On July 4, U.S. President Donald J. Trump signed into law H.R. 1, the One Big Beautiful Bill (OBBB) Act. The House approved the bill on July 3 with a vote of 218 to 214, while the Senate passed it on July 1 with a vote of 51 to 50, with Vice President JD Vance casting the decisive vote. Spanning almost 900 pages, the bill introduces substantial changes to tax laws, budget cuts, and various Republican initiatives.
As the new bill becomes law, the merger and acquisition (M&A) market is expected to experience significant impacts due to the sweeping alterations in tax policy embedded within the OBBB. These changes could reshape the landscape for both buyers and sellers, influencing decisions regarding corporate restructuring, valuations, and strategic growth plans. Understanding the specifics of these tax modifications is crucial for stakeholders navigating the complex M&A environment. Below, we delve into the key tax changes introduced by the bill.
- Extension of 100% Bonus Depreciation – The OBBB reinstates a full 100% deduction for qualifying properties acquired and placed in service after Jan. 19, 2025. The deduction was previously set at 40% for 2025 and was projected to phase out by 2027. Furthermore, the OBBB removes the phase-out schedule, thereby ensuring that the 100% bonus depreciation remains permanently in effect, unless future legislation dictates otherwise. Alongside bonus depreciation, a new elective 100% depreciation allowance has been introduced for qualified production property (QPP) placed in service until 2030. This allowance applies to newly built and certain existing non-residential real estate utilized for manufacturing, production, or refining specific tangible personal property within the U.S. Generally, this new depreciation benefit covers properties where construction commences after Jan. 19, 2025, and before Jan. 1, 2029, or properties acquired after Jan. 19, 2025. This could lead to an increase in asset acquisitions as well as investments in new construction. By extending immediate expensing for qualifying property, companies would have stronger incentives to invest in new assets, thereby potentially increasing the volume of asset acquisitions. However, there are no retroactive changes to bonus depreciation for the 2023 and 2024 tax years.
- Enhanced Section 179 Expensing - The expensing limit is increased to $2.5 million, with a phaseout threshold of $4 million for properties placed in service after 2024, and these amounts will be adjusted for inflation annually. The previous expensing limit was $1.25 million, with a phaseout threshold of $3.13 million. Similar to bonus depreciation, this tax incentive allows businesses to immediately deduct the cost of eligible assets like equipment and software, rather than depreciating them over time, with the limit phasing out dollar-for-dollar beyond the threshold.
- Immediate Expensing of Research and Development Costs - This allows for the immediate deduction of domestic research and development (R&D) costs from 2025 to 2029, reversing the previous rule requiring five-year amortization starting in 2022. In addition, domestic research and development costs that were capitalized in the tax years 2022, 2023, or 2024 can be fully deducted in 2025. However, foreign research and development expenses must continue to be capitalized over a 15-year period. This change impacts the M&A market by enhancing the attractiveness of companies with significant domestic R&D expenditures, potentially increasing their valuation and making them more appealing targets for acquisition. It also provides acquiring firms with opportunities to optimize tax strategies and reduce post-acquisition costs associated with domestic R&D investments.
- Interest Deduction Based on EBITDA - Under current law, taxpayers can deduct business interest expenses up to the sum of business interest income, 30% of adjusted taxable income (ATI), and floor plan financing interest. The OBBB enhances the deduction of business interest expenses by removing depreciation, amortization, and depletion from the calculation of ATI. This results in a higher ATI, which in turn increases the amount of business interest that can be deducted. This change impacts the M&A market by potentially lowering financing costs for acquisitions, as companies can deduct more interest expenses, making leveraged buyouts more financially attractive. Additionally, it may increase the appeal of acquiring companies with substantial interest expenses, as the enhanced deductions improve overall tax efficiency and cash flow.
- Permanent Qualified Business Income Deduction - The Section 199A deduction becomes a permanent fixture, while keeping the deduction rate at 20%. It offers owners of pass-through entities like S corporations, partnerships, LLCs, as well as sole proprietors and self-employed individuals the ability to deduct up to 20% of their qualified business income, plus 20% of qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income. This permanent and favorable deduction rate can significantly influence the M&A market by increasing the attractiveness of pass-through entities as acquisition targets.
- Excess Business Losses - The Inflation Reduction Act (IRA) limits deductions for noncorporate taxpayers’ business losses through 2028, allowing these losses to offset other income sources only up to a certain limit, with excess losses carried forward under net operating loss rules. The OBBB makes this limitation permanent for pass-through entities by restricting aggregate business deductions to total gross income or gain from trades or businesses, along with a threshold amount adjusted for inflation ($313,000 for 2025).
Other Key Elements of the OBBB:
- Medicaid Reforms - The OBBB includes major federal funding cuts to Medicaid that were opposed by hospitals and doctors. The Senate Joint Economic Committee Minority estimates that about 20 million people could lose their coverage under the OBBB.[1] In contrast, the nonpartisan Congressional Budget Office projects that the OBBB would leave 11.8 million people uninsured by 2034.[2] These changes could profoundly impact the M&A market, particularly within the healthcare sector, as companies may face increased financial pressures due to a rise in uninsured patients and potential shifts in patient demographics. This environment may lead to consolidation among healthcare providers seeking to mitigate risks and optimize operational efficiencies, as well as strategic acquisitions aimed at expanding service offerings to cater to an evolving market landscape.
- State and Local Taxes (SALT) Deduction Limit – The SALT cap is temporarily raised from the previous $10,000 limit to $40,000 for the 2025 tax year. This amount will be adjusted for inflation, beginning at $40,400 in 2026 and increasing by 1% each year until 2029. In 2030, the deduction limit returns to $10,000. However, for taxpayers with a modified adjusted gross income exceeding $500,000, the deduction amount gradually decreases, with adjustments for inflation and a minimum threshold of $10,000.
- Clean Energy Tax Credits – The OBBB introduces substantial reductions to the Inflation Reduction Act (IRA), which are anticipated to negatively affect the wind and solar industries specifically. The bill stipulates that solar and wind projects commencing construction by July 4, 2026 can bypass the requirement to be operational by the end of 2027, with treasury guidance allowing four years post-construction start to complete the projects. Therefore, projects initiated in early 2026 have until the end of 2030 for completion. In contrast, projects not under construction by July 4, 2026 must be operational by the end of 2027 to qualify for tax credits. The bill also revises "technology-neutral" tax credits under sections 45Y and 48E of the U.S. tax code, applicable to power projects with zero or negative lifecycle greenhouse gas emissions and energy storage projects, offering credits of 30% to 70% of project costs. Legacy tax credits remain unaffected, and the bill permits tax credit sales, barring certain buyers.
Conclusion
The enactment of H.R. 1, the One Big Beautiful Bill, marks a significant shift in tax policy, with far-reaching implications for the M&A landscape. As companies grapple with these changes, they must strategically adapt to the new tax environment to seize growth opportunities and navigate potential challenges. The revised tax laws offer avenues for optimization, such as enhanced expensing options and interest deductions, which can be leveraged to improve financial outcomes in transactions. Businesses that proactively align their strategies with the evolving regulatory landscape will be better positioned to drive successful mergers and acquisitions, ensuring resilience and competitiveness in a rapidly changing market. Embracing innovation and strategic foresight will be key to thriving amidst these transformative times.
References:
[2] https://www.cbo.gov/publication/61534
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