies will face new reporting requirements that depend on how the business and worker occupations are characterized. Further, an employee’s ability to deduct tips could also depend on employer policies, such as mandatory tips, service charges, or other amounts that are not determined solely by customers.  

Deduction for Overtime Pay 

The bill creates a permanent deduction of up to $12,500 (single) and $25,000 (joint) of qualified overtime compensation for tax years 2025 through 2028. The deduction is available without regard to whether a taxpayer itemized deductions but begins to phase out once modified adjusted gross income exceeds $150,000 for single filers and $300,000 for joint filers. 

Qualified overtime compensation is defined as compensation paid to an individual required under Section 7 of the Fair Labor Standards Act (FLSA). Employers must perform new information reporting to separately report overtime pay. 

Takeaway 

Determining whether compensation is qualified overtime pay will not be made using tax rules but will instead depend on the employer’s characterization of the pay under the FLSA. 

Auto Loan Interest Deduction 

The bill will create a permanent deduction of up to $10,000 of interest on a qualified passenger vehicle loan for tax years 2025 through 2028. The deduction begins to phase out once modified adjusted gross income exceeds $100,000 for single filers and $200,000 for joint filers.  

The vehicle must be manufactured primarily for use on public streets, roads, and highways, and its final assembly must occur in the U.S. The deduction does not apply to lease financing and the loan cannot be to finance fleet sales, purchase a commercial vehicle, purchase a salvage title, purchase a vehicle for scrap or parts, or be a personal cash loan secured by a vehicle previously purchased by the taxpayer. 

Takeaway

Auto loan financing companies will face additional reporting requirements and be required to furnish a return with specific information on loans. 

Personal Exemption for Seniors 

The bill provides a new $6,000 personal exemption for individuals aged 65 and above for tax years 2025 through 2028. The deduction phases out for taxpayers with modified adjusted gross income exceeding $150,000 for joint filers and $75,000 for all other taxpayers.  

Takeaway

The personal exemption is meant to fulfill Trump’s pledge to remove tax on Social Security payments, which is not allowable under reconciliation rules. The legislation does not affect payroll taxes on Social Security payments. 

Individual TCJA Extensions 

The bill largely makes the individual TCJA provisions permanent, although with some important modifications. The individual rate cuts and bracket adjustments are made permanent while providing an extra year of inflation adjustment for the lower brackets. The bill also makes permanent: 

• The repeal of general personal exemptions;  

• The limits on the deductions for mortgage interest (while adding mortgage insurance premiums as qualified interest), personal casualty losses, and moving expenses; 

• The repeal of miscellaneous itemized deduction (with an exception for some educator expenses); and 

• The exclusion for bicycle commuting reimbursements. 

The bill restores an itemized deduction for up to 90% wagering losses, capped at the amount of wagering income.  

The bill makes permanent the increased alternative minimum tax exemption and phaseout thresholds but would claw back inflation adjustments to the phaseout thresholds by resetting them to 2018 levels. The actual phaseout of the exemptions based on the amount of income exceeding the thresholds is slowed by half.  

The bill permanently repeals the Pease limitation on itemized deductions that the TCJA suspended through 2025, but it would create a new limit. The new provision would essentially cap the value of itemized deductions so that the maximum benefit achievable for the deductions is equivalent to offsetting income taxed at a top rate of 35% rather than offsetting income taxed at the higher individual marginal rate of 37%.  

The bill creates a 0.5% haircut on individual itemized charitable deductions but also adds a permanent charitable deduction for non-itemizers of up to $2,000 for joint filers and $1,000 for other taxpayers. 

SALT Cap 

The bill makes the SALT cap permanent while raising the threshold for five years and then reverting it to $10,000 in 2030. The cap is set at $40,000 for 2025 but phases down to $10,000 once income exceeds $500,000. Both thresholds will increase by 1% for each year through 2029.  

Takeaway

Earlier drafts of the bill would have shut down taxpayers’ ability to use pass-through entity tax regimes to circumvent the SALT cap; the final version eliminated those provisions.  

Transfer Taxes 

The bill permanently sets the lifetime exemptions for the gift, estate, and generation-skipping transfer taxes at $15 million for 2026 and indexes them for inflation thereafter. The change represents a modest increase from the exemptions under the TCJA, which were initially set at $10 million but reached $13.99 million in 2025 with inflation adjustments. 

Active Business Losses 

The legislation makes the active loss limit under Section 461(l) permanent but reverses recent inflation adjustments in the $250,000 threshold.  

