The ‘Beautiful’ Tax Bill Contains Potential Hidden Tax Increases for Certain Companies

By Stuart E. Leblang, Shariff N. Barakat, Michael J. Kliegman, Howard Leventhal and Amy S. Elliott

The corporate tax changes in the so-called One Big Beautiful Bill Act¹  (OB3) that was signed into law on July 4, 2025, contained a mix of tax incentives and some base broadeners. While headlines have focused on the business-friendly elements—such as making permanent the deduction for domestic research costs, bonus depreciation, and an increased deduction for interest expense—the bill also includes permanent structural changes that could increase the effective tax rate (ETR) for some corporations.

Many businesses will likely emerge as net winners. However, there are categories of corporations that could potentially face significantly higher net tax burdens depending on their specific profiles. In particular, companies may be negatively affected if they:

1. Have sizable foreign earnings and plan to borrow to acquire other businesses so that they can continue expanding their reach internationally;
2. Capitalize significant amounts of interest expense (this is most likely to have the biggest impact, especially hitting companies with relatively high leverage);²
3. Generate low-taxed foreign earnings subject to the global intangible low-taxed income (GILTI) regime without sufficient foreign tax credits (FTCs) (even with other favorable changes to GILTI); or
4. Make consistent charitable deductions of at least 1 percent of taxable income (this is a more minor change, but still worth a mention).

Plan to Borrow to Acquire? You May Be Disadvantaged.

OB3 retroactively (and permanently) increased the Section 163(j) cap on the amount of interest expense that a business can deduct. The cap is generally 30 percent of a taxpayer’s adjusted taxable income (ATI) plus any business interest income.³ Because ATI is similar to earnings before interest, taxes, depreciation and amortization (EBITDA), the cap was often described as 30 percent of EBITDA. In 2022, it was effectively lowered to 30 percent of EBIT. OB3 returns it back to 30 percent of EBITDA for taxable years beginning after December 31, 2024.⁴

But OB3 made other changes to the Section 163(j) limit that will hurt certain businesses. Starting next year,⁵ taxpayers will have to back out of ATI all of their subpart F income, GILTI income (technically, this is now called net CFC tested income) and gross ups associated with the same.⁶ So while 30 percent of EBITDA is larger than 30 percent of EBIT, taxpayers’ interest expense deduction cap is now more like 30 percent of EBITDA minus foreign income.⁷  Taxpayers with significant amounts of foreign-source income may suddenly find themselves with a broader tax base and higher tax bill as a result.⁸

Capitalizing Interest Expense? You May Owe More Tax.

Another change that OB3 made to the interest expense deduction cap (the so-called coordination rule) could turn out to be hugely impactful for levered companies that had previously managed to avoid the pain of the cap by electing to capitalize their borrowing costs. The Tax Code contains provisions that may allow for capitalization of interest expense depending on the taxpayer’s specific circumstances.⁹ Taxpayers may have chosen to take advantage of these provisions to capitalize (rather than immediately deduct) their interest expense so that it is included in the cost of an asset and depreciated over the asset’s useful life.

A quick online search reveals numerous articles authored by accountants proclaiming the benefits of interest capitalization as a way to “unlock deductions trapped by Section 163(j).”¹⁰ As one firm explained, by capitalizing the expense, you “effectively [remove] interest from the 30% ATI cap. . . . However, the downside is a delayed deduction—rather than an immediate expense, the interest is recovered gradually through depreciation or when the asset is sold.”¹¹

Assuming they operate within the confines of the law,12 taxpayers should be allowed to take positions that enable them to maximize their business considerations. When faced with a choice to either deduct or capitalize, taxpayers may be willing to delay their cost recovery by capitalizing if it means they will not be limited by their Section 163(j) cap. It is a give and take.

While it is the case that interest capitalization gained steam when the Tax Cuts and Jobs Act (TCJA)¹³ replaced the preexisting earnings stripping rules with what is now the EBITDA cap,¹⁴ use of the technique reportedly ballooned when the cap was lowered to 30 percent of EBIT in 2022 (when ATI was computed to include deductions for depreciation, amortization and depletion). When TCJA was enacted, the broad-based limit on the ability of businesses to reduce their taxable income by deducting their borrowing costs was expected to generate some $30 billion of additional revenue in 2024 alone.¹⁵But taxpayers changed their behavior, and by the time 2024 rolled around, the Joint Committee on Taxation had significantly reduced its revenue estimate for Section 163(j) down to less than $9 billion of revenue in that year.¹⁶

