The S corporation has long been a favorite structure for small and mid-sized business owners, and for good reason. It offers liability protection, avoids double taxation, and can reduce self-employment taxes by splitting income between salary and distributions.
But with the passage of the One Big Beautiful Bill Act (OBBBA) and other tax shifts on the horizon, now is a good time to ask: Is an S corp still the best fit for your business?
What’s Changed?
The OBBBA includes several provisions that could influence how you think about your entity type:
- 100% Bonus Depreciation is back, allowing businesses to immediately deduct the full cost of eligible equipment purchases. This impacts tax planning across all entity types but may create strategic advantages when paired with other structures.
- EBITDA-Based Interest Deduction: The bill reinstates interest deductibility based on EBITDA, potentially expanding deductions for leveraged companies. This could influence how income is allocated and taxed for S corp owners.
- Expanded R&D Credits: These apply to all businesses, but passthrough entities like S corps may face added complexity when allocating credits across shareholders.
- The QBI Deduction is Now Permanent. The 20% Qualified Business Income deduction under Section 199A is here to stay for the foreseeable future. That’s good news for S corps and other passthrough entities, offering long-term planning stability, especially compared to C corps.
Thinking About Switching? Know the Rules First
The idea of changing your structure may sound appealing, but it’s not something to do lightly. Here’s why:
- Revoking S corp status requires a majority vote and a formal letter to the IRS. Once revoked, you can’t re-elect S corp status for five years without IRS approval.
- LLCs can elect S corp taxation with Form 2553, but only if they meet eligibility rules (like a limited number of shareholders and one class of stock). This switch also comes with added complexity around payroll and owner compensation.
- C corp to S corp conversions can trigger built-in gains (BIG) tax if appreciated assets are sold within five years, potentially wiping out expected tax savings.
- Partnerships converting to corporations may face tax consequences depending on asset and liability transfers.
In other words, entity choice isn’t a toggle switch; it’s a strategic decision with long-term implications for taxes, payroll, ownership, and succession.
Key Questions to Consider
- Are you paying yourself a reasonable salary as required by the IRS?
- Are you planning major capital purchases or financing that could affect your deductions?
- What happens to your current structure support your long-term goals for growth, succession, or sale?
- Are there tax planning opportunities you’re missing under your current setup?
Let’s Reevaluate Your Structure Together
Your business has likely evolved since you first chose your entity type and so has the tax landscape. With the OBBBA now law and more changes on the horizon, now is the right time to revisit your options.
At Bailey Scarano, we help business owners evaluate their options through the lens of long-term tax impact, ownership goals, and exit strategy. If you’re considering a change or want to be sure staying put still makes sense, we’re here to help you make an informed decision.