Takeaway

The final bill struck an unfavorable provision in earlier drafts that would have required disallowed losses to remain in the Section 461(l) calculation in future years. Under the final bill, disallowed losses still become net operating losses in subsequent years and can offset other source of income.  

Other Provisions 

The bill contains a number of other meaningful tax changes, including: 

• Creating a 1% floor for charitable deductions for corporations by providing that a deduction is allowed only to the extent it exceeds 1% of taxable income (up to the current 10% cap) for tax years beginning after 2025; 

• Changing the explicit regulatory mandate for disguised sale rules under Section 707(a)(2) to clarify that the rules are self-executing without regulations, effective after the date of enactment; 

• Raising the percentage of allowable assets a real estate investment trust (REIT) may have in a qualified REIT subsidiary from 20% to 25% effective for tax years beginning after 2025; 

• Making permanent the increases to the low-income housing tax credit;  

• Increasing the Section 48D credit for semiconductor manufacturing facilities from 25% to 35% for property placed in service after 2025; 

• Making permanent the new markets tax credit; 

• Treating spaceports like airports for the private activity bond rules, effective for obligations issued after the date of enactment; 

• Increasing the limit on the “cover over” to Puerto Rico and the U.S. Virgin Islands for excise taxes on distilled spirits effective for imports after 2025; 

• Allowing the liability from gain on the sale of qualified farmland property to be paid in 10-year installments for sales after the date of enactment; and 

• Creating tax-preferred accounts for children, with a pilot program offering a $1,000 contributory credit for qualifying children for tax years beginning after 2025. 

Takeaway

The inclusion of the new markets tax credit and the CFC look-through rule, which are both scheduled to expire at the end of 2025, indicates that Republicans do not have much hope for another tax bill this year. House Ways and Means Committee Chair Jason Smith, R-Mo., originally left those provisions off the House bill, saying he hoped to address them in a bipartisan extenders bill. Republicans have also discussed moving a second reconciliation bill, although that may have been a negotiating ploy to appease members whose priorities are not addressed in this bill. 

Next Steps 

Taxpayers should assess the potential impact of major provisions when considering the tax efficiency of transactions and investments. There may be planning opportunities that should be considered now, such as accelerating or abandoning energy credit projects or investments and modeling the impact of changes to the limit on the interest deduction under Section 163(j), bonus depreciation, and research expensing under Section 174. Changes to opportunity zone rules could affect the timing for triggering capital gains and making investments. International changes may present arbitrage opportunities to capitalize on favorable changes or mitigate the impact of unfavorable changes. 

Written by Dustin Stamper. Copyright © 2025 BDO USA, P.C. All rights reserved. www.bdo.com 

Navigating What’s Next: Industry-Specific Tax Strategies 

This reconciliation bill marks one of the most consequential shifts in tax policy in recent years —impacting businesses across nearly every sector. At MGO, we’re helping clients in manufacturing, real estate, financial services, energy, and emerging technology interpret the changes and respond with purpose.

From bonus depreciation and research expensing under Section 174 to the evolving rules around Section 163(j), Opportunity Zones, and global tax alignment, our professionals bring deep technical insight and practical industry knowledge to every engagement. Whether you’re modeling tax scenarios, rethinking compliance, or reevaluating deal timing, MGO’s team is ready to help. Contact us to learn more.  

The post Republicans Complete Sweeping Reconciliation Bill  appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• A slower SEC rulemaking process may reduce regulatory pressure, giving asset managers more time to adapt compliance strategies and implement reforms. 

• Shifting SEC priorities could lead to revised or withdrawn regulations, offering asset managers a chance to reassess risk and reallocate compliance resources. 

• A more supportive stance on digital assets may open the door for investment firms to expand offerings and attract clients exploring cryptocurrency exposure. 

—

A Regulatory Reset in Progress 

With a new SEC chairman at the helm, your investment firm may soon feel the impact of a more measured and business-friendly regulatory approach. Paul Atkins’ confirmation signals a likely shift away from rapid-fire rulemaking and toward methodical, consultative oversight — a welcome reprieve for asset managers overwhelmed by previous years’ aggressive timelines and expanding mandates. 

While there’s still uncertainty about how far these changes will go, your firm can prepare to capitalize on a potentially reduced compliance burden, extended implementation windows, and emerging opportunities in areas like digital assets. 

What’s Changing at the SEC? 

The appointment of Chairman Atkins follows former Acting Chair Mark Uyeda’s philosophy: “Slow is smooth and smooth is fast.” This shift in mindset means your organization may benefit from longer regulatory timelines, fewer surprises, and increased opportunities to provide input before new rules are finalized. 

