GOP Tax Law Gives Entrepreneurs Incentive to Be C Corporations

The US’ new $3.4 trillion tax-and-spending package will help entrepreneurs receive incentives both for initial investment and for “doubling down” on their wager of success.

Spurring initial investment further enhances Section 1202 of the federal tax code, which allows exclusions of capital gains for qualified small business stock. Section 1202 also has been described as “powerful” and a “big deal for small business.”

But why? While a number of 100% exclusions are found in the tax code, such as scholarships and damages for physical injury, many arise in a personal and not in a business context. In the ceaseless debate over choice of business entity, revisions in the new tax law may favor C corporations by making the applicability of Section 1202 more likely. The three significant changes for stock issued after July 4 are:

• A 50% exclusion applies at three years of holding, increasing to 75% at four years and 100% at five years. No partial exclusion previously existed for holding qualified stock less than five years.
• An increase to $75 million indexed in the maximum aggregate gross assets allowed when stock is issued, an increase from $50 million.
• A maximum exclusion of the greater of $15 million lifetime indexed increased from $10 million (one-half for married filing separate) or 10 times the adjusted basis in the stock.

With the earlier satisfaction of the holding period for the exclusion, the ability to extend 1202 treatment for added rounds of financing, and the possibility of a greater dollar reward, startup businesses and others ripe for growth should consider C corporation status rather than S status for potential payroll tax advantages, or should consider operating as a limited liability company for greater informality and flexibility.

What if the sale of stock at a huge gain turns out to be a “pipe dream” rather than a reality? With a low 21% federal corporate tax rate, and a maximum further loss at the individual level of 23.8% on “qualified” dividends as to the balance, the risk of higher taxes on a transaction may be justified by the possibility of no taxes on a liquidating distribution of the remaining proceeds.

Another provision in the new tax law will help to minimize the adjusted book value of assets for purpose of Section 1202 as well as encourage investment in machinery, equipment, furniture, commercial property improvements, and certain software.

The new law reinstates 100% bonus depreciation for businesses of all sizes that acquire property after Jan. 19, 2025, if not under an earlier binding contract.

Bonus depreciation allows a business to write off all or a portion of the cost of many capital items in the year that they are placed in service. The undepreciated portion is then written off using a method and term of years dictated by the law in place.

The new law also makes the 100% bonus depreciation “permanent,” which in tax parlance means indefinite. However, its presence simplifies tax accounting and allows a tax benefit in current dollars, which reduces the tax burden and the cost of capital.

Immediate write-offs can encourage domestic investment, which creates jobs and wage increases. The Tax Foundation has predicted that permanent bonus depreciation would by itself raise the gross domestic product by 0.6% and would create hours of work equivalent to 145,000 new jobs.

With the restoration of 100% bonus depreciation came modifications to a partially analogous provision, expensing under Section 179 of the federal tax code. Because Section 179 can’t be used to create or increase a loss and includes dollar maximums, it often lacks the value of bonus depreciation.

However, certain improvements—such as roofs on commercial property—may qualify for Section 179 and not bonus depreciation. Acquisitions in the first 19 days of 2025 may be eligible for expensing but for only 40% bonus depreciation.

For 2025, the maximum Section 179 deduction is now $2.5 million, phasing out at $4 million of potentially eligible purchases with both numbers indexed in future years. Other provisions of the new tax law likely to benefit the entrepreneur include the permanency of the qualified business income deduction and qualified opportunity zones, as well as the restoration of deductibility of research and experimental costs.

However, the return to 100% bonus depreciation and the expanded applicability of Section 1202 small business stock appear to be the most consequential for the business community. Although state laws may vary, both offer rich rewards to the entrepreneur at the federal level.

A business can spend millions on equipment and nonstructural commercial improvements with full immediate write-off instead of over five or 15 years respectively even if the purchases are financed over many years. That can create positive cash flow in early years while showing a tax loss on paper. And if the entrepreneur’s mode of investment was through a C corporation, the gain on disposition may enjoy a onetime “tax holiday.”

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

David S. De Jong is a principal of Stein Sperling in Rockville, Md., focusing on tax planning and controversy, estate planning, business transactions and valuations.

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