OBBBA 2026 Pass-Through Entity Tax Changes: How the One Big Beautiful Bill Act Reshapes LLC vs S Corp vs C Corp Strategy
Quick Answer
The One Big Beautiful Bill Act (OBBBA), signed into law in July 2026, fundamentally changes the LLC vs S Corp vs C Corp calculus by making the 20% QBI deduction permanent, raising the SALT cap to $40,000, restoring 100% bonus depreciation, and introducing no-tax-on-tips-and-overtime provisions that directly impact S Corp salary strategy. Pass-through entity owners (LLCs and S Corps) gain the most from permanent QBI extension, while C Corp owners benefit from R&D expensing restoration but face new minimum tax complexities. Every business owner should re-run their entity selection math under OBBBA — the gap between pass-through and C Corp taxation has shifted significantly.
Key Takeaways
- QBI Deduction Made Permanent: The 20% Section 199A deduction — previously set to expire — is now permanent under OBBBA, locking in maximum effective pass-through rates of ~29.6% (top bracket 37% × 80%) versus C Corp’s 21% + dividend tax.
- SALT Cap Raised to $40,000: The state-and-local-tax deduction cap increases from $10,000 to $40,000 (phasing out at $500K single / $1M MFJ), disproportionately benefiting pass-through owners in high-tax states who can now deduct more state income tax on business income.
- 100% Bonus Depreciation Restored: Full expensing of qualified property returns retroactively for 2025–2029, accelerating deduction timing for capital-intensive LLCs, S Corps, and C Corps — but the timing strategies differ by entity type.
- No-Tax-on-Tips & Overtime Creates New S Corp Salary Planning: S Corp owners who receive tips or overtime pay through their W-2 salary can exclude those amounts from federal income tax, creating a novel salary structuring opportunity.
- C Corp Minimum Tax & GILTI Adjustments: OBBBA modifies the corporate alternative minimum tax and GILTI calculations, affecting C Corp owners with international operations or large book-income baselines.
- Estate Tax Exemption Locked In: The high estate tax exemption (~$13.6M individual) is made permanent, eliminating the 2026 sunset panic for family-owned pass-through entities planning generational transfers.
What the OBBBA Changes for Business Entity Taxation
The One Big Beautiful Bill Act represents the most significant tax legislation since the TCJA of 2017. For business owners choosing between LLC, S Corp, and C Corp structures, the law changes multiple variables simultaneously. Here’s what matters most for entity selection.
1. QBI Deduction (Section 199A): Permanent Extension
The single biggest change for pass-through entities is that the 20% Qualified Business Income deduction is now permanent. Originally scheduled to sunset after 2025 under the TCJA, the QBI deduction was the driving force behind millions of S Corp and LLC elections.
What this means by entity:
| Entity Type | QBI Treatment Under OBBBA | Maximum Effective Rate |
|---|---|---|
| Sole Prop / Single-Member LLC | 20% off qualified business income | ~29.6% (top bracket) |
| S Corp (pass-through) | 20% off pass-through share (not W-2 salary) | ~29.6% on distributions |
| Partnership / Multi-Member LLC | 20% off each partner’s qualified share | ~29.6% per partner |
| C Corp | No QBI deduction (21% flat rate instead) | 21% + up to 20% dividend tax |
QBI Income Thresholds for 2026: The deduction begins phasing out at $243,725 for single filers and $487,450 for married filing jointly (inflation-adjusted). Above these thresholds, W-2 wage and qualified property limitations apply.
For businesses above the threshold, S Corps have a structural advantage: the W-2 wages paid to owner-employees count toward the QBI wage limit, potentially preserving more deduction than a comparable sole proprietorship. Our S Corp salary optimization guide details how to balance salary versus distributions for maximum QBI benefit.
2. SALT Cap Expansion: $40,000 Deduction
The OBBBA raises the state and local tax (SALT) deduction cap from $10,000 to $40,000 for 2026 through 2035, with a phase-out beginning at $500,000 of income for single filers ($1,000,000 MFJ).