Key Implications: 

• Deliberate Rulemaking: Asset managers may no longer need to scramble to meet short compliance deadlines. The SEC appears poised to review and potentially withdraw or revise several proposed rules, including those on ESG disclosures, outsourcing, and custody of client assets. 

• Extended Timelines for Final Rules: Rules adopted but not yet in effect — such as the updated Form N-PORT — could see delayed implementation. This gives your firm more time to develop thoughtful compliance strategies and engage in dialogue with regulators. 

• Regulatory Clean-Up: An executive order mandates the SEC to eliminate “anti-competitive” regulations. This could simplify your compliance burden, reduce red tape, and make way for innovation — especially for firms looking to explore emerging sectors. 

Digital Assets: A Strategic Advantage 

Chairman Atkins is also signaling a more favorable stance on digital assets. If your firm has been hesitant to move into cryptocurrency and blockchain investments, now may be the time to re-evaluate. 

Under the prior administration, SEC enforcement actions created a chilling effect on digital innovation. In contrast, Atkins — with advisory experience in crypto — is expected to introduce clearer, more constructive frameworks. His focus on “rational and principled” regulation could position digital assets as a viable component of your offerings, giving early movers a strategic edge. 

Don’t Scale Back Just Yet 

Despite this seemingly softer tone, your compliance strategy shouldn’t be scaled down prematurely. Regulatory priorities are still evolving, and the risks of misjudging the new agenda remain high. 

Stay informed and keep your compliance systems strong while observing how the SEC’s actions unfold. By maintaining readiness and flexibility, your organization can adapt strategically and avoid costly missteps. 

Your Best Practices for Navigating Regulatory Shifts 

• Monitor SEC statements and actions closely to stay ahead of regulatory pivots. 

• Use extended comment periods to advocate for reasonable, industry-informed rulemaking. 

• Evaluate potential investments in compliance technology or digital assets with regulatory trends in mind. 

• Avoid reducing compliance resources until changes are formally adopted and clarified. 

How MGO Can Help 

Navigating regulatory uncertainty requires both agility and insight, and that’s where MGO comes in. Our team stays on top of every SEC development, helping investment firms interpret shifts in policy, plan for evolving compliance demands, and seize emerging opportunities, from ESG to digital assets. Whether you need support rethinking your compliance strategy, evaluating new technologies, or engaging regulators during comment periods, MGO can give you the clarity and experience you need to stay ahead, regardless of the headlines.   

The post How a Softer SEC Could Benefit Your Investment Firm  appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• As a board director, you should align your internal audit with board goals by clarifying purpose, mandate, and adherence to IIA Global Standards for stronger governance and oversight. 

• Risk-based internal audit planning is key to helping boards address strategy, emerging threats, and resource gaps in a dynamic business environment. 

• Strong board oversight improves internal audit performance, enhances resource readiness, and supports the use of AI and data analytics. 

—

In today’s rapidly evolving business landscape, the internal audit (IA) function’s role has become more valuable in helping organizations create and sustain long-term shareholder value. IA provides objective assurance, advice, insight, and foresight leveraging a risk-based approach. Board oversight and support of the internal audit function is essential to its effectiveness. Listing standards and more recently, the update Global Internal Audit Standards™ issued by The Institute of Internal Auditors (IIA) provide a principles-based framework for the board to oversee the IA function and its performance.   

Below are some essential questions that boards of directors should consider in their oversight of the IA function: 

Are the board and internal audit aligned on purpose, mandate, expectations, roles, and responsibilities?  

• Has the IA charter been authorized by the board, and is it aligned with the new global standards?  

• What is the IA mandate, and was it created, updated, and authorized in collaboration with stakeholders such as external auditors, management, and the board? 

• Are roles, responsibilities, and expectations for IA, board, and management clearly defined in a charter including the scope and types of IA services to be provided? 

• What is the process and frequency of updating the IA charter and/or mandate due to circumstances such as organizational changes, new laws and regulations, acquisitions, significant changes to strategy or risk profile, etc.?  

• Is IA organizationally independent and free from management influence (e.g., reporting directly to the board, positioned at an appropriate level of the organization, etc.)? 

Are the board, internal audit, and management aligned on strategy and risk priorities? 

• How does the IA function determine that its annual plan and performance objectives align with the overall strategy, risks, and objectives of the organization? Were efforts made to collaborate with the board, management, external auditors, and others, as appropriate? 

• Does the CAE demonstrate a clear understanding and maturity of the organization’s governance, risk management, and control processes?  

• Has IA’s risk assessment process identified and assessed both the likelihood and potential impact of various risks to the organization? 

• How does the IA function identify and evaluate internal controls for adequacy in reducing risk?  

