Entity Setup
Entity Setup Decision: Choosing the Right Entity Structure Under Recent Changes
New depreciation and entity level adjustments under OBBBA make your choice of business entity more strategic than ever—for tax savings and compliance.
By NomadicTax Research Team • 5-8 min read • April 27, 2026
## Why Entity Structure Matters Now
With enactment of the One, Big, Beautiful Bill Act (OBBBA), several **entity-level tax policies** have shifted. These include permanent 100% first-year depreciation, expanded depreciation-based deductions, and changes to entity-level add-backs for interest/AMI. Choosing between LLC, S-Corp, or C-Corp now impacts tax cash flow more sharply. ([irs.gov](https://www.irs.gov/irb/2026-06_IRB?utm_source=openai))
## Key Entity-Related Policy Changes You Should Understand
- **Additional First-Year Depreciation (§ 168(k))**: Under OBBBA, qualified property acquired after **January 19, 2025** gets **100% additional first-year depreciation**, removing prior phase-downs and date limits. ([irs.gov](https://www.irs.gov/irb/2026-06_IRB?utm_source=openai))
- **Adjusted Taxable Income (ATI) Redefined**: Changes to § 163(j)(8) remove several disallowed deductions when computing ATI for taxable years beginning after December 31, 2025. Entity structures heavy in depreciation or foreign business income may be more impacted. ([irs.gov](https://www.irs.gov/irb/2026-15_IRB?utm_source=openai))
## Entity Types & Strategies in Light of These Changes
| Entity Type | Pros Under New Policy | Possible Cons / Challenges |
|-------------|-------------------------|----------------------------|
| **C-Corporation** | Can use full depreciation; surplus profit taxed at corporate rate with potential for lower rates on accumulated earnings. Ideal if business investing heavily in qualified production or assets. | Double taxation on dividends; high ATI add-backs may reduce benefit of certain interest deductions. |
| **S-Corporation** | Pass-through tax simplifies owner taxation; full depreciation flows through. | Unincorporated self-employment tax still applies; inability to split certain deductions. |
| **LLC taxed as partnership** | Flexible ownership; partner-level depreciation; fewer formalities. | Distributions, basis, and debt-financing issues may complicate interest limitations; recordkeeping demands can rise. |
## Example Scenarios
- **Manufacturing Startup**: Purchases new production machinery post-Jan 19, 2025. As a C-Corp, it can claim full depreciation immediately, lowering taxable income. As S-Corp or LLC, impact passes through—but pressure on owner's AGI and phase-outs may apply.
- **Real Estate Developer**: Entity acquiring or constructing property (nonresidential real property used as “qualified production property” for manufacturing, refining, agriculture) may benefit from special depreciation allowance. But real property tax issues, recapture, and compliance obligations must be considered. ([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))
## Practical Steps to Choose Wisely
- **Run projections**: model tax liability under C-Corp vs Pass-Through for next 3-5 years using spreadsheets, including depreciation, ATI limitations.
- **Consider state tax implications**: some states conform, others don't; some tax at entity level.
- **Pay attention to ownership and exit**: C-Corps have different treatment on sale/dividend; S-Corps have eligibility constraints.
- **Always maintain strong documentation**—especially when recalling qualified property definitions, interest add-backs, and depreciation schedules.