Year-End Planning for Private Equity/Venture Capital: Revisiting Tax Strategies in Light of the OBBBA

By Erik Berge | Senior Wealth Strategist, Citizens Private Wealth

New tax laws rarely simplify planning. The result of legislative compromise is often more complexity. The One Big Beautiful Bill Act (OBBBA), signed into law in July, is no exception. The new law introduces provisions that can affect deductions, income thresholds, and the sequencing of certain planning decisions in complex ways.

As an example, the higher state and local tax (SALT) deduction cap under the OBBBA appears on the surface to expand opportunity, raising the cap from $10,000 to $40,000 beginning in 2025.

In practice, PE/VC professionals in high-tax states may already mitigate the SALT limitation through pass-through entity tax (PTET) elections. Still, the details matter for income outside PTET coverage or in states without a PTET regime.

As year-end nears, a priority for taxpayers will be assessing how OBBBA's changes intersect with strategies already in place. For PE/VC stakeholders, this means reviewing entity structuring, carried interest timing and liquidity planning, ensuring strategies remain aligned with both state and federal tax laws, such as the new SALT provision.

Reviewing the SALT Cap: Limited Relief for Those Already Using PTET

The 2017 Tax Cuts and Jobs Act (TCJA) imposed a $10,000 cap on state and local tax (SALT) deductions, significantly limiting federal deductibility for high-income taxpayers in high-tax states. In response, many states introduced pass-through entity tax (PTET) regimes, allowing qualifying businesses to pay state taxes at the entity level and preserve the federal deduction.

The OBBBA raises the SALT cap to $40,000 ($20,000 for married filing separately) starting in 2025, with a phaseout back to the $10,000 limit beginning at $500,000 of MAGI. While this appears to offer relief, the change is temporary (set to expire after 2029) and may have limited impact for those already using PTET structures.

Still, the details matter. PTET mechanics vary widely by state, with different election methods, deadlines, and treatment of non-resident income. For PE/VC professionals, these nuances affect decisions around carried interest timing, co-investment structuring, and the sequencing of distributions, capital calls, and even Q4 state estimated tax payments).

Even with a higher SALT cap, PTET elections remain a key tool for reducing partner-level tax liabilities, though their impact depends on entity structure and state rules. As year-end approaches, reviewing PTET elections can help maximize deductibility and align with OBBBA's expanded eligibility.

PTET Strategy: What to Consider Before Year-End

State-level PTET regimes differ significantly in how elections are made, when they are due, and how non-resident income is treated. For individuals with pass-through income across multiple states, optimizing PTET requires careful coordination to ensure elections are timely and deductions are fully captured.

Individuals relying on PTET regimes should confirm election deadlines, review estimated payments, and assess whether income is sourced to states with PTET laws. In some cases, adjusting entity-level distributions or accelerating income recognition may improve deductibility.

QSBS and Section 199A: New Opportunities for PE/VC Stakeholders

The One Big Beautiful Bill Act (OBBBA) introduces significant enhancements for PE/VC stakeholders through the permanent extension of the Section 199A deduction and the expansion of Qualified Small Business Stock (QSBS) gain exclusions.

Section 199A Deduction Made Permanent: The popular 20% deduction for qualified business income (QBI) from pass-through entities, including sole proprietorships, partnerships, and S corporations, is now permanent. This change provides ongoing tax relief for small and mid-sized business owners and reinforces the value of pass-through structures in PE/VC planning.

While the specified service trade or business (SSTB) limitation still applies to QBI for PE/VC firms, it does not affect PTET elections under the OBBBA, making this a valuable strategy even for SSTB participants.

Expanded QSBS Gain Exclusion: For QSBS acquired after the enactment of the OBBBA, a new tiered exclusion applies based on the holding period:

• 3 years: 50% of gains excluded
• 4 years: 75% of gains excluded
• 5+ years: 100% of gains excluded

Additionally, the gain exclusion cap has increased from $10 million to $15 million, with inflation indexing beginning in 2027. The definition of a "small business" has also expanded to include C Corps with up to $75 million in gross assets (up from $50 million), broadening eligibility and creating new opportunities for PE/VC investors to benefit from favorable tax treatment.

Entity Structuring

With the revised provisions under the OBBBA, PE/VC stakeholders may want to reconsider how entity structure influences the effectiveness of planning strategies.

PTET and firm-level structures: PTET elections and Section 199A deductions apply to partnerships and S corporations, affecting firm- or partner-level tax outcomes. Coordinating these strategies can enhance deductibility, but success depends on how income is sourced, allocated, and timed. Liquidity at the entity level is also critical to fund PTET payments without disrupting distributions.