• How do the CAE and IA function consider risks of fraud in its risk assessment and audit plan? 

• What risks are not included in the IA plan and why?  

• What risk areas would be added to the plan if additional resources were available? 

• What is the process and cadence for updating the internal audit plan for newly identified areas of risk?  

• Does IA communicate timely with both management and the board about noted governance, risk, control, and/or compliance deficiencies resulting from its testing of processes, procedures, and controls? What is management’s remediation plan to address deficiencies and improvement opportunities identified by IA? Who is included in remediation efforts and how are their efforts monitored to resolve findings promptly? 

How is quality assurance and performance being monitored and evaluated? 

• What monitoring and evaluation techniques are being used by the board to help ensure  IA is fulfilling its mandate and performance objectives including conforming to standards, laws, and regulations? 

• Does IA conduct annual assessments of its own quality and effectiveness through both ongoing internal monitoring and periodic self-assessments? 

• Has the CAE established a Quality Assurance and Improvement Program (QAIP) to evaluate and work to ensure   IA conforms to the IIA Global Internal Audit Standards™, meets performance goals, and strives for continuous improvement? What are the results of the most recent internal quality assessment? Who performed the assessment? How is the board overseeing an action plan to address instances of nonconformance with standards or opportunities for improvement? 

• When was the last external quality assessment performed? Was it performed by a qualified independent assessor or team? 

• What is IA’s remediation plan to address identified deficiencies and opportunities for improvement, and how is the board tracking progress against that plan? 

Does the IA team have the necessary resources and expertise to fulfill its current responsibilities and evolving needs? 

• Has the board approved the CAE’s roles and responsibilities and identified necessary qualifications, experience, and competencies to conduct the identified roles and responsibilities in alignment with the requirements included in the IIA Global Internal Audit Standards™?  

• Has the board evaluated the CAE’s performance and approved the CAE’s compensation? 

• When were IA job descriptions last reviewed, and do they align with the evolving team’s expectations in terms of responsibilities, requirements, skills, and experiences? 

• What additional professionals, skills, experiences, and capabilities does the CAE need to fulfill the IA mandate and plan? Does IA have the ability to attract and retain qualified professionals? 

• Does IA have the necessary technology and technical skillsets to keep up with the rapid changes in the business and industry? 

• How does IA utilize advanced tools and technologies (e.g., automation, data analytics, AI) to enhance its efficiency and effectiveness while mitigating risks associated with adoption of new technologies? 

• What continuing education, training, and upskilling opportunities are being provided to the IA staff? 

• Does the CAE and IA staff reference the International Professional Practices Framework (IPPF) in conducting their audit work?  

• How does the CAE oversee and evaluate IA staff to determine adherence to the IIA’s Global Internal Audit Standards™ and Code of Ethics and alignment with IA plan and mandate? 

• Does the board support adequate funding of the IA function for the successful implementation of the audit strategy and achievement of audit plan objectives? 

• Does the board support IA’s adoption and use of technology to enhance efficiency and effectiveness of processes and procedures (e.g., tools for automation, data analytics, and use of AI, etc.)? Does the board, management and IA understand the risks of utilizing these tools and have safeguards in place to mitigate these risks? 

• Does IA have the necessary technology and technical skillsets to keep up with the rapid changes in the business and industry? 

• How does IA utilize advanced tools and technologies (e.g., automation, data analytics, AI) to enhance its efficiency and effectiveness while mitigating risks associated with adoption of new technologies? 

What is being done to ensure the board and senior management support and collaborate with IA? 

• What is being done to cultivate an inclusive and supportive culture within the IA team, and in interactions with the board and management? 

• What actions has the board taken to champion the IA function and its value? 

• What are the criteria and processes for determining which issues should be escalated to the board for discussion? 

• Does the board have a regular cadence of meetings with the CAE and/or IA, and on occasion are these meetings without management present? 

• Were there any disagreements with management or instances where IA access to information was restricted?   

Board oversight of the internal audit quality structure and function helps protect the integrity of operations and related financial reporting.  

Written by Amy Rojik, Rachel Moran and Lee Sentnor. Copyright © 2025 BDO USA, P.C. All rights reserved. www.bdo.com 

Modern Governance Requires Modern Internal Audit Support, and MGO Can Help  

At MGO, we help middle-market organizations and their boards embrace proactive oversight through robust internal audit programs. Our professionals bring deep experience across regulated industries — like healthcare, life sciences, technology, and entertainment — to make sure your internal audit function is not only compliant but strategic. From outsourced and co-sourced internal audit services to audit readiness, risk advisory, and performance enhancement, we empower boards and executives to confidently navigate risk, optimize governance, and drive long-term value. Contact us to learn more.  