The coordination rule in OB3 effectively nullifies the capitalization strategy by applying the EBITDA cap to capitalized interest as well,¹⁷ with a narrow exception for interest expense that is required to be capitalized under two provisions (one that relates to certain self-produced property and another that relates to personal property that is part of a straddle¹⁸). Outside of those two exceptions,¹⁹ any interest expense that is capitalized²⁰ will be disallowed in the current year and carried forward to the extent it exceeds the cap. Further, an ordering rule²¹  provides that capitalized interest applies against the cap before interest that the taxpayer would like to deduct as a business expense. Finally, to the extent capitalized interest is limited by the cap and carried forward, it is no longer capitalizable but only deductible in future years.²²This provision could be especially painful for certain levered businesses²³ given the high-interest rate environment.²⁴

Businesses that choose to capitalize significant amounts of business interest expense (including such expense in the basis of tangible property or inventory) would be impacted the most. While some may have chosen to capitalize their interest expense to mitigate the harm of the Section 163(j) cap, others may have had different motivations. For example, renewables projects may have chosen to capitalize interest expense to increase the tax basis used to determine the amount of any available tax credit.

Taxpayers that otherwise would have been subject to the base erosion and anti-abuse tax (BEAT) may have chosen to capitalize interest expense into inventory and recover the expense through cost of goods sold (COGS), since COGS payments are generally not considered base erosion payments under BEAT.²⁵ Note that while an earlier version of OB3 under consideration by the Senate would have effectively closed the BEAT’s COGS exception in the case of capitalized interest expense by treating such amounts as a base erosion payment, that provision was stripped from the bill before its enactment (although a reference to BEAT remains in the coordination rule).²⁶

Although Section 163(j) provides that any disallowed interest expense (whether the taxpayer wanted to deduct it or capitalize it) can be carried forward indefinitely, some companies may find themselves subject to the cap indefinitely. In that case, it would be unlikely that the taxpayer could realize any future tax benefit from such a carryforward,²⁷  and applying the Section 163(j) cap to capitalized interest expense may not just give rise to a timing difference but could also have a negative impact on the company’s ETR.

GILTI Expansion

Among other changes, OB3 marginally increased the GILTI rate (technically, the rate on net CFC tested income, as GILTI is now referred to) and repealed the qualified business asset investment (QBAI) exemption. As it happens, both of these changes were also proposed by President Biden (although Biden would have doubled the GILTI rate). While these tax increases are tempered somewhat by a favorable change to the GILTI expense allocation rules, U.S. multinational corporations that otherwise have a relatively low foreign ETR, calculated on an aggregate/blended basis, face a real risk of potential material impacts.

The current effective tax rate on GILTI is 13.125 percent (a federal corporate income tax rate of 21 percent with a 50 percent Section 250 deduction—so 10.5 percent base—plus a 20 percent foreign tax credit (FTC) disallowance). It was scheduled to increase to 16.406 percent in 2026.²⁸

OB3 tempered the increase in two ways. First, it permanently set the Section 250 deduction to 40 percent (instead of 37.5 percent) for taxable years beginning after December 31, 2025 (so the 10.5 percent base rate would go to 12.6 percent—instead of 13.125 percent—in 2026).³⁰ Second, it reduced the FTC disallowance (a so-called haircut) from 20 percent to 10 percent (so 90 percent FTCs would be allowed for taxable years beginning after December 31, 2025).³¹  The result of these changes is that the GILTI ETR will increase to 14 percent next year (up from the 13.125 percent in 2025 but down from 16.406 percent scheduled for 2026 before OB3).³² For firms that pay minimal foreign taxes, these changes could mean a U.S. tax increase of as much as 2.1 percentage points on foreign-source income.

Meanwhile, OB3 repealed QBAI,³³ also effective for taxable years beginning after December 31, 2025. This means that the base of income subject to the (higher) GILTI rate is now generally larger, especially in the case of businesses that had a lot of high-basis tangible assets in foreign jurisdictions.

While the increased tax rate and broader base are generally negatives, OB3 did include a positive change to GILTI—a fix to the problematic GILTI expense allocation rules.³⁴  The problematic rules generally provided that certain expenses incurred in the United States (including interest expense, for example) could not exclusively offset U.S.-source gross income, and must, at least in part, be allocated to the so-called GILTI basket (the Section 951A category) for purposes of determining the FTC limitation, effectively reducing allowable FTCs and increasing the GILTI tax due. Among other things, the fix explicitly provides that no amount of interest expense or research and experimental expenditures should be apportioned to the GILTI basket, effective for taxable years beginning after December 31, 2025.

