How Private Equity Avoided Major Tax Hits From Trump’s Big Bill

Management Fee Waiver Mechanisms

Complementing the carried interest win, fund managers retained the ability to convert management fees into capital gains through fee waiver arrangements. By forgoing standard 2% management fees in exchange for larger profit allocations, managers continue transforming ordinary income into lower-taxed capital gains—a tactic the IRS has audited but failed to eliminate through legislation[4][8]. The OBBBA’s silence on this practice allows firms like Blackstone and KKR to maintain effective tax rates below 20% on management compensation[8][12].

Expanded Debt Financing Advantages

Interest Deduction Cap Increase

A buried provision in Section 163(j) of the OBBBA significantly benefits leveraged buyouts by expanding interest deductibility. The bill increases the business interest deduction cap through adjusted income calculations, enabling portfolio companies to deduct approximately 15% more interest expense than under previous law[1][10]. This change subsidizes private equity’s debt-heavy acquisition model, where firms typically load target companies with acquisition debt. The Congressional Budget Office estimates this will cost $200 billion in lost revenues over ten years—effectively incentivizing the debt-driven strategies that contributed to bankruptcies like Toys “R” Us and Red Lobster[1][13].

EBITDA-Based Deduction Restoration

The legislation permanently restores the EBITDA-based interest deduction limitation, replacing the stricter EBIT standard that had applied since 2022. For private equity-owned companies, this change increases deductible interest expenses by excluding depreciation and amortization from the limitation calculation—a critical advantage for capital-intensive portfolio companies[10][13][17]. Combined with bonus depreciation provisions, this creates powerful tax shields for leveraged acquisitions in manufacturing, infrastructure, and real estate[10][13].

Survival of Pass-Through Tax Structures

PTET Deductions Remain Intact

Private equity funds successfully defended the pass-through entity tax (PTET) deduction, which allows management companies and carried interest vehicles to deduct state and local taxes at the entity level. Despite House proposals to eliminate PTET for “specified service businesses,” the final OBBBA preserved the deduction without limitation—enabling firms to bypass the $10,000 SALT deduction cap that applies to individuals[12][15]. This provides substantial cash flow benefits to asset managers in high-tax states like New York and California[12].

Blocker Corporation Tax Avoidance

The legislation failed to address offshore tax avoidance strategies using “blocker corporations” in jurisdictions like the Cayman Islands. Research reveals private equity and hedge funds continue routing $331 billion in U.S.-generated passive income through tax havens over the past decade, using foreign entities to conceal investor identities and avoid unrelated business income tax (UBIT)[2][5]. The OBBBA’s inaction preserves this legal tax avoidance channel, particularly for pension funds and endowments investing through private equity structures[2][5].

Notable Legislative Omissions

Capital Gains and QSBS Protections

The OBBBA left private equity’s capital gains advantages untouched, rejecting proposed increases to the top rate and preserving the 20% ceiling. Additionally, Section 1202’s Qualified Small Business Stock (QSBS) exclusion was expanded rather than curtailed: The per-issuer exclusion cap rose from $10 million to $15 million (indexed to inflation), while the aggregate gross asset limit for issuing corporations increased to $75 million[9][11][13]. These changes enhance tax-efficient exits for venture capital and growth equity investments[9][11].

GILTI Modifications Favoring Offshore Structures

International provisions maintained favorable conditions for offshore investments. While renaming GILTI (Global Intangible Low-Taxed Income) to NCTI (Net Controlled Foreign Corporation Tested Income), the OBBBA reduced the foreign tax credit haircut from 20% to 10% and retained the Section 250 deduction at 40%—yielding a 12.6% effective rate[10][17]. These changes benefit private equity funds holding foreign portfolio companies through controlled foreign corporations[5][10].

Lobbying Machinery and Political Influence

The American Investment Council—private equity’s primary lobbying arm—executed a $12 million quarterly campaign targeting key congressional committees. This included direct appeals to Senate Finance Committee Chair Mike Crapo (R-ID) and House Ways and Means Chair Jason Smith (R-MO), emphasizing how proposed tax increases would “stifle investment in American businesses”[1][7][19]. The industry’s 2024 political contributions heavily favored Republicans, with 78% of $41 million in donations supporting GOP candidates—a strategic investment given Republican control of both legislative chambers[7][18].

Critical leverage came from state-level allies: New York Republicans Elise Stefanik, Mike Lawler, and Nick LaLota threatened to withhold votes on the OBBBA unless SALT deduction expansions were included—a provision that indirectly benefited private equity by preserving PTET strategies[14][18]. This coalition-building exemplifies how the industry navigated complex legislative trade-offs to protect core interests.

Implications for Portfolio Companies and Investors

Enhanced Leverage Capacity

The expanded interest deductibility enables private equity sponsors to deploy 15-20% more debt in acquisitions while maintaining equivalent coverage ratios. For a standard $500 million leveraged buyout, this could support an additional $75 million in debt financing without increasing tax burdens—boosting equity returns by approximately 3 percentage points[1][10][13]. However, this also increases bankruptcy risks for portfolio companies in rising-rate environments, as seen in 2023’s record 104 private equity-backed bankruptcies[1].

Tax Efficiency for Institutional LPs

Pension funds and endowments benefit from preserved blocker corporation structures, which continue shielding them from UBIT on debt-financed investments. A typical state pension plan investing through Cayman blockers avoids 3.8-5.2% in annual tax leakage compared to direct investments—materially enhancing net returns for beneficiaries[2][5][12]. This explains why 78% of public pensions maintain offshore feeder fund investments despite political scrutiny[2].

Conclusion: Regulatory Wins With Structural Risks

The OBBBA solidifies private equity’s tax advantages through 2035 but amplifies systemic vulnerabilities. While the industry avoided $72 billion in potential tax increases, the expanded debt subsidies could accelerate the “bankruptcy wave” that saw 327 PE-owned firms collapse since 2022[1][19]. For policymakers, the outcome demonstrates how technical legislative provisions—like the interest deduction formula change in Section 163(j)—can deliver substantial industry benefits without public debate. Going forward, institutional investors should monitor portfolio-level debt ratios closely, while regulators face renewed pressure to address the $331 billion in partnership income flowing through tax havens annually[2][5]. The private equity tax shield remains intact, but its structural consequences for portfolio companies and federal revenues warrant continued scrutiny.