The post Internal Audit: Essential Questions for Board Directors in their Oversight Role  appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• IRS Form 7217 introduces new tax reporting requirements for investors in private equity, hedge funds, investment partnerships, or any other partnership.  

• Partners receiving in-kind distributions must file Form7217 for each distribution and report basis of the distributed property, including any basis adjustments to such property.  

• Fund managers should prepare for investor questions and compliance impacts as the IRS increases scrutiny of partnership transactions and basis shifting.  

—

New Filing Obligations for In-Kind Distributions 

Beginning with tax years starting in 2024, the IRS now requires partners in partnerships to report in-kind distributions of property using a newly released form — Form 7217: Partner’s Report of Property Distributed by a Partnership. This rule applies broadly across the investment fund landscape, including private equity, venture capital, hedge funds, and fund-of-funds that receive securities or other property distributions not classified as cash. 

If your fund structure allows for non-cash distributions — especially in restructuring scenarios or when forming continuation funds — your investors may now be required to attach Form 7217 to their tax returns for each distribution event. Making sure you’re compliant and clearly communicative with your investors will be critical.  

When Does Form 7217 Apply? 

Form 7217 applies when a partner receives a distribution of property other than cash or marketable securities treated as cash. Investment partnerships meeting certain criteria can distribute marketable securities tax-free, allowing partners to defer income recognition until those securities are sold. But this deferral still comes with added compliance: every qualifying distribution event now requires its own Form 7217. 

Reporting includes: 

• Date of each distribution 

• Basis of distributed property 

• Any basis adjustments related to the transaction 

Importantly, a separate form is required for each distribution date. That means multiple distributions throughout the year will result in multiple Form 7217 attachments— raising complexity and potential audit exposure for recipients. 

Why This Matters: IRS Focus on Partnership Scrutiny 

This change is part of a larger trend: increased IRS scrutiny of basis-shifting and partnership transactions. Form 7217 represents another step in the agency’s efforts to monitor and track partnership activity more closely, especially in areas involving deferred tax treatment and in-kind distributions. 

Fund managers should anticipate an uptick in questions and document requests from LPs and investor tax advisors as we quickly approach the 2024 tax season extended deadline. Being proactive now can reduce filing risk and streamline communication. 

How Fund Managers Can Prepare 

To help investors meet their compliance obligations and avoid downstream tax issues, your firm should consider the following steps: 

1. Update Tax Reporting Workflows 

Integrate Form 7217 requirements into your fund’s year-end tax packages and document handoffs. 

2. Communicate Early with Investors 

Inform LPs of their obligations under the new rules, especially if your fund strategy involves in-kind distributions. 

3. Consult with Tax Advisors 

Work with partnership tax professionals to ensure accurate tracking and address any gray areas involving property classification. 

The post What Fund Managers Need to Know About New IRS Reporting Rules  appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• Fidelity bonds are not interchangeable with fiduciary or D&O insurance. Each policy type serves a distinct risk category and compliance role. 

• Coverage is required regardless of plan size or audit exemption. Even small plans or those not subject to audit may be noncompliant without proper bonding. 

• Cybersecurity coverage is not automatically included. ERISA bonds must be reviewed to confirm whether cyber-related risks are addressed. 

—

Fidelity bonds are known as the fundamental component of safeguarding your employee retirement plans. Required by the Employee Retirement Income Security Act (ERISA), these bonds protect plan assets from any losses due to misappropriation or misuse by the individuals who handle plan funds. Yet, despite the importance of this safeguard, there still exists widespread confusion among plan sponsors and their administrators.  

Read on for further clarification on the key compliance requirements — by correcting five frequently encountered myths about these ERISA fidelity bonds, you can better align with the regulatory expectations and reinforce internal controls.  

Understanding ERISA Fidelity Bond Requirements 

Mandatory Coverage 
ERISA generally mandates that most retirement plans maintain fidelity bond coverage equal to at least 10% of plan assets, with minimum and maximum thresholds. Exceptions apply to certain unfunded, governmental, or church plans. Form 5500, filed annually under penalty of perjury, asks directly about this coverage — so accurate compliance is essential. 

Bond Sourcing and Structure 
The bond must be obtained from an insurer listed on the Department of the Treasury’s approved surety list. It can be issued as a standalone bond or included within a broader insurance policy, but it has to meet ERISA’s first-dollar coverage rule, which prohibits deductibles. 

Covered Individuals 
Anyone with access to plan funds — including fiduciaries and relevant third-party administrators — must be included in the bond’s scope. The coverage has to apply to all plan assets, regardless of asset type or custody arrangements. 