Why this matters for entity choice:
Pass-through entity owners pay business income tax on their personal returns. In high-tax states (California, New York, New Jersey, Illinois), state income tax on business earnings can easily exceed $40,000 for profitable businesses. The higher SALT cap means:
- S Corp and LLC owners can deduct up to $40,000 of state income tax, reducing the effective pass-through tax burden
- C Corp owners benefit less because corporate-level state taxes are fully deductible as business expenses (not subject to SALT cap)
- The pass-through disadvantage in high-tax states shrinks but doesn’t disappear — state corporate taxes remain fully deductible for C Corps
Example — California Business Owner with $400,000 Income:
| Factor | Pre-OBBBA (SALT $10K cap) | Post-OBBBA (SALT $40K cap) |
|---|---|---|
| California state tax | ~$37,000 | ~$37,000 |
| Deductible SALT | $10,000 | $37,000 |
| Additional federal deduction | — | $27,000 × 35% = $9,450 tax savings |
This $9,450 annual savings makes S Corp and LLC structures more attractive in high-tax states than under the old $10,000 cap.
3. Bonus Depreciation: 100% Full Expensing Returns
OBBBA restores 100% bonus depreciation for qualified property placed in service during 2025–2029, phasing down 20% per year through 2033.
Entity-specific strategies:
- S Corp and LLC: Full depreciation flows to owners’ personal returns immediately, reducing current-year taxable income. For an S Corp owner in the 37% bracket, a $100,000 equipment purchase generates $37,000 in tax savings in year one.
- C Corp: Full depreciation reduces the 21% corporate tax rate, generating $21,000 in savings on the same purchase — but losses can only offset corporate income (not personal wages or other income).
- Sole Proprietor / Single-Member LLC: Bonus depreciation can create or increase a net operating loss (NOL), which may offset other income subject to NOL limitations.
For capital-intensive businesses (construction, manufacturing, transportation), this widens the advantage of pass-through taxation. See our guide on LLC/S Corp strategy for construction contractors for industry-specific depreciation tactics.
4. No-Tax-on-Tips and Overtime: S Corp Salary Innovation
One of OBBBA’s most novel provisions eliminates federal income tax on qualified tips and overtime pay received by W-2 employees. This creates an unprecedented planning opportunity for S Corp owner-employees.
How it works for S Corp owners:
S Corp shareholders must receive “reasonable compensation” for their services. Under OBBBA, if an S Corp owner-employee’s compensation includes amounts that qualify as overtime pay or tips, those amounts are excluded from federal taxable income (though still subject to FICA).
Structured correctly, an S Corp owner could:
- Set a base salary at a reasonable level
- Receive additional compensation classified as overtime (for hours worked beyond 40/week)
- Exclude the overtime portion from federal income tax
Important caveats:
- The IRS will scrutinize overtime classification for owner-employees
- State tax treatment varies — not all states conform to the federal exclusion
- Reasonableness still applies — total compensation must align with industry standards
- This strategy does not work for LLC sole proprietors (no W-2 wages) or C Corp owners (salary is fully deductible but taxable)
This makes S Corp election more attractive for service-based businesses where owner-employees work significant hours. Our S Corp reasonable compensation enforcement guide covers how to document compliance.
5. R&D Expensing and Section 174
OBBBA restores immediate R&D expensing under Section 174, reversing the disastrous 5-year amortization requirement that took effect in 2022. This change applies retroactively to 2025 and forward.
Impact by entity:
- C Corps: R&D credits offset the 21% corporate rate directly. For tech and manufacturing companies, this restores the incentive to accumulate IP within a C Corp.
- S Corps: R&D credits pass through to shareholders but may be limited by individual AMT and basis rules. However, immediate expensing reduces pass-through income, lowering individual tax.
- LLCs: Same as S Corps for multi-member LLCs (partnership taxation). Single-member LLCs benefit from reduced Schedule C income.
For AI and tech startups, the interaction between QSBS (Section 1202) and restored R&D expensing reinforces C Corp advantages. See our S Corp vs C Corp guide for AI startups for the full analysis.
6. C Corp Minimum Tax and International Provisions
OBBBA modifies but does not eliminate the corporate alternative minimum tax (CAMT), adjusting the book-income threshold and providing transition relief. The GILTI (Global Intangible Low-Taxed Income) regime is also modified with a higher exclusion percentage.
For most small business owners, these provisions are irrelevant — the CAMT applies only to corporations with three-year average book income exceeding $1 billion. However, for mid-market C Corps approaching that threshold, entity-level planning becomes critical.