QSBS and portfolio-level structures: QSBS benefits apply only to investments in qualifying C Corporations. Investors should evaluate portfolio companies for eligibility and coordinate liquidity events with holding period thresholds. Trust structuring and charitable planning may help preserve QSBS status, but fund-level decisions, such as the use of blocker entities or co-investment structures, can affect how gains are realized and reported.

Entity strategy integration: Entity structuring decisions should align with income timing and liquidity planning. For example, deferring carried interest may improve PTET deductibility, but only if entity-level cash flow supports the strategy. Reviewing ownership structures, distribution plans, and jurisdictional rules ensures that tax benefits are captured efficiently.

Income Deferral

For PE/VC stakeholders, deferring income can help manage tax exposure across years and jurisdictions. Whether the goal is to delay recognition of carried interest, reduce or eliminate short-term capital gains, optimize deductions under PTET, or preserve QSBS gain exclusion eligibility, timing matters.

Section 1061 of the Internal Revenue Code modifies the tax treatment of carried interest by requiring a three-year holding period to qualify for long-term capital gains rates; gains realized in under three years are recharacterized as short-term and taxed at higher ordinary income rates. This rule applies to Applicable Partnership Interests (APIs) held by fund's General Partners, , where timing carry recognition to meet the three-year long-term capital gain holding period can significantly affect after-tax outcomes. Thus, gains realized from investments held more than one year but less than three tend to be considerably more attractive to the Limited Partners to whom Section 1061 does not apply.

Deferral strategies do not exist in isolation. They should be coordinated with entity structure and PTET timing to ensure deductions are maximized and not inadvertently phased out.

Beyond deferral, additional layers of planning, such as QSBS eligibility under Section 1202 and Section 199A deductibility, can shape outcomes. Charitable planning and trust structuring may also impact QSBS qualification or the flow-through of Section 199A benefits. Stakeholders should assess whether entity-level liquidity and distribution planning support both PTET payments and long-term QSBS holding strategies.

Additional Considerations: Fine-Tuning the Strategy

Beyond the core planning areas, several adjacent issues may influence how PTET elections, entity structuring, and income timing play out. These considerations can help refine the strategy and avoid unintended consequences as year-end approaches:

• Non-PTET States and Mixed Income Sources
  Not all states offer PTET regimes, and some income, such as interest, dividends, or gains, may fall outside PTET coverage. Reviewing where income is sourced and whether alternative planning (e.g., trust structuring or charitable strategies) can offset exposure is key.

• Estimated Tax Payments and Safe Harbor Rules
  PTET elections can shift tax liability from individual to entity level, affecting safe harbor thresholds and estimated payment schedules. Individuals should revisit payment timing to avoid underpayment penalties and ensure alignment with both federal and state rules.

• Charitable Planning and AGI Limits
  Charitable contributions reduce taxable income, but do not impact MAGI. Qualified Charitable Distributions (QCDs), however, do not impact MAGI and may offer strategic advantages for eligible individuals with charitable goals or looking to reduce the impact of required minimum distributions.

• Trust and Estate Implications
  Ownership through trusts or family entities may complicate PTET eligibility or alter how deductions flow through to beneficiaries. Reviewing trust structures and distribution plans can help preserve deductibility and avoid surprises at the individual level.

• Liquidity and Distribution Planning
  PTET payments are made at the entity level, requiring sufficient liquidity to fund taxes before distributions. Partners should confirm their partnerships are positioned to meet obligations without disrupting investment or cash flow plans.

• Legal Coordination and Compliance
  Tax strategies like PTET elections, QSBS planning, and carried interest deferral often intersect with legal considerations, such as partnership agreements, trust documents, and corporate governance rules. Coordinating with legal counsel ensures that entity structures support the intended tax outcomes and that elections or deferrals are properly documented and enforceable.

Strategic Alignment: Making the Pieces Work Together

While PTET elections, entity structuring, and income deferral each offer distinct planning opportunities, their real value comes from how they work in concert. A decision in one area, like deferring carried interest, can directly affect the timing and value of PTET deductions, which in turn may depend on how income flows through different entities. In cases where carry is distributed in stock, taxation is deferred until sale, shifting the planning burden from fund-level decisions to individual-level considerations around timing, risk, and liquidity.

This year, with new thresholds under OBBBA and evolving state-level rules, the priority is to ensure strategies are aligned, sequenced correctly, coordinated across jurisdictions, and tailored to individual income profiles. That kind of integration is complex, but necessary in order to maximize tax efficiency.

For many PE/VC stakeholders, existing strategies may still be well-positioned, but the details deserve a second look. With the OBBBA introducing new thresholds and timelines, now is the time to revisit elections, entity structures, and income timing to confirm they still align. A year-end review with your Citizens Private Wealth advisor can help ensure that what's in place remains effective and efficient.