Entity Setup
Entity Setup Strategies in the U.S. Post-OBBB: What Small Businesses Must Know
New rules under the One, Big, Beautiful Bill mean changes to choice of entity, accounting methods, and eligibility tests affecting small businesses starting 2025-26.
By NomadicTax Research Team • 5-8 min read • February 21, 2026
## Understanding the One, Big, Beautiful Bill (OBBB)
Signed into law July 2025 as Public Law 119-21, the OBBB introduces sweeping changes affecting deductions, tax credits, standard deductions, and the structure of enterprises in the U.S. For small business owners setting up or reevaluating their entities, being aware of these from the outset is essential. ([eitc.irs.gov](https://www.eitc.irs.gov/newsroom/irs-releases-tax-inflation-adjustments-for-tax-year-2026-including-amendments-from-the-one-big-beautiful-bill?utm_source=openai))
## Key Legal Entity Considerations
### 1. Entity type and tax method
| Entity form | Notes under OBBB & 2026 adjustments |
|---|---|
| Sole proprietorships & single-member LLCs | No separate entity tax, but self-employment deductions and “no tax on tips” rules are relevant. Certain overtime & tip deductions available under OBBB through 2028. ([irs.gov](https://www.irs.gov/newsroom/one-big-beautiful-bill-act-tax-deductions-for-working-americans-and-seniors?utm_source=openai)) |
| Partnerships, S corporations, C corporations | Pay attention to changes in **gross receipts thresholds** for cash method of accounting (now more limited). Also, phase-outs of excess business losses and rules affecting income splitting. ([irs.gov](https://www.irs.gov/irb/2025-45_IRB?utm_source=openai)) |
### 2. Accounting method thresholds
For 2026, corporations and partnerships wanting to use the **cash method of accounting** must average **no more than $32 million in gross receipts** over the previous 3 years. Entities above this threshold generally required to use accrual method. ([irs.gov](https://www.irs.gov/irb/2025-45_IRB?utm_source=openai))
### 3. Excess business loss limits
Individuals with trade or business losses are subject to lower limits for losses that can offset other income. For 2026, the limit is $256,000 for single individuals and $512,000 for joint filers. ([irs.gov](https://www.irs.gov/irb/2025-45_IRB?utm_source=openai))
## Action Steps When Setting Up or Restructuring
- **Choose the right entity early**: Address tax outcomes and whether new deductions under OBBB apply—in particular, whether you're eligible for new deductions for overtime or tips and implications for self-employment.
- **Maintain detailed financials**: To meet gross receipts thresholds, audited statements may be needed especially if applying for certain benefits or programs (e.g., IRS CAP). ([irs.gov](https://www.irs.gov/businesses/corporations/highlights-and-updates-for-the-cap-2026-application-period?utm_source=openai))
- **Stay compliant with elections**: If electing cash accounting, Section 444 elections, or revoking those, deadlines and forms matter. Read the Form 8752 instructions for setting base year and election year requirements. ([irs.gov](https://www.irs.gov/instructions/i8752?utm_source=openai))
## Example Scenarios
- **Startup LLC with high receipts**: An LLC expecting $40 million in average receipts over first 3 years can’t use cash method; must switch to accrual accounting. This affects revenue recognition and potentially tax payable.
- **Solo consultant earning tips and overtime**: Under OBBB, the consultant may deduct overtime hours beyond standard rate and qualified tips (if occupation is recognized). Must track income sources: tip vs wage vs 1099 vs W-2, file accordingly. Elect these deductions carefully.
## Best Practices & Pitfalls to Avoid
- Plan ahead for administrative burdens: audits, financial statements, or payroll reporting may require more documentation under new rules.
- Monitor phase-outs: e.g., excess business loss and education loan interest deductions have income limits. Watch AGI and filing status.
- Don’t assume automatic eligibility: many OBBB provisions are temporary (2025-2028) and have strict eligibility criteria (occupation, reporting, SSN requirement). Missing one requirement can disqualify deductions.
By sizing up revenue projections, choosing an entity form early, and planning accounting methods with OBBB in mind, small business owners can avoid surprises and optimize tax savings for 2025 and 2026.