Updated LLC vs S Corp vs C Corp Comparison: Post-OBBBA
Effective Tax Rate Comparison (2026, $300,000 Business Income)
| Factor | Sole Prop / LLC | S Corp | C Corp |
|---|---|---|---|
| Taxable business income | $300,000 | $300,000 | $300,000 |
| QBI deduction (20%) | -$60,000 | -$60,000 (on distributions) | N/A |
| Taxable income (entity) | $240,000 | $240,000 (approx.) | $300,000 |
| Entity-level tax | $0 | $0 | $63,000 (21%) |
| Owner salary | N/A | -$120,000 (reasonable) | -$120,000 |
| SE tax / FICA on salary | ~$17,000 (SE tax on full profit) | ~$9,180 (FICA on $120K salary) | ~$9,180 (FICA on $120K) |
| Owner individual tax | ~$56,800 (24% of $236,650) | ~$42,000 (24% of $175,000) | $0 (if no dividend) |
| Dividend tax | $0 | $0 | $0 (if retained) / up to $23,400 |
| Total estimated tax | ~$73,800 | ~$51,180 | ~$72,180 (no dividend) |
Note: Simplified illustration. Actual results vary by state, filing status, and deductions. See our pass-through vs double taxation guide for detailed methodology.
Key insight: The S Corp advantage widens under OBBBA because the permanent QBI deduction applies to the distribution portion of S Corp income, while the salary portion avoids SE tax entirely.
Break-Even Income Analysis Update
The income level at which S Corp election becomes worthwhile hasn’t changed dramatically, but the savings magnitude has:
| Annual Net Profit | LLC SE Tax | S Corp Total Tax | Annual Savings |
|---|---|---|---|
| $60,000 | $8,478 | $7,200 | $1,278 |
| $100,000 | $14,130 | $10,800 | $3,330 |
| $150,000 | $21,195 | $14,400 | $6,795 |
| $250,000 | $30,024 | $18,000 | $12,024 |
| $500,000 | $36,448 | $21,780 | $14,668 |
Assumes S Corp salary set at 40% of profit, single filer, 2026 rates with permanent QBI.
Action Items: What Business Owners Should Do Now
If You’re Currently a Sole Proprietor or Single-Member LLC
- Run the S Corp break-even analysis with OBBBA’s permanent QBI deduction — the savings are now locked in for the foreseeable future, making the switch more compelling.
- Evaluate salary + overtime structuring if you work 50+ hours per week in your business.
- Accelerate capital purchases to take advantage of 100% bonus depreciation before the phase-down begins.
- Review your state’s SALT cap conformity — some states don’t conform to federal SALT changes.
If You’re Currently an S Corp
- Re-evaluate your reasonable compensation in light of the overtime exclusion — you may benefit from restructuring salary components.
- Maximize QBI deduction planning — with permanent QBI, income smoothing and wage optimization have long-term value.
- Consider whether C Corp conversion makes sense — for businesses planning to retain significant earnings for 5+ years, the 21% rate with restored R&D expensing may be competitive.
If You’re Currently a C Corp
- Assess dividend distribution strategy — the SALT cap increase makes pass-through taxation more competitive for owner-operated businesses.
- Leverage restored R&D expensing — if your C Corp has accumulated intellectual property, the immediate deduction improves cash flow.
- Review S Corp conversion feasibility — if your business has become more service-oriented and less capital-intensive, the pass-through advantage may now outweigh C Corp benefits.
If You’re Choosing an Entity for a New Business
- Default to S Corp for service businesses earning $60,000+ — permanent QBI + SE tax savings + overtime exclusion make this the strongest default choice.
- Choose C Corp for venture-backed startups — QSBS eligibility and VC requirements still dominate this decision. See our AI startup entity guide.
- Use LLC structure for real estate — liability protection without the payroll complexity. See our LLC/S Corp guide for real estate investors.
- Model multiple years — use your projected revenue, expenses, and capital purchases to project 3-year tax outcomes under each entity type.
Frequently Asked Questions
Does the OBBBA make the QBI deduction permanent for all pass-through entities?
