Tax Law Landscape Changes You Can’t Ignore
Recent legislation under the One, Big, Beautiful Bill (OBBB) has reshaped federal tax policy significantly. Important updates include raised standard deductions, changed tax rate brackets, new deductions (tips, overtime), and enhancements for seniors and families—all of which influence your choice of business entity. (irs.gov)
When choosing between being an LLC taxed as a sole proprietor or partnership, an S-corporation, or a C-corporation, several changes matter:
- The size of standard deductions may reduce benefits of being a sole prop if your personal income is low vs income retained in a corporation. The standard deduction for married filing jointly is now $32,200 for 2026 under OBBB. (irs.gov).
- Marginal tax rates shift the break-points for pass-through entities vs C-corps. OBBB retains the top 37% bracket, but income ranges are elevated. (irs.gov).
Case Study: Sarah’s Graphics Studio
Sarah is a graphic designer expecting $500,000 net income this year. She is married filing jointly with her spouse involved minimally in the business.
| Business Structure | Key Tax Impacts Under OBBB | Pros & Cons for Sarah |
|---|---|---|
| Sole Proprietorship / LLC | Income flows directly into her personal return; full standard deduction; new deductions (tips may not apply) | Pros: simplicity, full access to enhanced deductions. Cons: higher self-employment tax; bracket creep when combined with spouse’s income. |
| S-Corporation | Can pay herself a salary and take distributions; payroll taxes on salary; distribution income taxed via ordinary rates post-salary; access to business deductions | Pros: reduce self-employment taxes; limited liability; keep standard deduction. Cons: administrative cost; balancing salary vs distributions matters now more with new rate brackets. |
| C-Corporation | Taxed at flat corporate rate; after distribution, dividends taxed to shareholders; possible double taxation but certain optimized strategies (e.g., retaining earnings, benefits) | Pros: retained earnings could stay taxed at corporate level if low; may help if reinvesting; cons: corporate + dividend tax could be higher. |
Action Steps When Setting Up or Restructuring
-
Run forecasts: Estimate both business and personal income under each structure using the current rates and deductions. Then see which gives you better after-tax income.
-
Consider employee/shareholder split: If using S-corp or LLC electing S, paying yourself a “reasonable salary” may shift you into different brackets—optimize distributions accordingly.
-
Factor in retirement plan contributions and credits: For C-corps, you may have different options; individuals benefit from raised contribution limits.
-
Think about future plans: If you plan to scale, add partners, raise capital, or exit—C-corporation status may attract investors better, but tax efficiency might favor pass-through initially.
Example Outcome for Sarah
After modeling figures, Sarah realized that electing an S-corporation will allow her to take advantage of her standard deduction, reduce self-employment taxes, but still keep most income taxed at beneficial rates under OBBB’s increased brackets. Retained earnings in C-corp would have been taxed twice once dividends are distributed, making it less favorable given her high personal income.
Bottom line: OBBB changes make structuring decisions more impactful. Model your numbers, align with long-term goals, and choose the structure that optimizes taxes and operations.