The One Big Beautiful Bill Act (OBBBA) made significant changes that impacted business entity selection by adjusting the tax benefits tied to various closely held business structures. The process of selecting the right entity is not a one-size-fits-all exercise. It requires a clear understanding of business activities, ownership structure, operational activities, long-term objectives, and exit strategies. This process also includes an evaluation of the tax implications and tax compliance burdens associated with operating a business as a C corporation or pass-through entity. Your entity choice will affect the value of your business, cash flow, and after-tax returns.
The OBBBA adds a new layer of tax considerations that business owners should address as they evaluate and model business entity structures. The OBBBA introduced several changes that were made permanent, improved, or new, providing tax benefits to both C corporations and pass-through business entities, and particularly to small and middle-market companies engaged in certain business activities or industries. These shifts provide incentives for businesses to perform entity choice modeling and reassess what type of entity — C corporation, S corporation, or LLC/partnership — can provide the most significant tax advantages for each business owner’s unique situation.
The following key tax provision changes in the OBBBA, including extensions of existing law, will have the greatest impact on entity selection decisions:
C Corporations
Section 1202: Qualified Small Business Stock (QSBS)
To further incentivize investment in startups and small business, the OBBBA expands the gain exclusion rules on the sale of QSBS issued after July 4, 2025, by providing for a tiered gain exclusion (50% exclusion for stock held at least three years, 75% for stock held for at least 4 years, and a 100% exclusion for stock held at least five years), increasing the exclusion cap from $10 million to $15 million or 10-times basis (if greater), and increasing the gross asset threshold from $50 million to $75 million. Any gain that is not excluded is subject to an increased tax rate of 28%. Only eligible C corporations can issue QSBS, potentially making this a more attractive entity choice option for individual owners of certain private companies, especially those seeking significant tax savings on a future sale of appreciated QSBS. There are many other requirements to qualify stock as QSBS, so careful planning is required.
Permanent 21% Corporate Income Tax Rate
The OBBBA did not make changes to the 21% corporate income tax rate. Business owners should continue to model and evaluate whether operating as a C corporation may provide more attractive operational or compliance efficiencies for owners, employees, financing, and long-term growth plans. While C corporations are subject to double tax and are subject to more administrative and regulatory requirements, they have less ownership restrictions than S corporations. In addition, the C corporation structure may provide tax savings, especially if the C corporation intends to reinvest earnings or a sale of QSBS-eligible stock is contemplated.
CONSIDERATIONS: if your primary goal is tax savings on the sale of your appreciated QSBS, the expanded QSBS benefits may make a C corporation a more attractive entity choice, potentially offering greater tax-free gains for investors and founders, particularly with the shorter holding periods for partial exclusion. It is expected that more QSBS-eligible companies may explore C corporation status due to the higher gross asset threshold. However, it is important to note that these changes are only applicable to QSBS issued after July 4, 2025. The prior law rules, including the 5-year holding period, $10 million exclusion cap, and the $50 million gross asset threshold, continue to apply to QSBS issued before July 4, 2025. Remember that even with the current 21% corporate income tax rate, operating as a C corporation may entail more tax complexities and costs. The new QSBS rules may add more complexities to QSBS qualification requirements and preservation of your corporation’s QSBS status. A tax modelling analysis will be instrumental in making this decision. For example, many start-ups operate at a loss for several years, making the double-taxation treatment of C corporations less of an impediment.
Pass-Through Entities
Pass-through entities may benefit from the following key tax provisions:
Qualified Business Income Deduction
Originally enacted as a temporary measure as part of the 2017 Tax Cuts and Jobs Act, the qualified business income (QBI) deduction allows eligible pass-through entities a deduction of up to 20% on their QBI. The deduction is not available to C corporations. The OBBBA made this deduction permanent at the current 20% rate and made other modifications. The new law also broadened the QBI range phase-outs and allows for more high-income specified service trade or business (SSTB) owners to qualify for at least a partial deduction. These changes provide pass-through entity owners with greater certainty and enable more reliable long-term planning.
SALT Cap limitation and Pass-Through Entity Tax (PTET) Workaround Protection
The OBBBA increases the individual SALT cap to $40,000 beginning in 2025 through 2029, at which time it reverts to the $10,000 SALT cap limit starting in 2030. The new law provides a phase-down for taxpayers with a modified adjusted gross income (MAGI) over $500,000, which is reduced by 30% of the excess income above that threshold. Both the MAGI thresholds and temporary limits are increased 1% each year through 2029. It is important to note that the OBBBA did not alter the ability for pass-through entities to make PTET elections and obtain a full deduction at the entity level. Many states and jurisdictions have enacted PTET regimes, which were designed to help pass-through entity owners circumvent the federal SALT deduction cap.
CONSIDERATIONS: The QBI deduction and the availability of the PTET workaround remain key components in the entity selection process, especially for pass-through businesses that do not qualify for the QSBS gain exclusion. While the permanent 20% QBI deduction provides greater clarity, entity selection modelling should take into account eligibility, thresholds, and the expected QBI deduction amount. Business owners should also evaluate the availability and impact of evolving PTET workaround regimes in applicable states, and the impact of other individual and business changes contained in the OBBBA, as part of their entity choice tax-cost analysis.
We encourage you to work closely with your CBIZ tax professionals to help determine the best entity for your business goals.
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