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Implications of the US Budget Bill on Private Markets Investors
The One Big Beautiful Bill Act (OBBBA) was signed into law during a ceremony at the White House over the July 4th holiday. Though it contains a number of provisions with delayed implementation, we can now frame our expectations for the impact of the final version of the Bill and how it might shape the investing landscape.
These are the topics we believe are top of mind for private markets investors.
Is Section 899 included in the final version of the Bill?
Section 899, the so-called “revenge tax” that was included in the House version of the Bill, was removed from the Senate version at the request of the US Treasury Secretary after the recent G7 Summit. Section 899 would have imposed retaliatory taxes on non-US investors from countries that have enacted certain types of taxes affecting US persons that the US had argued were “unfair.” With the deletion of Section 899 from the final Bill, OBBBA will make no changes to the availability of benefits under either US tax treaties or Section 892, which provides exemptions for foreign governments. Consequently, non-US investors generally should have the same US tax considerations as they did prior to this Bill being passed.
Were excise taxes on investment income of private universities, colleges, and foundations increased?
The final Bill does not increase tax rates for private foundations but does increase excise taxes on the investment income of private universities and colleges to up to 8% based on student/endowment ratio (with some carve outs). While this reflects an increase compared to prior law, it is a significant decrease from the House version of the Bill, which would have raised the excise tax on private university and college endowment income up to 21% and increased excise taxes applicable to investment income earned by certain private foundations to 10% (up from 1.39%).
Are there any other relevant tax considerations for private markets investors?
OBBBA extends or makes permanent many provisions from the 2017 Tax Cuts and Jobs Act (TCJA) that were set to expire at the end of 2025. The highest marginal individual rates will remain at 37% for ordinary income and 20% for preferentially taxed long-term capital gains. The legislation also makes permanent the TCJA’s suspension of miscellaneous itemized deductions, such as investment advisory fees, fund management fees, and tax prep fees. Corporate income tax, which was permanently reduced to 21% in the TCJA and not expiring in 2025, was not affected.
The final Bill extends and expands certain business-favorable provisions from the TCJA, including rules related to deduction and amortization of domestic R&D expenses, reinstatement of 100% first-year bonus depreciation on certain assets, and the 199A deduction for qualified business income, which was made permanent at 20%. In addition, the Bill expands the availability of the business interest deduction.
Favorable changes to investment tax rules include expansion of the Section 1202 capital gain exclusion for “qualified small business stock,” which allows qualified taxpayers to exclude up to 100% of the gain on the sale of corporate stock from federal income taxation. The Bill increases the availability of the benefit by establishing a tiered exclusion, allowing taxpayers that have held stock in a qualified company a reduced benefit for holding periods as short as three years (instead of the five-year minimum holding period under current law) and raises the per-issuer gain exclusion cap from $10 million to $15 million (indexed for inflation). Similarly, the Bill makes permanent the capital gains exclusion or deferral for qualified opportunity zones.
State and local tax (SALT) federal deductions were increased to $40,000 through 2029 (from $10,000), though they are phased out for high earners. The final Bill does not override the “pass-through entity tax” rules enacted by several states in response to the federal SALT limitation, as had been proposed in the House version of the Bill. No corporate SALT deduction cap was proposed in any version of the Bill, so SALT should remain fully deductible against federal corporate tax.
Which investable sectors may be impacted positively or negatively?
We believe the OBBBA is set to have a varied impact on different sectors of the US economy, with both positive and negative effects from a purely financial perspective. In terms of investing, we see there being both risks and opportunities.
In the energy sector, the impact is mixed. While certain clean-energy technologies such as hydrogen, nuclear, and geothermal will continue to receive targeted federal support, much of the broader clean energy sector faces significant setbacks. The wind, solar, and electric vehicle markets are likely to struggle in the near term, as the phaseout of tax credits and regulatory shifts reduce their investment appeal and long-term viability. On the other hand, oil, gas, and coal companies are expected to benefit from the Bill, with expanded leasing opportunities and reduced royalty rates. Battery energy storage was also spared the fate of some clean-energy technologies, with energy storage credits extended through 2033.
