This post builds on our previous analysis of Partnerships, S corporations, and Corporations (“C” corporations) following the passage of the One Big Beautiful Bill (“OB3”). Many of our business clients are currently reassessing the choice between structuring their businesses as a Partnership, Subchapter S Corporation or a Corporation after OB3 passed. We conclude that Corporations are the best fit for certain qualifying businesses that are planning to grow and sell and that Partnerships are best for professional service, investment, and oil and gas businesses that plan to continue operating for a long period.
| Topic | What Changed / New Under OB3 | Implication |
|---|---|---|
| Section 199A (QBI / pass-through deduction) | OB3 makes the Section 199A qualified business income (QBI) deduction permanent, maintaining the 20% deduction for eligible pass-through businesses. | This preserves a major advantage for pass-through entities and adds certainty as 199A remains on the books indefinitely. |
| Bonus depreciation / Expensing | The bill restores and makes permanent 100% bonus (full expensing) for “qualified property” acquired on or after January 20, 2025. | This strengthens the case for C Corporations, especially for capital-intensive businesses, because they can immediately deduct full cost of qualifying assets. |
| Qualified Small Business Stock (QSBS) / § 1202 | OB3 significantly expands and liberalizes § 1202 benefits: → A 50% gain exclusion applies to QSBS held for more than 3 years and 75% exclusion for more than 4 years (whereas, the old rule required 5 years for full exclusion). → Other enhancements to make the regime more favorable to startups and investors. | This change improves the attractiveness of a C corporation structure (or of converting) for companies with exit potential. |
| SALT Deduction / State & Local Taxes | OB3 increases the SALT deduction cap for individuals from $10,000 to $40,000 for the 2025–2029 tax years, with phase-outs based Modified Adjusted Gross Income (MAGI). Also, OB3 abrogates Notice 2020-75, which had allowed pass-through entity level state taxes (PTET / entity-level SALT) in certain cases, by requiring that state taxes paid by a partnership or S Corp be separately stated items. | This diminishes one favorable workaround for pass-throughs (also known as the SALT “workaround” by entity taxes). |
| International / Cross-Border Tax Provisions | OB3 makes several international tax rules permanent and/or modifies them: → GILTI / FDII rules are made permanent at current rates instead of increasing. → The “haircut” on the foreign tax credit for non-controlled taxable income (NCTI) is reduced (from 20% to 10%) starting Dec 31, 2025, meaning taxpayers can claim more foreign tax credits. → The BEAT (Base Erosion & Anti-Abuse Tax) is frozen permanently at the current rate (rather than rising) for applicable corporations. | These changes highlight the value of a Corporation over passthrough entities for international businesses. |
| AMT & Other Extensions | OB3 makes permanent various TCJA provisions that were set to expire, such as high AMT exemptions and phase-out thresholds. Also, many business tax deductions and credits that would have expired are extended or made permanent. | This reduces the “sunset risk” in tax planning. |
| Other Notable Changes (less directly structural) | → Several energy and/or green tax credits are scaled back or eliminated. → Estate and gift tax exemptions are increased, made more favorable, and permanentized. → Modifications to executive compensation deductions for public companies. → Changes to moving expense benefits, HSA rules, and other individual tax items. | These are relevant in certain situations (e.g. if a business is part of a family group, or in transition) but less central to the S vs. C core trade. |
Quick-Reference Comparison Table (OB3 Environment)
| Tax Feature | S Corporation | C Corporation | Partnership |
|---|---|---|---|
| Pass-through taxation | ✅ Yes | ❌ No | ✅ Yes |
| 199A deduction (20%) | ✅ Yes | ❌ No | ✅ Yes |
| Double taxation risk | ❌ No | ✅ Yes | ❌ No |
| 21% Deferral Potential | ❌ No | ✅ Yes | ❌ No |
| Bonus depreciation (100%) | ✅ Yes | ✅ Yes | ✅ Yes |
| QSBS / §1202 eligibility | ❌ No | ✅ Yes (50–75% exclusion with 3–4 yrs) | ⚠️ Limited (only if partnership holds QSBS stock properly) |
| International rules (GILTI/FDII/BEAT improvements) | ❌ Problematic | ✅ Yes | ❌ Problematic |
| SALT deduction workaround (PTET) | ❌ Removed under OB3 | N/A | ❌ Removed under OB3 |
| Eligibility restrictions | ✅ U.S. only, ≤100 shareholders, 1 class of stock | ✅ Very flexible | ✅ Very flexible |
| Estate & gift tax planning | ⚠️ Moderate | ✅ Strong | ✅ Best (FLPs, LLCs, etc.) |
