Entity Setup
Entity Setup in 2026: Structuring a U.S. Entity Under the New Depreciation Rules
Permanent 100% bonus depreciation and production property rules change the calculus when choosing entity types— here's how to structure in 2026 for maximum tax efficiency.
By NomadicTax Research Team • 5-8 min read • June 27, 2026
## What’s New Under Tax Law for Depreciation
As of recent guidance under the One, Big, Beautiful Bill, **qualified property** placed in service after **January 19, 2025** can now receive a **100% additional first-year depreciation deduction** under Section 168(k), permanently. ([irs.gov](https://www.irs.gov/irb/2026-06_IRB?utm_source=openai)) Previously, the bonus depreciation rate was phasing down. Also, certain qualified sound recording productions now come under qualified property for this purpose. ([irs.gov](https://www.irs.gov/irb/2026-06_IRB?utm_source=openai))
Also, a new **special depreciation allowance** was introduced for **qualified production property**—nonresidential real property used in manufacturing, agriculture, refining, etc.— placed in service **after July 4, 2025** through **Jan 1, 2031**. These rules allow electing a depreciation deduction up to 100% of the unadjusted depreciable basis of such 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))
## Choosing Entity Type: LLC, S-Corp, C-Corp, or Partnership?
Your choice of entity affects depreciation deductions, how income is taxed, and what pass-through or double taxation applies.
| Entity | Depreciation Interaction | Tax Impact | Things to Monitor |
|--|--|--|--|
| **S-Corporation / Partnership** | Pass through benefit of bonus depreciation directly to owners—deductions show up on Schedule K-1 or Form 1120-S | Owners’ individual tax rates apply; losses may be limited based on basis or passive activity rules | Passive loss limitations; what counts as trade or business; being able to materially participate |
| **C-Corporation** | Full depreciation allowed. If property is held in the corporation, recapture upon sale flows through corporation | Potential double taxation if profits are distributed; but could be beneficial for high-capital asset operations where income is retained in entity | Planning for exit or sale; structure of capitalization; state law considerations |
| **Single-member LLC (disregarded entity)** | Treated as sole proprietorship; depreciation flows through; easier to manage but less formal structure | No entity level tax, but self-employment taxes and personal liability concerns | State registration; liability protection; allocating usage if personal vs business use |
## Practical Example
*Business Scenario:* Crafters, Inc. builds a manufacturing facility (nonresidential real property) in Texas, with $10 million in qualified production property, in August 2025. Under the special depreciation allowance, it may elect to take a 100% depreciation deduction on the full basis—for tax years before Jan 1, 2031. That heavily frontloads deductions and can reduce taxable income significantly in early years, especially in a C-Corp retaining earnings.
If instead structured as an S-Corp, shareholders would pass depreciation deductions through to themselves; if some are passive investors, they need to ensure material participation to make full use.
## Entity Setup Checklist & Actionable Insights
1. **Inventory your capital assets** and check whether acquisition and service date fall after Jan 19, 2025 (bonus depreciation) or after July 4, 2025 (production property allowance).
2. **Consider entity that gives best timing**—if you expect large capital expenditures, a C-Corporation or partnership may be optimal; verify state tax treatment of bonus depreciation.
3. **Elect correctly** at the entity level when multiple statuses exist; make required elections for bonus depreciation under § 168(k) or special production property.
4. **Watch for depreciation recapture issues**—if property use changes or is sold, recapture rules can claw back deductions.
5. **Coordinate with financing and exit plans**—if the entity sells or merges, the depreciated basis and attribute carryovers matter.
## Conclusion
The sweeping changes in depreciation law give opportunities for frontloaded tax savings. But entity type matters—structure affects whether those savings benefit owners directly or must navigate corporate taxation. With proper planning, you can maximize deductions, reduce tax burden, and maintain flexibility.