The defense and homeland security sectors are also clear winners. Military manufacturers, defense contractors, and construction companies are likely to see an increase in contracts as a result. The legislation allocates an additional $150 billion for military spending, including investments in the “Golden Dome” missile defense system, shipbuilding, and munitions production. Given the size and duration of these investments, the defense and aerospace industry will likely feel significant tailwinds for some time to come.
The space exploration sector is also set to benefit. For those operating spaceports, the Bill allows such facilities to be treated similarly to airports under the exempt-facility bond rules, significantly reducing capital costs. Broader infrastructure and R&D tax incentives included in the legislation further support expansion and innovation in commercial space operations.
With an array of Medicaid reforms and funding cuts, changes to the provider tax structure, and reduced reimbursement rates, the medical industry as a whole is likely to experience heightened fiscal pressure. Many states will likely struggle to compensate for the loss of federal support, though the newly established Rural Hospital Fund, totaling $50 billion over five years, will offer some targeted relief.
The Bill also introduces new limitations impacting “foreign entities of concern” designation, which defines non-admissible partners and restricts certain suppliers. This expansion may benefit third-country suppliers as the US shifts away from Chinese suppliers.
What is the potential macroeconomic impact of this Bill?
At the highest level, while there are pro-growth sector-specific opportunities, most projections view this Bill as a pathway towards a number of interrelated cost increases, most of which will likely exert negative pressure on the US economy over the long term.
The Bill is set to increase the bottom-line threshold of US government spending, as immigration and defense spending are now baked into the budget, with no commensurate revenue captured. While estimates on by how much vary, the OBBBA will increase the US deficit. Moreover, the legislation adds further fiscal pressure through a substantial increase in federal interest payments, compounding the overall debt burden.
This increase in the deficit, when compounded with increased tariffs, could lead to higher interest rates. Increased immigration spending, if effective, could lead toward labor shortages that negatively affect agriculture, hospitality, and building industries, to name a few. Similarly, higher tariffs could lead to higher production costs or supply chain shortages, both of which may lead to higher costs passed onto the consumer.
Ultimately, the Bill’s long-term effects will depend on how its provisions are implemented and how industries adapt to the new regulatory environment.
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What comes next?
For investors, more questions remain — from potential increased structural complexity to due diligence and tax planning. In the end, we see a number of short-term, sector specific opportunities combined with potential long-term headwinds. At the very least, the Bill landed in a place that is broadly positive on the business tax front. Its overall impact will depend on the balance between these positive and negative factors, which we will be monitoring closely.
Disclosure
HarbourVest Partners, LLC (“HarbourVest”) is a registered investment adviser under the Investment Advisers Act of 1940. This material is solely for informational purposes; the information should not be viewed as a current or past recommendation or an offer to sell or the solicitation to buy securities or adopt any investment strategy. In addition, the information contained in this document (i) may not be relied upon by any current or prospective investor and (ii) has not been prepared for marketing purposes. In all cases, interested parties should conduct their own investigation and analysis of the any information set forth herein and consult with their own advisors. HarbourVest has not acted in any investment advisory, brokerage or similar capacity by virtue of supplying this information. The opinions expressed herein represent the current, good faith views of the author(s) at the time of publication, are not definitive investment advice, and should not be relied upon as such. This material has been developed internally and/or obtained from sources believed to be reliable; however, HarbourVest does not guarantee the accuracy, adequacy or completeness of such information. The information is subject to change without notice and HarbourVest has no obligation to update you. There is no assurance that any events or projections will occur, and outcomes may be significantly different than the opinions shown here. This information, including any projections concerning financial market performance, is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. The information contained herein must be kept strictly confidential and may not be reproduced or redistributed in any format without the express written approval of HarbourVest.
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