Business Entity Type Is a Tough but Crucial Tax Decision in 2026

When Congress passed the tax-and-spending law in July last year, many companies breathed a sigh of relief. The legislation brought long-awaited certainty to areas of the tax code that were once murky.

But with clarity comes choice, and for many business owners, one of the toughest decisions is also one of the most foundational: Which entity type is right for us now?

From updated incentives for C corporations to permanent deductions for pass-throughs, the fiscal package has reshaped the tax advantages associated with each entity type. For business owners, that means new opportunities and new complexity in aligning tax strategy with long-term growth.

The type of entity you choose will influence your business’s overall valuation, cash flow, and post-tax profitability. Here’s what has changed and what to consider as you weigh your entity options.

C Corporations

Qualified Small Business Stock: The tax law enhances incentives for investment in startups and smaller companies by revising QSBS gain exclusions for stock issued after July 4, 2025. Under the new rules, gain exclusions are tiered: 50% for stock held for at least three years, 75% for at least four years, and a full 100% exclusion for at least five years.

The exclusion cap also has increased to $15 million (or 10 times the original investment basis, if higher), and the gross asset ceiling is now $75 million. Any gain up to $15 million that doesn’t qualify for exclusion will be taxed at a 28% rate. Anything over $15 million will be taxed as long-term capital gains at a 20% rate.

Only C corporations can issue QSBS, so these changes may make this structure more appealing to founders seeking significant tax breaks on future sales of appreciated stock. It’s crucial to review the comprehensive requirements for QSBS qualification to ensure compliance.

Permanent 21% Corporate Tax Rate: The tax law maintained the corporate tax rate at 21%. Owners should continue evaluating whether the C corporation structure aligns with their goals regarding operational efficiency, financing needs, growth strategies, and compliance requirements.

Despite having double taxation and higher regulatory demands, C corporations offer fewer restrictions on ownership. They may be beneficial in scenarios involving reinvestment of profits or plans to sell QSBS-qualified shares.

If maximizing tax-free gains from the future sale of QSBS is your objective, the expanded QSBS provisions could make forming or remaining a C corporation more enticing, given the larger exclusion limits and shorter required holding periods.

With the asset limit now higher, more businesses may see C corporation status as a smarter fit, especially if a future sale is part of the plan.

These expanded exclusions only apply to stock issued after July 4, 2025. The previous rules still govern earlier issuances. Careful modeling and tax planning will help align the benefits with your business objectives, particularly given the greater complexity of QSBS compliance and qualification requirements.

Pass-Through Entities

Qualified Business Income Deduction: Introduced by the 2017 Tax Cuts and Jobs Act as a temporary benefit, the QBI deduction allows qualifying pass-through entities to deduct up to 20% of their business income—a deduction not available to C corporations.

The tax package enacted last year made this provision permanent at the existing 20% level and expanded phase-out ranges, enabling more high earning specified service trade or business owners to claim at least a partial deduction.

That means greater certainty and potentially more savings for pass-through owners who plan ahead.

SALT Cap Adjustment and PTET Workaround: Beginning in 2025, the tax package raises the individual state and local tax deduction cap to $40,000. However, this provision will sunset in 2029, with the cap reverting to $10,000 in 2030.

The law introduces a phase-out for individuals with a modified adjusted gross income exceeding $500,000, with the phase-out amount equal to 30% of their modified adjusted gross income above this threshold. Both these thresholds will increase by 1% annually through 2029.

The tax law left pass-through entity tax elections unchanged, meaning that pass-through entities in states with PTET frameworks can still obtain a full deduction at the entity level, helping owners mitigate the federal SALT deduction limitation.

The continuation of the QBI deduction and the PTET workaround allows for more reliable tax planning for pass-through entities, particularly for those ineligible for QSBS exclusions.

When weighing entity types, it’s essential to analyze eligibility criteria, projected deduction amounts, and the state-level availability of PTET rules. Your choice should reflect the most advantageous overall tax position, accounting for federal and state law and the various modifications introduced by last year’s fiscal package.

Given the complexity of these tax changes, consult with trusted tax advisers to evaluate which entity structure best aligns with your unique business goals and financial strategy.

Comprehensive analysis and professional guidance will help you make an informed decision in today’s evolving tax environment.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Joseph J. Perry is CBIZ’s national tax leader based in Melville, N.Y.

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