This article is sponsored by CBIZ.
Selecting the right business entity structure is an important strategic decision because it affects the business’ value, cash flow, after-tax returns, and long-term objectives. This decision requires a clear understanding of business activities, ownership structure, operational activities, long-term objectives, and exit strategies, as well as a thorough evaluation of the tax implications and compliance burdens associated with different entity types.
The One Big Beautiful Bill Act (OBBBA) made significant changes that could affect business entity selection by changing the tax benefits associated with certain business structures. This creates additional tax implications for business owners to consider when evaluating and modeling business entity structures.
OBBBA provides tax benefits to both C corporations and pass-through business entities, particularly small and middle-market companies engaged in certain business activities or industries, giving businesses an incentive to perform entity choice modeling to reassess what type of entity is the most tax-advantaged for their unique situation.
Key provisions for C Corporations
The OBBBA expands qualified small business stock (QSBS) gain exclusions for stock issued after July 4, 2025, offering 50% exclusion for shares held three years, 75% for four years, and 100% for five years. The exclusion cap has also increased to $15 million or 10-times basis if greater, and the gross asset threshold to $75 million. Non-excluded gains are taxed at 28%. Only eligible C corporations can issue QSBS, making this structure more attractive for owners seeking future tax savings, but careful planning is required to qualify.
OBBBA did not change the permanent 21% corporate income tax rate, but business owners should continue to analyze whether the C corporation structure suits their goals, especially if they intend to reinvest earnings or take advantage of the new QSBS rules.
If maximizing tax savings on the sale of appreciated QSBS is your priority, the expanded QSBS benefits under the OBBBA may make C corporation status more appealing. Shorter holding periods for partial gain exclusions and higher caps and asset thresholds offer greater potential tax-free returns for investors and founders. However, these advantages only apply to QSBS issued after July 4, 2025; previous rules still govern earlier issuances. While a C corporation can be attractive, keep in mind the added complexities and costs, including double taxation and stricter QSBS qualification requirements. Careful tax modeling is essential when considering a transition.
Pass-through entity considerations
The qualified business income (QBI) deduction is now permanent at up to 20% under the OBBBA. This deduction, which is unavailable to C corporations, now benefits a broader range of high-income owners of specified service trades or businesses (SSTBs) thanks to expanded phase-outs. With permanence comes certainty, making long-term planning more reliable for pass-through owners.
Another notable change is the adjustment to the state and local tax (SALT) deduction cap. The individual SALT cap increases to $40,000 from 2025 to 2029, with a gradual phase-down for taxpayers with modified adjusted gross incomes over $500,000. Starting in 2030, the cap reverts to $10,000. OBBBA maintains the ability for pass-through entities to make pass-through entity tax (PTET) elections, enabling owners in many states to work around the SALT deduction cap at the entity level.
When considering entity selection, the QBI deduction and PTET workaround are key considerations, especially for owners not eligible for the QSBS exclusion. Detailed modelling is key, and eligibility, income thresholds, state-specific PTET rules, and the expected QBI deduction must all be factored into the analysis.
Choosing the best path forward
In the wake of OBBBA, choosing the right entity structure is more critical than ever. With new opportunities and complexities for both C corporations and pass-through entities on the horizon, many business owners will be reassessing their options. By carefully modeling your entity choice and considering how OBBBA provisions impact your specific situation, you can optimize your tax position and support your long-term goals.
Ready to evaluate your business structure? Connect with a CBIZ tax professional to get help determining the best entity for your business goals.
About CBIZ
CBIZ helps businesses discover new ways to grow with applied industry knowledge, innovative technology, and data-driven insights that inspire greater possibilities.A full-service professional services advisor in 22 major markets, coast to coast, CBIZ combines nationwide reach with industry-specific insight to turn unseen opportunities into accelerated growth.