Entity Setup
Entity Setup: Choosing the Right Business Structure in Light of New Inflation Adjustments
With the IRS’ 2026 inflation-adjusted thresholds under OBBB, choosing your business entity affects taxes more than ever—here’s what to consider for S-Corps, LLCs, and more.
By NomadicTax Research Team • 5-8 min read • November 24, 2025
## Why 2026 Inflation Adjustments Affect Entity Decisions
The One, Big, Beautiful Bill Act (OBBB) introduced adjustments that will apply in **tax year 2026**, filed in 2027. Key changes include:
- Increased **standard deductions**: $32,200 for Married Filing Jointly, $16,100 for Single/Married Filing Separately, and $24,150 for Heads of Households. ([irs.gov](https://www.irs.gov/newsroom/irs-releases-tax-inflation-adjustments-for-tax-year-2026-including-amendments-from-the-one-big-beautiful-bill?utm_source=openai))
- Higher thresholds for tax brackets and **AMT exemptions** (unmarried – $90,100, phase-out at $500,000; married – $140,200 phase-out at $1,000,000). ([irs.gov](https://www.irs.gov/newsroom/irs-releases-tax-inflation-adjustments-for-tax-year-2026-including-amendments-from-the-one-big-beautiful-bill?utm_source=openai))
- Estate tax basic exclusion at $15,000,000 (up from $13,990,000) for estates of decedents dying in 2026. ([irs.gov](https://www.irs.gov/newsroom/irs-releases-tax-inflation-adjustments-for-tax-year-2026-including-amendments-from-the-one-big-beautiful-bill?utm_source=openai))
These changes shift the **break-even points** for choosing different entity types, particularly for owners near thresholds.
## Comparing Entity Types Under the New Regime
| Entity Type | Tax Advantages | Considerations Under 2026 Adjustments |
|-------------|----------------|------------------------------------------|
| **S Corporation** | Pass-through avoids double taxation; profits taxed at individual rates. | If income hits higher bracket thresholds, owner pays more on distributions—managing salary vs. distributions becomes more critical given bracket movement. |
| **LLC taxed as Partnership/Sole Proprietor** | Flexibility; deduct losses directly. | Self-employment taxes apply; higher thresholds for deductions may help, but structural liability is a concern. |
| **C Corporation** | Flat corporate rate; retains earnings. | For small-business, changes to itemized deduction limitations and standard deductions affect pay for shareholder-employees. Also, OBBB’s changes don’t affect corporate tax rate directly. |
| **Trusts & Estates** | Beneficiary distributions, estate tax tools. | Estate tax exclusion increase gives breathing space. But planning ahead of 2026 is important. |
## Actionable Steps for Entrepreneurs & Business Owners
1. **Project your 2026 income**: Estimate revenue, salary to owner(s), distributions. Understand which tax bracket(s) you may fall into under new thresholds.
2. **Review your current entity**: If an LLC taxed as S-Corp is pushing you into elevated individual brackets due to retained earnings, consider if switching entity classification or salary/distributions mix makes sense.
3. **Use the increased estate tax exclusion**: If planning gifts or transfers now, the higher $15 million exclusion in 2026 gives more breathing room. Structuring—transfers to trusts now vs later—should be timed.
4. **Take advantage of standard deduction increases**: For single‐owner pass-through entities receiving income via individual return, the bump in standard deduction reduces tax liability; for others, itemizer thresholds and SALT limits remain relevant. |
## Real-World Example
Imagine Ana and Ben operate an LLC taxed as an S-Corp. In 2026 they expect flow-through income plus salary to sum to $400,000. Under old thresholds, much of that would have hit **35%** marginal tax rate earlier. With inflation adjusted thresholds, more of their income may sit in **32%** bracket—meaning every dollar saved in salary vs distributions has more take-home value.
If they instead operate as a C-Corp, paying salaries plus dividends, for 2026, passing profits through at individual rate may be cleaner, provided self-employment or payroll taxes are managed.
## Checklist Before December 31, 2025
- **Check your fiscal year vs calendar year** if you might change entity type beginning 2026.
- **Model tax liability** under both current and future brackets—with updated standard deductions & AMT thresholds.
- **Discuss with tax counsel** about making entity classification changes that align with your projected growth and income thresholds.
- **Revisit operating agreements or ownership structures** to see how distributable profits or losses move between partners with new limits.
With these adjustments in effect for 2026 and beyond, selecting the right structure now could mean significant tax savings and compliance ease.