Entity Setup
Entity Setup: Choosing the Right Business Structure Under the New 100% Bonus Depreciation Rules
With OBBB's sweeping depreciation changes, some business structures benefit more than others—learn which entity type maximizes the 100% first‐year depreciation deduction.
By NomadicTax Research Team • 5-8 min read • February 26, 2026
## Overview of the New Depreciation Policy Under OBBB
Notice 2026-11 confirms that, under the One, Big, Beautiful Bill, businesses can take **100% additional first-year depreciation deduction** for qualified property acquired **after January 19, 2025**. ([irs.gov](https://www.irs.gov/newsroom/treasury-irs-issue-guidance-on-the-additional-first-year-depreciation-deduction-amended-as-part-of-the-one-big-beautiful-bill?utm_source=openai)) This change is **permanent**, removing previous sunset dates. ([irs.gov](https://www.irs.gov/irb/2026-06_IRB?utm_source=openai)) Hidden in this change are powerful planning opportunities around how you structure your business entity to maximize tax savings.
## Comparing Entity Types With the 100% Depreciation Rule
| Entity Type | How Bonus Depreciation Applies | Pros | Limitations |
|-------------|-------------------------------|------|-------------|
| **Sole Proprietorship** | Property qualifies if acquired after date, and business deductions reduce personal return schedules. | Simple structure, no double taxation. | Can’t offset passive income; self-employment taxes still apply. |
| **Partnership / LLC (pass-through)** | Same as above; partners take depreciation deduction on their shares. | Flexibility in allocations; losses flow through. | Must ensure partner basis is sufficient; some partners may struggle to use losses. |
| **S Corporation** | Entity gets deduction; shareholders benefit without self-employment tax on distributions. | May reduce SE tax burden. | Restrictions on income types; limitations on number of shareholders. |
| **C Corporation** | Full 100% depreciation applies; corporation takes the deduction and retains cash or distributes dividends. | High byte deduction within corporate structure. | Double taxation on dividends; less efficient if profits distributed to owners. |
## Key Considerations for Entity Choice
- **Basis limitations and losses.** If your entity generates losses because of large deductions, you need sufficient basis to absorb them (especially in pass-throughs).
- **Taxable income vs. cash flow.** Bonus depreciation rapidly reduces taxable income, but this could delay profits if you're reinvested; pay attention to how deductions affect net operating loss carryforwards and state deductions.
- **Recapture issues.** If property ceases to meet qualifications (for example, if usage changes), depreciation may need to be recaptured. Notice 2026-16 clarifies how recapture rules apply for qualified production property. ([irs.gov](https://www.irs.gov/newsroom/treasury-irs-issue-guidance-on-special-depreciation-allowance-for-qualified-production-property-announce-upcoming-proposed-regulations-under-the-one-big-beautiful-bill?utm_source=openai))
## Example: Manufacturer Choosing Between S Corp vs. C Corp
Imagine **BrightWidgets LLC**, a newly formed business producing custom equipment with $500,000 in equipment purchases placed in service in **November 2025**. Options:
- **As an S Corporation**: BrightWidgets elects S Corp status. The entity takes the 100% bonus depreciation deduction, offsets other business income. Owner avoids SE tax on distributions.
- **As a C Corporation**: Has the same initial deduction, but any profit distributions are taxed again as dividends and taxed at the corporate level first.
If BrightWidgets owner expects high profits and plans to distribute them, S Corp might yield lower overall taxes. If reinvestment is the goal and profits stay with the company, C Corp may work.
## Actionable Steps to Implement Best Entity Structure
1. Inventory purchases that qualify as **“qualified property”**—check acquisition and placed-in-service dates (post Jan 19, 2025). Notice 2026-11 provides the standard. ([irs.gov](https://www.irs.gov/newsroom/treasury-irs-issue-guidance-on-the-additional-first-year-depreciation-deduction-amended-as-part-of-the-one-big-beautiful-bill?utm_source=openai))
2. Decide entity type early—changing after large asset acquisition may complicate basis and eligibility.
3. Attach the required election statements to your tax return (e.g., when making §168(k)(10) or component or sound recording elections). ([irs.gov](https://www.irs.gov/irb/2026-06_IRB?utm_source=openai))
4. Track recapture triggers—changes in use or disposition of assets.
5. Coordinate with state taxes—some states don’t conform immediately to federal bonus depreciation rules.
**Takeaway:** The permanent 100% bonus depreciation under OBBB rewards businesses that acquire substantial tangible property and structure wisely. Choosing the right entity type, meeting timing rules, and planning for recapture can translate into major tax savings.