The net effect of these changes is that, for U.S. multinationals with relatively low foreign ETRs, these OB3 changes risk impacting equity valuations (with the impact multiplying if the company also has high QBAI exposure, i.e. lots of foreign buildings and machinery, which may be the case for certain energy firms³⁵). This could impact companies across a broad range of industries that have been able to achieve low tax rates on their foreign operations.

Penalizes Generous Corporations

OB3 imposes a 1-percent floor on the deduction of charitable contributions made by corporations.³⁶ This floor effectively disallows the first 1 percent of a corporation’s charitable deduction,³⁷ assuming the aggregate of the corporation’s charitable deductions for any taxable year is at least 1 percent and no greater than 10 percent of the corporation’s taxable income (current law caps corporate charitable deductions at 10 percent ³⁸).

This would increase a corporation’s effective tax rate by at least 0.25 percent, assuming its combined federal, state and local effective corporate income tax rate is 25 percent and its charitable giving amounts to at least 1 percent of its taxable income. The change is effective for taxable years beginning after December 31, 2025. It would disproportionately harm corporations that consistently give more than 1 percent of their pre-tax income to charities.

The floor may encourage corporations to forego contributions for one or more years so that they can bunch them up to minimize the amount that is disallowed (for example, instead of donating just under 1 percent annually and having no deduction available, a corporation might donate nothing for two years and 3 percent in year three, so that it can take a deduction for the 2 percent above the floor). ³⁹ Although corporations that exceed the 10-percent cap would generally be allowed to carryforward the disallowed 1-percent to subsequent taxable years, when it would generally be allowed on a first-in, first-out basis, we expect this would benefit few firms. Most corporate charitable giving would likely not be influenced by these tax considerations. It remains to be seen whether other actions by Congress, including legislation under consideration this week that would cut funding for the Corporation for Public Broadcasting, might trigger corporations to change their giving plans.

^{[1] Technically entitled “An Act to provide for reconciliation pursuant to title II of H. Con. Res. 14,” P.L. 119-21 is available here: https://www.congress.gov/119/bills/hr1/BILLS-119hr1enr.pdf}

^{[2] Note that these two groups of impacted companies (described in Nos. 1 and 2) are harmed by changes made to the provision in the Tax Code that places limits on how much interest expense a business can deduct (IRC §163(j)). While it was known for some time that lawmakers planned to increase the limit, certain other changes made to §163(j) were a surprise—with advisors first seeing the language June 16, 2025, only 15 days before the Senate passed the bill. This gave taxpayers very little time to be able to grasp the impact before lawmakers had to vote. This report aims to highlight these stealth tax increases for the market and identify which types of companies would be most harmed.}

^{[3] There is also a reduction for floor plan financing interest (in the case of car dealers, for example). Note that that are special exemptions, including for certain small businesses (those with average annual gross receipts of $25 million or less).}

^{[4] See Section 70303 of OB3, which amends IRC §163(j)(8)(A)(v) to strike the time qualifier such that adjusted taxable income for purposes of this subsection is always computed without regard to any deduction allowable for depreciation, amortization, or depletion.}

^{[5] For taxable years beginning after December 31, 2025.}

^{[6] See Section 70342 of OB3, which amends IRC §163(j)(8)(A) to add an additional exclusion from ATI for “amounts included in gross income under sections 951(a), 951A(a), and 78 (and the portion of the deductions allowed under sections 245A(a) (by reason of section 964(e)(4)) and 250(a)(1)(B) by reason of such inclusions).”}

^{[7] In a separate but somewhat related change, IRC §904(b) is amended to prohibit any interest expense from being allocated to the GILTI basket (the net CFC tested income basket) for purposes of determining the FTC limitation (see OB3 Section 70311).}

^{[8] If a business is unable to fully deduct its borrowing costs because of this change to how the cap is calculated, it may have to limit its borrowing. Consider the following example: ABC Corp is a U.S. company that makes commercial freezers. Currently, 40% of its sales come from outside of the United States, but because it does not generally rely on borrowing to fund its operations, the fact that its foreign earnings will be excluded from the calculation of its §163(j) cap is not particularly problematic. However, over the next 10 years, let us assume that the market for commercial freezers is going to be 70% abroad. To best position itself to compete for that business, ABC Corp wants to acquire foreign freezer manufacturers, and it will need to borrow to fund those acquisitions. But this reduced cap means that ABC Corp—which is not doing anything nefarious but is simply trying to expand its market, since you can only sell so many commercial freezers domestically—will be at a disadvantage to its foreign-parented competitors when it tries to outbid them for target companies. The Senate’s section-by-section summary provides no explanation for why this provision—which arguably inappropriately disadvantages companies that earn foreign-source income—was added to the bill. To be clear, this change would not get at earnings stripping or other strategies used by multinationals to erode the U.S. corporate tax base. Instead, it has the effect of making U.S. multinationals less competitive and could lead to more foreign takeovers.}

