Sponsors are pricing add-ons on interest math from 2022, treating purchase price allocation as paperwork, and sitting on elections that block the biggest incentive in the law.

Private equity prides itself on underwriting. Right now, a meaningful share of the industry is underwriting a tax code that no longer exists.

The One Big Beautiful Bill Act changed three things that sit at the center of sponsor economics: the business interest limitation, the depreciation available on acquired assets, and the treatment of production facilities. Our research found that 44% of leveraged companies carrying disallowed interest had not re-modeled their interest capacity under the new rules, and that portfolio companies captured an estimated 60% of the OBBBA acceleration value available to them on 2025 spending. Those are not rounding errors in a business whose returns are measured in basis points of IRR.

What follows is direct, because the stakes justify it.

1. Your Interest Capacity Is Bigger Than Your Model Says

From 2022 through 2024, Section 163(j) capped deductible business interest at 30% of a tax EBIT figure. For tax years beginning after December 31, 2024, the cap returned to 30% of tax EBITDA. For a leveraged, capital-intensive portfolio company, that is not a technical adjustment. It is a step change.

Consider a company with $40 million of tax EBITDA, $12 million of depreciation, and $13 million of interest expense. Under the EBIT rules, deductible interest was capped at $8.4 million, and $4.6 million was deferred. Under the EBITDA rules, the cap is $12 million and only $1 million is deferred. Add $10 million of new equipment expensed under bonus depreciation, and the old rules would have cut the cap to $5.4 million. Today the depreciation is added back and the interest deduction does not move.

If your models were built in 2022 or 2023, they are understating after-tax cash flow on every leveraged platform with meaningful depreciation. That affects how much leverage you can efficiently put on the next add-on, the after-tax cost of equipment financing, and the value of disallowed interest carryforwards from 2022 through 2024 that may now be usable.

Those carryforwards are an asset. A buyer will pay for them only if they are documented, modeled, and survive the ownership change limitations under Section 382 that apply at exit. Right now most of them are sitting in a footnote.

Two 2026 changes cut the other way and also belong in the model. Interest that companies elect to capitalize into assets must now pass through the 163(j) limit first, closing a workaround some platforms relied on. And certain international income inclusions are now excluded from the calculation, which tightens the cap for platforms with foreign subsidiaries.

2. Purchase Price Allocation Is a Cash Tax Negotiation

Bonus depreciation at 100% applies to used equipment acquired from an unrelated party after January 19, 2025. That includes equipment acquired in asset purchases, in stock purchases with a Section 338(h)(10) or 336(e) election, and in partnership interest acquisitions with a 754 step-up.

That makes purchase price allocation one of the largest cash tax levers in a deal. On a $60 million platform acquisition with $18 million allocable to machinery and equipment, that allocation produces roughly $3.8 million in year-one federal tax value. Allocate it to goodwill instead, which amortizes over 15 years, and year-one value falls to about $250,000, a present value loss of roughly $1.3 million on a single deal.

Here is the uncomfortable part. Many deal teams let the allocation default to whatever the valuation report produces, and many valuation reports default toward goodwill because it is the path of least resistance. If your deal team is not actively engaged in that process, you are subsidizing the tax position of the deal with your IRR. The allocation must be supportable; equipment must be valued as what it is. But supportable and passive are not the same thing.

The same logic applies to structure. If you are not willing to pay a seller a gross-up for an election that steps up asset basis, run the numbers again. The step-up is worth more today than it has been since 2022.

3. Your Real Estate Election May Be Blocking Your Next Plant

Between 2018 and 2022, many sponsors put platform real estate into a property company and had it elect to be treated as a real property trade or business, escaping the interest limitation in exchange for slower depreciation. That election is irrevocable. It also requires alternative depreciation on the property company’s buildings, which disqualifies new production facilities from the 100% production property deduction the OBBBA just created.

If a portfolio company is planning a new plant or a major expansion before 2029, find out this week whether its property company made that election. If it did, the new facility may need to be owned somewhere else. Given that the restored EBITDA base has eroded much of the original reason for the election, this is a case where the defensive move of 2022 has become the expensive constraint of 2026.

4. Depreciation You Cannot Use Is Equity You Are Wasting

Not every portfolio company can absorb a 100% deduction. Platforms with net operating losses, thin margins, or heavy interest expense generate deductions that turn into carryforwards and lose value every year they sit.

For those companies, owning every asset is a habit, not a strategy. A residual-based lease places the depreciation with a lessor that can use it now and returns much of that value through lower payments. For equipment acquired during loss years, a sale-leaseback can convert dormant tax value into liquidity: gain on the sale may be sheltered by existing losses, the lessor takes a fresh basis that can qualify for bonus, and the company receives cash it can deploy into an add-on without a single dollar of new equity. That is non-dilutive capital in its most literal form.

5. Model the Exit, Not Just the Hold

Full expensing creates recapture exposure in asset-sale exits, because the equipment’s tax basis is near zero. In stock-sale exits without a step-up election, the buyer inherits that low basis and may price it in. Over a typical four- to six-year hold, the time value of the deduction usually wins. But it should win on purpose, in the model, rather than by accident.

Equipment financing structures matter here too. Arrangements that carry change-of-control triggers, prepayment penalties, or covenants that require consent at exit create friction a buyer will notice. Financing that never complicates the sale is worth more than it costs.

6. Your Buy-and-Build Is Funding Add-Ons One at a Time

Most platforms finance add-on equipment the way they acquired the add-ons: one company at a time, each with its own lender, its own structure, and its own tax position. That leaves value scattered across the portfolio. One add-on generates more depreciation than it can absorb while the platform above it has taxable income to spare. Another buys equipment in a month when the financing source cannot close before year end.

Where add-ons join a consolidated group, the tax capacity question should be answered at the platform level, and equipment acquisitions should be sequenced and structured against that combined capacity. Where they do not, because of rollover equity, minority holders, or pass-through structures, the case for placing depreciation with a lessor becomes stronger, not weaker. In either case, a single capital partner that can finance across the platform and its add-ons, at deal speed, removes one of the most common sources of friction in a 100-day integration plan.

What Buyers Will Ask in 2029

The sponsors who sell platforms over the next three to four years will face buyers who have caught up to the new rules. Those buyers will ask how much of the interest carryforward is real and usable after the ownership change. They will ask whether the production facilities were documented to support the deductions claimed. They will ask what recapture exposure sits inside the equipment base and how the financing arrangements behave at closing. Platforms with clean answers will command cleaner diligence and, in a competitive process, better prices. Platforms without them will spend the final months of the hold reconstructing records instead of negotiating value.

The Ask

Have every portfolio CFO re-run the tax model on the current rules before the next board meeting. Put purchase price allocation on the deal team’s checklist with a named owner. Audit property company elections across the portfolio. Identify the platforms that cannot use their depreciation, and fix that with structure rather than accepting it.

None of this requires new strategy. It requires updating the assumptions underneath the strategy you already have.