Five Myths That Can Risk Your Compliance 

1. “Our fiduciary insurance covers the ERISA bond requirement.” 
You’ve probably heard this common misunderstanding. That’s because fiduciary liability insurance covers breaches of fiduciary duty, while fidelity bonds cover acts such as theft or embezzlement by those handling funds. Both are important, but not interchangeable. 

2. “Retroactive fidelity bond coverage can fix past gaps.” 
Insurers generally can’t issue retroactive bonds due to legal constraints. Sponsors discovered without coverage during a plan audit must work with the Department of Labor (DOL) to document their remediation efforts and make sure they’re compliant. 

3. “We’re exempt because our plan doesn’t require an audit.” 
The thing is, audit exemptions don’t apply to fidelity bonds. ERISA requires fidelity coverage regardless of the number of plan participants or the size of the plan assets. 

4. “Our D&O insurance includes fidelity coverage.” 
D&O insurance may reference fidelity coverage, but this doesn’t guarantee your compliance with ERISA bonding requirements. For example, many policies include deductibles, which disqualify them under ERISA. You should review each policy carefully. 

5. “The bond protects against cyber theft by default.” 
Some fidelity bonds include provisions related to cybersecurity...but not all do. The DOL encourages plan sponsors to be proactive and assess and supplement your cyber protections. Combination policies can be explored but must still meet ERISA requirements. 

Supporting Plan Integrity Through Review 

Protecting retirement plan assets is both a regulatory obligation and a fiduciary priority. MGO’s Employee Benefit Plan Audit professionals can assist with evaluating your current fidelity bond coverage, identifying potential gaps, and supporting alignment with DOL and ERISA guidelines. Our team brings a detail-oriented, audit-first perspective to strengthen the security and compliance posture of your plan. Contact us to learn more.  

The post ERISA Fidelity Bonds: Dispelling Five Common Misunderstandings  appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• New FASB guidance now affects how your company identifies the accounting acquirer in SPAC and VIE-related transactions.  

• There are fewer transactions that may qualify as business combinations now under ASU 2025-03.  

• You must still evaluate VIE status for disclosure, even if it doesn’t impact acquirer identification.  

—

Summary 

The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2025-03, Determining the Accounting Acquirer in the Acquisition of a Variable Interest Entity, to address stakeholder concerns about unintuitive accounting outcomes in transactions involving variable interest entities (VIEs). For example, many operating companies have entered the U.S. public markets by merging with a special-purpose acquisition company (SPAC). While a SPAC merger might be economically similar to conducting an IPO, under the old guidance, it often resulted in a new basis of accounting for the operating company instead of carryover basis. Stakeholders expressed concerns to the FASB about this inconsistency, which will be less likely to occur under the new ASU. 

After adopting the ASU, an entity must assess the factors in ASC 805, Business Combinations, to determine the accounting acquirer in an acquisition transaction primarily effected by exchanging equity interests when the legal acquiree is a VIE that meets the definition of a business.  

Background 

Identifying the accounting acquirer is important because it affects the carrying amounts of the combined entities’ assets and liabilities and post-combination net income. The accounting acquirer records the assets acquired and liabilities assumed in a business combination generally at their acquisition date fair values, with limited exceptions. Additionally, the accounting acquirer reflects the accounting acquiree’s income beginning on the acquisition date.  

Under prior U.S. generally accepted accounting principles (U.S. GAAP), if the legal acquiree was a VIE, the primary beneficiary of the VIE was always the accounting acquirer. Conversely, when the legal acquiree is not a VIE, if a business combination is effected primarily by exchanging equity interests, and the determination of the accounting acquirer is not clear after applying the guidance in ASC 810, Consolidation, an entity must consider the following factors from ASC 805 to identify the accounting acquirer:  

• Relative voting rights in the combined entity 

• Existence of large minority voting interest in the combined entity 

• Composition of the governing body of the combined entity 

• Composition of senior management of the combined entity 

• Terms of the exchange of equity interests 

• Relative size of the combining entities 

Applying these factors can result in a determination that the legal acquiree is the accounting acquirer and, therefore, the transaction is a reverse acquisition. See our Blueprint, Business Combinations Under ASC 805, for more guidance on evaluating these factors and the accounting for a reverse acquisition. 

Main Provisions 

To address stakeholders’ concerns about the inconsistency in the accounting for the acquisition of a VIE that is a business as compared to the accounting for a voting interest entity that is a business, the FASB issued ASU 2025-03. The new guidance requires that an entity evaluate the factors in ASC 805-10-55-12 through 55-15 to determine the accounting acquirer when all the following conditions are met: 

• The acquisition transaction is effected primarily by exchanging equity interests. 

