S-Corp or C-Corp? Choosing the Best Structure After the OBBB Act

The choice of business entity has always been a foundational decision for American entrepreneurs, but the legislative landscape of 2025 has rewritten the rules. With the passage of the One Big Beautiful Bill Act (OBBBA) in July 2025, several temporary provisions from previous years have been made permanent, while new incentives have been introduced specifically for domestic corporations. For successful business owners, the standard advice of the last decade may no longer hold true.

Choosing between a Subchapter S Corporation and a Subchapter C Corporation is no longer just about avoiding double taxation. In the post-OBBBA era, factors such as the permanent Qualified Business Income (QBI) deduction, expanded Qualified Small Business Stock (QSBS) benefits, and aggressive full-expensing rules for capital investments have created a more nuanced decision-making matrix. This guide explores how these shifts impact your bottom line and your long-term exit strategy.

The S-Corp Advantage: Permanent Pass-Through Benefits

For many small to mid-sized businesses, the S-Corporation remains the gold standard for tax efficiency. The primary appeal of an S-Corp is its pass-through nature; the entity itself pays no federal income tax. Instead, profits and losses flow through to the shareholders’ personal tax returns, avoiding the double taxation of dividends.

The OBBBA has solidified the S-Corp’s position by making the Section 199A Qualified Business Income (QBI) deduction permanent. Previously scheduled to sunset at the end of 2025, this provision allows eligible owners to deduct up to 20% of their qualified business income from their federal taxable income. According to the IRS summary of OBBBA provisions, the act also increased the phase-out thresholds, allowing higher-earning professionals in fields like law and medicine to retain the deduction at higher income levels.

Furthermore, S-Corps offer a unique strategy for managing Self-Employment (SE) taxes. By paying themselves a reasonable salary and taking the remaining profit as a distribution, owners can save significantly on the 15.3% SE tax. In a landscape where individual marginal rates have been stabilized at a 37% maximum by the OBBBA, the combination of the 20% QBI deduction and SE tax savings often results in a lower effective tax rate than the C-Corp alternative.

The C-Corp Renaissance: Growth and Exit Incentives

While S-Corps are built for annual cash flow efficiency, C-Corporations are increasingly favored by those planning for rapid scale and high-value exits. The OBBBA maintained the flat 21% federal corporate tax rate, making the C-Corp an attractive vehicle for businesses that intend to reinvest their earnings rather than distribute them immediately to shareholders.

The most compelling reason to choose a C-Corp in 2025 is the expansion of Section 1202, also known as Qualified Small Business Stock (QSBS). Under the OBBBA, the benefits of QSBS have been significantly broadened. For stock issued after July 4, 2025, the gross asset threshold for qualifying companies was increased from $50 million to $75 million, and the per-investor gain exclusion cap was raised to $15 million.

As detailed in the Alvarez & Marsal analysis of QSBS changes, the OBBBA also introduced tiered holding periods. While a 100% gain exclusion still requires a five-year hold, investors can now claim a 50% exclusion after just three years. This makes the C-Corp structure incredibly lucrative for founders and venture-backed startups looking to exit within a shorter timeframe without a massive capital gains hit.

Bonus Depreciation and R&D: Leveling the Playing Field

One of the most significant ROI boosters in the OBBBA is the permanent reinstatement of 100% bonus depreciation and the return to full expense for Research and Development (R&D) costs. Under prior law, bonus depreciation was phasing out, and R&D costs had to be amortized over five years.

Both S-Corps and C-Corps benefit from these changes, but they impact the structures differently. For an S-Corp, a $2 million equipment purchase can create a massive paper loss that offsets the owner’s other income in the current year. For a C-Corp, these deductions can be used to zero out corporate tax liability, allowing the company to retain more cash for future acquisitions.

The OBBBA’s shift toward full expensing means that capital-intensive businesses, such as manufacturing, tech development, and construction, can achieve a 0% effective tax rate in years of heavy investment, regardless of their entity choice. However, the C-Corp structure often provides more flexibility for carrying forward these Net Operating Losses (NOLs) to offset future corporate profits.

Key Considerations for High-Net-Worth Owners

When deciding between these two structures after the OBBBA, several specific factors should drive your tax strategy:

• State and Local Taxes (SALT): The OBBBA increased the SALT deduction cap to $40,000 for individuals through 2029. S-Corp owners can benefit from this personally, but many states also offer Pass-Through Entity (PTE) tax elections that allow S-Corps to pay state taxes at the entity level, effectively bypassing the federal SALT cap entirely.
• Charitable Giving: C-Corporations are now subject to a 1% floor for charitable deductions, meaning they can only deduct contributions that exceed 1% of their taxable income. S-Corp owners, conversely, pass their charitable gifts through to their personal returns, where they may be subject to different AGI limitations.
• Reasonable Compensation: S-Corp owners remain under the IRS microscope regarding their salary-to-distribution ratio. C-Corp owners don’t face this specific SE tax issue but must be wary of accumulated earnings taxes if they keep too much cash in the business without a documented plan for use.

Making the Final Decision: Flexibility vs. Exit Value

The OBBBA has made the S-Corp more permanent and predictable, but it has made the C-Corp more explosive and rewarding for those chasing the big exit. If your goal is to draw a steady, tax-optimized income and utilize the 20% QBI deduction to its fullest, the S-Corp is likely your winner. If you are building a legacy company with plans to go public, sell to private equity, or take advantage of the $15 million QSBS exclusion, the C-Corp is the superior strategic choice.

The optimal structure for your business depends on your five-year growth plan, your capital expenditure requirements, and your eventual exit strategy. Because the OBBBA has introduced complex new rules for controlled groups and international income, a surface-level analysis is no longer sufficient for high-net-worth individuals.

Connect with a Qualified Tax Strategist

Choosing the wrong entity structure can cost a business owner millions in unnecessary taxes and lost exit opportunities. At Top Tax Planners, we simplify the process by connecting you with a curated network of the nation’s top-tier tax professionals. Our directory features verified experts who specialize in OBBBA compliance, entity optimization, and advanced pass-through strategies. Don’t leave your business structure to chance in this new legislative era. Visit the Top Tax Planners Directory today to find a qualified tax professional who can perform a comprehensive entity analysis and ensure your business is positioned for maximum tax savings and long-term ROI.