5. The One Big Beautiful Bill and Other Tax Changes Affecting M&A 2025 brought a wave of important tax developments— most notably, in the One Big Beautiful Bill Act (“OB3”) – that will affect the values of applicable targets and should be considered in structuring transactions as well. Legislative Developments ▪ Basis Recovery: OB3 restored 100% bonus depreciation for qualifying property, allowing businesses to immediately expense such capital expenditures. In addition to affecting potential target company values, this could make asset purchase structures more attractive to buyers. ▪ R&D Expensing: OB3 restored immediate expensing for domestic R&D costs, though taxpayers must still capitalize R&D costs incurred outside the U.S. ▪ Interest Deductions: OB3 generally increased business interest deductions by restoring a more generous EBITDA-based calculation for computing the business interest limitation (while tightening the rules in other respects). ▪ Qualified Small Business Stock: OB3 expanded tax incentives for investing in “small business” stock by (i) increasing the minimum gain exclusion to $15 million from $10 million, so that the exclusion generally is the greater of $15 million or 10 times basis, (ii) adding a phase-in starting after three years to the strict five-year holding period, and (iii) increasing the gross asset threshold to $75 million from $50 million. ▪ Renewable Energy Updates: OB3 substantially narrowed access to renewable energy tax incentives, making it substantially more difficult for certain projects to claim these credits. ▪ International Changes: OB3 revised certain controlled foreign corporation (“CFC”) provisions as well as other international tax rules, including the “Net CFC Tested Income” (previously referred to as “GILTI”), the base erosion and antiabuse tax (“BEAT”), and foreign-derived intangible income (“FDII”) regimes. The formulas for calculating Net CFC Tested Income and FDII have been simplified, and the rates have been increased. Also relevant for M&A transactions, U.S. shareholders that dispose of CFC stock are now allocated their share of Subpart F and Net CFC Tested Income inclusions on a pro rata basis, whereas prior law allocated the inclusions exclusively to the shareholder on the last day of the tax year. Regulatory Developments Digital Content and Cloud Transaction Regulations: Final regulations issued in January 2025 provide a “predominant character” test for determining how income from digital content transactions is characterized for tax purposes, allowing taxpayers to use a single sourcing rule for a complex transaction rather than forcing a bifurcation of the transaction into its constituent parts. Proposed regulations also released in January 2025 introduce sourcing rules for cloud-based transactions, generally treating such transactions as services performed in the jurisdiction where the service is rendered as determined by a complex formula. Domestically Controlled QIEs: Proposed regulations issued in October 2025 would reverse the 2024 lookthrough rule for domestic corporate shareholders of Qualified Investment Entities. By restoring the pre-2024 framework for corporations while leaving partnership, REIT, and RIC look-through in place, the rules reopen planning space for foreign investors using domestic blocker entities. Excise Tax on Stock Repurchases: Final regulations issued in November 2025 significantly narrow the scope of the 1% excise tax on stock buybacks. The Treasury also exempted numerous deal structures, including many tax-free reorganizations, take-privates and leveraged buyout closing redemptions, and withdrew the interim rule that captured foreign-parented groups funded by U.S. subsidiaries. Other Notable Developments ▪ Spin-Off Transactions: In September 2025, The Treasury withdrew proposed regulations that would have 48 Morrison Foerster
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