• The legal acquiree is a VIE. 

• The legal acquiree meets the definition of a business. 

The ASU cannot be applied to other transactions. As such, for acquisitions of VIEs that are effected primarily by exchanging cash or other assets or incurring liabilities, and for acquisitions of VIEs that do not meet the definition of a business, the primary beneficiary is always the accounting acquirer. See our Blueprint, Control and Consolidation Under ASC 810, for more guidance on identifying a VIE and its primary beneficiary. 

ASU 2025-03 Has a Limited Scope 

ASU 2025-03 does not change the guidance for identifying the acquirer of a VIE for a transaction that is not effected primarily by exchanging equity interests or for the acquisition of a VIE that does not meet the definition of a business. An entity cannot analogize to the guidance in ASU 2025-03 if the acquired VIE is not a business.  

Consider the following example:  

• Company A (the legal acquirer) issues some of its equity in exchange for all the equity of a life sciences entity (the legal acquiree).  

• The legal acquiree is a VIE but does not meet the definition of a business because substantially all the fair value of the gross assets acquired is concentrated in a single asset.  

• Company A determines that it is the primary beneficiary of the VIE and, therefore, is the accounting acquirer. 

Conversely, had the legal acquiree in met the definition of a business, the accounting acquirer might be different, depending on the facts and circumstances and based on the analysis of the factors in ASC 805. 

Insights 

Fewer Transactions May Be Business Combinations After Adopting ASU 2025-03 

After adopting ASU 2025-03, an entity that effects an acquisition transaction by primarily exchanging equity interests to acquire a VIE that is a business must consider the factors in ASC 805 to identify the acquirer. As a result, fewer transactions will be accounted for as business combinations. However, while the FASB’s intention when issuing this guidance was to align the accounting for economically similar transactions involving businesses, there will still be inconsistencies in the accounting for transactions involving VIEs that are not businesses, as discussed in the alert above.  

Legal Acquiree’s Vie Status Affects Required Disclosures 

While the legal acquiree’s VIE status will be less relevant in determining the accounting acquirer in a business combination primarily effected by exchanging equity interests when the VIE meets the definition of a business, ASC 810 requires that the primary beneficiary of a VIE disclose information about the VIE’s assets and liabilities unless an exemption from the disclosure requirements apply. The new ASU does not change these requirements. Therefore, the primary beneficiary may still need to determine whether the legal acquiree is a VIE for disclosure purposes.    

Effective Dates and Transition 

The following table summarizes effective dates and transition for ASU 2025-03: 

Accounting Standards Update No. 2025-03 Business Combinations (Topic 805) and Consolidation (Topic 810): Determining the Accounting Acquirer in the Acquisition of a Variable Interest Entity 

Written by Adam Brown and Jon Linville. Copyright © 2025 BDO USA, P.C. All rights reserved. www.bdo.com 

How MGO Can Help 

Navigating the evolving landscape of U.S. GAAP and variable interest entity (VIE) accounting can certainly be complex, especially with the adoption of ASU 2025-03. At MGO, our experienced assurance and consulting professionals are well-versed in the nuances of ASC 805 and ASC 810 and are equipped to help our clients interpret and apply this new guidance. Whether you’re planning a SPAC transaction, assessing business combinations, or re-evaluating your existing VIE structures, we can provide you with the tailored strategic insights and practical solutions your organization needs. Contact us to learn how we can help you maintain compliance and stay confident in your financial reporting.  

The post FASB Changes Guidance on Determining the Accounting Acquirer of a Variable Interest Entity  appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• The Tax Court’s decision in Denham Capital Management LP v. Commissioner confirms that limited partner status under state law doesn’t automatically exempt partners from self-employment (SECA) tax if they’re actively involved in the partnership’s business.

• The ruling emphasizes a functional analysis based on the facts and circumstances of each partner’s involvement, reinforcing the precedent set in Soroban Capital Partners.

• Fund managers must reassess their partners’ roles and compensation structures to make sure they’re compliant with SECA tax rules, especially when partners are materially participating in the business.

—

On December 23, 2024, the Tax Court held, in Denham Capital Management LP v. Commissioner, that active limited partners in an investment management company formed as a limited partnership were subject to self-employment (SECA) tax and not entitled to the statutory exemption for limited partners.  