Yes. The One Big Beautiful Bill Act makes the Section 199A QBI deduction permanent for qualified business income from S Corps, partnerships, multi-member LLCs, and sole proprietorships. The 20% deduction applies to qualified business income after deducting the owner’s W-2 salary (for S Corps) and is subject to income thresholds ($243,725 single / $487,450 MFJ for 2026) and W-2 wage/qualified property limitations above those thresholds.
How does the $40,000 SALT cap change affect my S Corp vs C Corp decision?
The raised SALT cap benefits pass-through entity owners (S Corps and LLCs) more than C Corp owners because state income taxes on pass-through business income are deducted on the owner’s personal return, where the SALT cap applies. C Corp state taxes remain fully deductible at the entity level. In high-tax states like California and New York, the $40,000 SALT cap reduces the pass-through disadvantage by up to $10,500 annually compared to the old $10,000 cap.
Can S Corp owners really benefit from the no-tax-on-overtime provision?
Yes, but with strict limitations. S Corp owner-employees who receive W-2 wages can classify qualifying overtime pay as excluded from federal taxable income. However, the IRS requires that total compensation remain “reasonable” for the services performed, and the overtime must be properly documented through payroll systems. This strategy works best for service-based businesses where owners actively work 50+ hours per week. Consult a tax professional before restructuring your S Corp salary to include overtime components.
Does the OBBBA change C Corp tax rates?
No. The C Corporation flat tax rate remains at 21%, which was already permanent under the TCJA. OBBBA modifies the corporate alternative minimum tax (CAMT) thresholds and provides GILTI relief for international operations, but these provisions primarily affect large corporations. For small to mid-size C Corps, the rate and structure remain unchanged.
Should I switch from C Corp to S Corp because of OBBBA?
Possibly, especially if your business is owner-operated with profits distributed annually rather than retained. The permanent QBI deduction, raised SALT cap, and overtime exclusion strengthen the pass-through advantage. However, C Corp-to-S Corp conversion involves recognizing built-in gains on appreciated assets, which can trigger significant tax liability. You should model the conversion costs against projected annual savings. For businesses with appreciated assets exceeding $500,000, the built-in gains tax (which applies for 5 years post-conversion) may outweigh the annual savings.
How does 100% bonus depreciation affect my entity choice for a new business?
For capital-intensive businesses (equipment, vehicles, machinery), 100% bonus depreciation under OBBBA creates larger immediate deductions for pass-through entities because the depreciation flows to the owner’s personal return, offsetting income taxed at up to 37%. The same deduction in a C Corp only offsets income taxed at 21%. However, for businesses with minimal capital purchases, this distinction is less important. The bonus depreciation schedule phases down 20% annually starting in 2030, so the advantage is strongest for purchases made before then.
Is the estate tax exemption now permanent under OBBBA?
Yes. OBBBA makes the enhanced estate tax exemption (approximately $13.6 million per individual, $27.2 million per couple in 2026) permanent, eliminating the planned 2026 reversion to ~$7 million. This is particularly significant for family-owned S Corps and LLCs with substantial business value, as it removes the pressure to complete gifting or restructuring strategies before a sunset date.
Strategic Takeaway: The Pass-Through Advantage Deepens
The OBBBA tilts the entity selection landscape further toward pass-through structures for most owner-operated businesses. The permanent QBI deduction eliminates the uncertainty that drove many “wait and see” decisions, while the SALT cap expansion and overtime exclusion add new layers of tax efficiency specific to S Corps and LLCs.
However, C Corps remain the right choice for businesses that:
- Seek venture capital or institutional investment
- Plan to accumulate significant retained earnings for R&D or expansion
- Aim for eventual IPO or acquisition (QSBS benefit)
- Have complex international operations (GILTI/CAMT modifications)
The bottom line: If you’ve been delaying an S Corp election because of TCJA sunset uncertainty, that uncertainty is now resolved. Run the numbers with your CPA under permanent QBI rules — most service businesses earning $60,000+ in net profit will find S Corp election more compelling than ever.
For a comprehensive comparison of all factors beyond taxation, see our LLC vs S Corp Complete Guide and LLC vs C Corp Complete Guide.
This article reflects OBBBA provisions as signed into law in July 2026. State-level tax conformity varies. Always consult a licensed tax professional for entity selection decisions specific to your situation.