Is it Time to Revisit Your Business Entity Structure?
There is always time to revisit your current business entity structure based on your business’s current needs. Read below to find out what has changed and why it is important to revaluate your existing business structure.
One Big Beautiful Bill Act (OBBBA)
The OBBBA is a reminder that entity choice shouldn’t be viewed as permanent. Likely when you started your business, you and your advisors discussed things like:
- Liability protection.
- Owners’ tax and succession goals.
- Federal and state tax laws and incentives.
- Expected growth trajectory.
- Availability of financing.
- Likelihood of a sale, acquisition, or merger.
Since those decisions were made, the world has changed. The economy, tax laws, and potentially even business goals have changed. These changes raise an important question, when was the last time you revisited your entity structure?
Why Revisit Your Entity Choice?
We’ve seen firsthand in recent years that over time, tax laws change. In the past decade alone, several major pieces of tax legislation have been enacted, interpreted, and refined including:
- The Tax Cuts and Jobs Act (TCJA) of 2017.
- The Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020.
- The Inflation Reduction Act of 2022.
- The One Big Beautiful Bill Act of 2025.
These tax laws have modified existing rules, repealed others and introduced new tax incentives. Some of the conclusions you reached years ago may not hold up in today’s tax landscape.
What Changed Since You Chose a Tax Structure for Your Business?
The cumulative effect of multiple tax law changes can build a strong case for making a change to your entity structure. The following examples illustrate how changes in the tax code can affect the assumptions behind your original choice.
Corporate Tax Rate Reduction
Starting in 2018, the highest corporate tax rate was permanently reduced from 35% to 21%. This was significant on its own, but implications went beyond lowering a company’s annual tax bill. The rate reduction changed the dynamic of the entity choice decision. For many years, C corporations were dismissed because of their relatively high tax rates. With the lowering of the corporate rate to 21% that assumption no longer held true. Business owners were forced to reevaluate the advantages and disadvantages of each entity type. Factors such as ownership goals, growth plans, financing needs, and exit strategies suddenly became more important.
Qualified Business Income Deduction (Section 199A)
The TCJA didn’t just help corporations, it also created new opportunities for pass-through entities, including the Qualified Business Income (QBI) deduction. There was a concern when the TCJA reduced the corporate tax rate from 35% to 21%. Pass-through businesses might be at a disadvantage since many individual income tax rates remained higher than the new corporate tax rate. The QBI deduction was designed, in part, to reduce the disadvantage. The QBI deduction lets owners of pass-through businesses (S corporations, partnerships, and sole proprietorships) deduct up to 20% of business income. Hence, the QBI deduction is often referred to as the pass-through entity deduction. The QBI deduction helped pass-through structures maintain their competitiveness. Originally the deduction was set to expire after December 31, 2025, but the OBBA made the deduction permanent.
Qualified Small Business Stock Gain Exclusion (Section 1202)
For many years C corporations were dismissed due to concerns with double taxation. While some of these concerns are still valid, recent changes to the Qualified Small Business Stock (QSBS) rules make C corporations more attractive. The QSBS gain exclusion lets eligible investors exclude up to 100% of the taxable gain recognized from the sale of qualified small business stock. The OBBBA expanded the QSBS rules, making it easier to qualify and increase potential tax savings. QSBS benefits are generally only available to shareholders of C corporations. Business owners who had previously dismissed C corporations now have incentive to rethink their decisions, particularly if they anticipate their stock will significantly appreciate or if they plan to sell their business in the near future.
Section 163(j) Changes
The TCJA introduced a new provision that restricts the amount of business interest taxpayers can deduct each year. Since its enactment, the act has been modified multiple times, which created uncertainty for businesses that rely heavily on debt financing. Real estate businesses, for example, which rely heavily on debt financing initially had the opportunity to opt out of Section 163(j). Lawmakers recognized this and realized that such a strict limitation could harm the industry. The trade-off was that businesses making the election would have to forgo the use of bonus depreciation. Administrative guidance released in early 2026 provided taxpayers with an opportunity to revoke that election to take advantage of renewed bonus depreciation opportunities.
Revaluate Your Business Structure Based on Your Business’s Current Needs
The best entity structure is not necessarily the one you chose years ago. Choosing an entity structure is one of the most important decisions business owners make. As tax laws, economic conditions, ownership goals, and business operations evolve, it may be prudent to revisit decisions made years ago. You may ultimately conclude that your current structure is still the best fit. However, the review process can provide valuable clarity and help confirm whether your business remains aligned with your long-term goals. John Pharr CPA to discuss your current entity structure and evaluate whether a change may be beneficial for your tax position, operational needs, and future plans.
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