^{[9] See, for example, Treas. Reg. §1.266-1 (the election to capitalize carrying charges).}

^{[10] GrantThornton, Capitalizing interest to unlock deductions trapped by Section 163(j) (March 14, 2025) (https://www.grantthornton.com/insights/alerts/tax/2025/insights/capitalizing-interest-to-unlock-deductions); PwC, Interest capitalization provisions may reduce Section 163(j) interest disallowance (Oct. 26, 2022) (https://www.pwc.com/us/en/tax-services/publications/insights/assets/pwc-interest-capitalization-may-reduce-interest-disallowance.pdf)}

^{[11] Bronswick Benjamin, How to optimize your business interest deductions (April 7, 2025) (https://bronswick.com/how-to-optimize-your-business-interest-deductions/).}

^{[12] If some taxpayers took expansive views on interest capitalization (potentially recovering their costs inappropriately fast), then lawmakers should have targeted that abuse specifically. Instead, this new coordination rule unfairly punishes all taxpayers that capitalize interest expense, even those that do so completely legally and for legitimate business reasons.}

^{[13] P.L. 115-97}

^{[14] Note that final regulations published in the Federal Register Sept. 14, 2020 (T.D. 9905) make clear that “Section 163(j) applies after the application of provisions that require the capitalization of interest, such as sections 263A and 263(g). Capitalized interest expense under those sections is not treated as business interest expense for purposes of section 163(j)” (see Treas. Reg. §1.163(j)-3(b)(5)).}

^{[15] Joint Committee on Taxation (JCT) Estimated Budget Effects of the Conference Agreement for H.R. 1, The “Tax Cuts and Jobs Act” (JCX-67-17, Dec. 18, 2017) (https://www.jct.gov/publications/2017/jcx-67-17/).}

^{[16] JCT Estimates of Federal Tax Expenditures for Fiscal Years 2024-2028, JCX-48-24 (Dec. 11, 2024) (https://www.jct.gov/publications/2024/jcx-48-24/).}

^{[17] See Section 70341 of OB3 (Coordination of Business Interest Limitation with Interest Capitalization Provisions) and in particular new IRC §163(j)(10)(A)(i).}

^{[18] IRC §§ 263A(f) and 263(g).}

^{[19] Note that OB3 Section 70341 also changes the definition of “business interest” in IRC §163(j)(5) to exclude “any interest which is capitalized under section 263(g) or 263A(F).” This change will also impact the definition of ATI, which is computed without regard to any business interest.}

^{[20] Including through elective capitalization provisions such as IRC §§266 and 263(a).}

^{[21] See new IRC §163(j)(10)(B)(i).}

^{[22] See new IRC §163(j)(10)(C).}

^{[23] According to KPMG, this change would “disproportionately impact private equity structures, software developers, service companies, and businesses without significant capital expenditures,” Accounting for income taxes implications of “One Big Beautiful Bill” (current as of July 4, 2025) (https://kpmg.com/kpmg-us/content/dam/kpmg/taxnewsflash/pdf/2025/05/kpmg-report-accounting-for-income-taxes-one-big-beautiful-bill-may-15-2025.pdf).}

^{[24] Similar to the example in Note 8, businesses that were able to avoid the pain of §163(j) before by taking advantage of capitalization may now be strategically disadvantaged, as it will make it harder for them to borrow to compete for acquisition targets. Blackstone Inc. (NYSE: BX) disclosed in its most recent annual report, Form 10-K, filed Feb. 28, 2025, that if “the ability to deduct corporate interest expense is substantially limited, our funds may face increased competition from strategic buyers of assets who may have an overall lower cost of capital or the ability to benefit from a higher amount of cost savings following an acquisition”  (https://www.sec.gov/ix?doc=/Archives/edgar/data/0001393818/000119312525042469/d912273d10k.htm).}

^{[25] There is no deduction to disallow, as this would effectively constitute a capitalizable reduction in gross income/receipts.}

