Entity Setup
Entity Setup for U.S. Startups: How Tax Notices and Rules are Shifting in Late 2025
Recent IRS rulings and regulations are changing how U.S. startups structure equity, debt, and tax-preferred status as they scale—this article breaks down what founders need to know now.
By NomadicTax Research Team • 5-8 min read • November 21, 2025
## Key Recent Updates from the IRS Affecting Startups
1. **Source of Borrow Fees & Securities Lending Rules**: The latest *Internal Revenue Bulletin 2025-46* includes *Notice 2025-63*, which outlines proposed rules to determine the source of certain borrowing fees in securities lending and repurchase agreements. ([irs.gov](https://www.irs.gov/irb/2025-46_IRB?utm_source=openai))
2. **Corporate Alternative Minimum Tax (CAMT) Guidance**: As part of *Bulletin 2025-43*, the IRS provides interim guidance on applying the new Corporate AMT for domestic corporate transactions, financially troubled companies, and consolidated tax groups. ([irs.gov](https://www.irs.gov/irb/2025-43_IRB?utm_source=openai))
3. **PTIN Fee Adjustment for Tax Return Preparers**: PTIN (Preparer Tax Identification Number) user fees have been adjusted (e.g., fee changes from $11 down to $10 plus contractor fees) in proposed regulations. A small but relevant compliance item for startups using external accountants or in-house preparers. ([irs.gov](https://www.irs.gov/irb/2025-42_IRB?utm_source=openai))
## Why These Updates Matter During Entity Setup
- **Capital Structure & Securities Lending**: Founders considering equity financing or secondary trading must understand how borrow fees and securities lending are taxed, especially when off-balance activities might carry unexpected tax sourcing rules.
- **Entity Choice and AMT Exposure**: With CAMT guidance in play, choosing between C-corporation vs. S-corporation (or LLC taxed as partnership vs. corporation) gets complex. Startups with large capital investments or profitability should model potential AMT exposure.
- **Outsourced vs. In-House Accounting Compliance**: Even smaller entities need to ensure PTIN rules are observed when preparers are used; non-compliance can lead to penalties.
## Actionable Setup Strategy
- **Model multiple scenarios**: Build projections that include impact of new AMT rates, securities lending income, interest deductions, and cross-border transactions if applicable.
- **Structure early financing carefully**: Debt vs. equity choice influences ability to claim interest deductions, deductible expenses, and exposure to rules on “source of income.”
- **Entity location & domicile**: State and federal tax impact differ; also keep in mind international implications (e.g. foreign affiliates or global minimum tax requirements under U.S. law).
- **Engage trusted tax counsel**: Particularly with proposed regulations (like Notice 2025-63) not yet final—input can sometimes influence outcomes.
## Real-Life Example
Startup “CloudSync Inc.” raises $5 million, offers convertible notes, employs a securities-lending desk, and expects rapid growth.
- Under current proposed rules, a portion of fees from securities lending may be sourced differently, altering whether they are taxed as U.S. or foreign income.
- As CAMT may bind, CloudSync should explore regular vs. accelerated depreciation, deductibility of R&D, and whether its state credits offset AMT liability.
- All contracts that pay income should define source and location clearly, to aid in compliance.
## Checklist Before Formal Incorporation or Equity Round
- Confirm entity type aligns with long-term exit plans (e.g. IPO or acquisition).
- Put clear agreements in place for income source and location in cross-border contexts.
- Ensure tax preparers and advisors are compliant with PTIN or equivalent requirements.
- Keep comprehensive records of transactions, lending, borrowing, and improvements to capital assets (especially when final regulations are forthcoming).
## The Bottom Line
For U.S. startups established in 2025 into 2026, the tax landscape is subtly shifting. The right entity setup, combined with awareness of proposed and final rules, can mean thousands saved. Proactive planning now pays off down the road.