The Tax Court previously decided in Soroban Capital Partners LP v. Commissioner, consistent with the IRS’s position, that the determination of limited partner status is a “facts and circumstances inquiry” that requires a “functional analysis.”  However, the Denham case is the first in which the Tax Court has applied the functional analysis of whether a state law limited partner was, in fact, active in the business of the partnership and a “limited partner” in name only. The key issue in the Denham Case, as in Soroban, was whether limited partners in state law limited partnerships may claim exemption from SECA taxes – despite being more than passive investors.  

Application of Functional Analysis in Denham 

Denham Capital Management was organized as a limited partnership under Delaware law and offered investment advisory and management services to private equity funds. As the court addressed the functional analysis, it reaffirmed that determinations of eligibility for the exemption under Section 1402(a)(13) require a factual inquiry into how the partnership generated the income in question and the partners’ roles and responsibilities in doing so. 

The court noted that, in the years at issue, Denham’s income consisted solely of fees received in exchange for services provided to investors, including advising and operating private investment funds. The court found the partners’ time, skills, and judgment to be essential to the provision of these services. It found unconvincing claims that Denham’s income – largely distributed to the partners as profits – were returns on investments, when only one of the partners had made a capital contribution to obtain their interest. 

Moreover, the court stated that all the partners, except for one that had made a capital contribution, were required to “devote substantially all of [their] business time and attention to the affairs of the partnership and its affiliates.” The court determined that the partners treated their roles in Denham as their full-time employment, with each participating in management and playing crucial roles in the business. 

Other relevant facts cited by the court included: 

• Fund marketing materials made clear that the partners had a significant role in Denham’s operation. 

• The partners’ expertise and judgment were a significant draw for fund investors, who could withdraw their investments if certain partners no longer participated. 

• Investment decisions for the funds were made by that fund’s investment and valuation committees, which included the partners. 

• The partners each exercised significant control over personnel decisions. 

• A sizable number of Denham employees received total compensation exceeding the partners’ guaranteed payments, suggesting such payments were not designed to adequately compensate the partners for their services. 

Concluding that “[i]ndividuals that serve roles as integral to their partnerships as those the [p]artners served for Denham cannot be said to be merely passive investors,” the court held that the partners were not “limited partners, as such” under Section 1402(a)(13) and the partners’ distributive shares were ineligible for the SECA tax exemption for limited partners. 

Takeaways for Fund Managers 

This is another big win for the government. Similar to the Tax Court’s ruling in Soroban Capital Partners LP v. Commissioner, the Tax Court in Denham required a functional analysis centered around the roles and activities of the individual partners. In Denham, the Tax Court detailed the various activities of the partners to show that they were active participants in the business of Denham and were not merely passive investors receiving a return on their capital. 

Primarily, it is important to note that, as in Soroban, the Tax Court denied the argument that the partners were eligible for the SECA tax exemption under Section 1402(a)(13) merely because they were limited partners in a state law limited partnership, making it clear that federal law and not state law prescribes the classification of individuals and organizations for federal tax purposes.  

In accordance with the Tax Court’s decisions in Soroban, Denham, and previous cases, fund managers and their tax advisers should be determining whether a partner, including a limited partner in a state law limited partnership, is subject to SECA tax by evaluating the activities of the partner using a functional analysis similar to the Tax Court’s analysis in Denham. Fund managers should also consider the guidance provided for in 1997 Proposed Reg. §1.1402(a)-2(h), which is instructive despite never being finalized. Pursuant to this guidance, an individual is considered a limited partner unless the individual: 

• Has personal liability for the debts of or claims against the partnership by reason of being a partner; 

• Has authority (under the law of the jurisdiction in which the partnership is formed) to contract on behalf of the partnership; or 

• Participates in the partnership’s trade or business for more than 500 hours during the partnership’s taxable year. 

It is still possible that the taxpayer in Denham will file an appeal. BDO will continue to monitor developments in this and similar cases. 

How MGO can help  

At MGO, our tax professionals work closely with fund managers, general partners, and their advisors to navigate the ever-evolving landscape of partnership taxation and self-employment tax exposure. We provide tailored analyses to evaluate the roles of individual partners, assess the applicability of SECA tax exemptions, and align partnership structures with federal tax requirements.

Leveraging our deep experience in private equity and fund advisory, we help our clients proactively address their compliance risks, prepare for potential IRS scrutiny, and implement tax strategies that align with both your business goals and your current legal interpretations. Contact us to learn how. 

Written by Joe Pacello and Julie Robins. Copyright © 2025 BDO USA, P.C. All rights reserved. www.bdo.com 

The post Tax Court Denies Fund Manager’s Claim of Exemption from Self-Employment Tax  appeared first on MGO CPA | Tax, Audit, and Consulting Services.