^{[26] With certain exceptions, capitalized interest expense paid or incurred by the taxpayer to a foreign person which is a related party of the taxpayer would have been treated as a base erosion payment pursuant to changes provided by Section 70331 in the Senate Finance Committee’s draft text of OB3 released June 16, 2025 (https://www.finance.senate.gov/imo/media/doc/finance_committee_legislative_text_title_vii.pdf). While that provision did not make it into the final bill, a reference to BEAT (IRC §59A(c)(3)) remains in the coordination rule section of OB3 (Section 70341), which grants Treasury explicit regulatory authority to issue “such regulations or guidance as may be necessary or appropriate to carry out the purposes of this subsection, including regulations or guidance to determine which business interest is taken into account under this subsection and section 59A(c)(3).” It is possible the BEAT reference should have been pulled from 70341 when the capitalized interest expense BEAT change in 70331 was pulled. We think it is less likely that Congress affirmatively included this reference with the intention that Treasury should—solely by regulation—limit taxpayers’ ability to avoid BEAT by choosing to capitalize their interest expense.}

^{[27] Note that valuation allowances and related accounting issues are beyond the scope of this report.}

^{[28] Because the IRC §250 deduction was scheduled to go down to 37.5% (100 – 37.5 = 62.5 x 0.21 = 13.125 / 0.8 = 16.406).}

^{[29] Note that prior to OB3’s enactment, the GILTI rate was scheduled to increase in 2026 due to a reduction in the IRC §250 deduction to 37.5%, resulting in a base rate of 13.125%. With the 80% FTC haircut, the effective tax rate on GILTI for 2026 would have been 16.406%.}

^{[30] See Section 70321 of OB3, which amends IRC §250(a)(1)(B) by striking 50% and replacing it with 40% and by striking IRC §250(a)(3), effective for taxable years beginning after December 31, 2025.}

^{[31] See Section 70312 of OB3, which amends IRC §960(d)(1) by striking 80% and replacing it with 90% (in addition to making a conforming amendment to §78), effective for taxable years beginning after December 31, 2025.}

^{[32] Because 12.6 / 0.9 = 14.}

^{[33] GILTI is designed to impose tax on a U.S. multinational’s foreign-source income that is deemed to represent a return on intangible investments (by subtracting out a 10% return assumed from QBAI or the tax basis in depreciable tangible assets). For example, businesses that invest in people and inventory and do not own the physical facilities that manufacture goods in a foreign country will not have a lot of QBAI. See Section 70323, which among other things, removes the adjustment for “net deemed tangible income return for such taxable year” from the definition of GILTI in IRC §951A(b).}

^{[34] See Section 70311 of OB3.}

^{[35] BakerHostetler, An Analysis of the 2025 Federal Tax Changes Under the “One Big Beautiful Bill” Legislation (July 9, 2025) (https://f.datasrvr.com/fr1/225/19609/Analysis_of_the_2025_Federal_Tax_Changes_--_BakerHostetler_SLIDES_July_9_Firm_Webinar.pdf).}

^{[36] See Section 70426 of OB3, which amends IRC §170(b)(2)(A) to provide that “[a]ny charitable contribution otherwise allowable (without regard to this subparagraph) as a deduction under this section for any taxable year, other than any contribution to which subparagraph (B) or (C) applies, shall be allowed only to the extent that the aggregate of such contributions—(i) exceeds 1 percent of the taxpayer’s taxable income for the taxable year, and (ii) does not exceed 10 percent of the taxpayer’s taxable income for the taxable year.” Note that to the extent that a corporation’s aggregate charitable contributions are disallowed because they exceed 1% but not 10% of its taxable income in a year, the disallowed amount “shall be taken into account as a charitable contribution for the succeeding taxable year, except that, for purposes of determining under this subparagraph whether such contribution is allowed in such succeeding taxable year, contributions in such succeeding taxable year (determined without regard to this paragraph) shall be taken into account under subsection (b)(2)(A) before any contribution taken into account by reason of this paragraph.”}

^{[37] See the Senate Finance Committee’s section-by-section explanation, (https://www.finance.senate.gov/imo/media/doc/finance_committee_section-by-section_title_vii4.pdf).}

^{[38] IRC §170(b)(2)(A), with certain exceptions.}

^{[39] EY, Estimate of reduction in corporate charitable giving resulting from the proposed 1% floor on deduction of charitable contributions made by corporations (June 2025) (https://independentsector.org/wp-content/uploads/2025/06/Ernst-Young-Study-on-1-Floor-on-Corporate-Charitable-Donations.pdf).}