Entity Setup
Structuring the Right Entity: Entity Setup Tips for Small Businesses Navigating OBBB Changes
Selecting or adjusting business entity structure in light of OBBB’s new inflation indexing, deductions, and provisions can yield major tax savings—here’s how.
By NomadicTax Research Team • 5-8 min read • November 23, 2025
## OBBB’s Impacts on Business Entities
The One, Big, Beautiful Bill introduced structural changes affecting businesses, especially regarding deductions, thresholds for expensing (§ 179), and credit ceilings. Entities need to evaluate how these shifts affect LLCs, S-corporations, partnerships, and corporations. ([irs.gov](https://www.irs.gov/irb/2025-45_IRB?utm_source=openai))
### Key Changes for Business Entities:
- **Section 179 Expensing Increase**: Under OBBB, for taxable years beginning in 2025, the maximum amount allowable for expensing under § 179 is $2,500,000 (phase-out threshold at $4,000,000). That change should be compared alongside other depreciation schedules. Rev. Proc. 2025-32 formalizes this. ([irs.gov](https://www.irs.gov/irb/2025-45_IRB?utm_source=openai))
- **Employer-Provided Childcare Credit Ceiling**: As noted earlier, the credit ceiling rose significantly—this benefits employers who incur childcare costs or provide services. Could shift entity benefit strategy in compensation packages. ([irs.gov](https://www.irs.gov/newsroom/irs-releases-tax-inflation-adjustments-for-tax-year-2026-including-amendments-from-the-one-big-beautiful-bill?utm_source=openai))
- **Inflation-Indexed Income Thresholds**: Corporate entities and pass-throughs should review thresholds for AMT, child tax credit, etc., especially as thresholds are now permanently raised under OBBB. This may affect effective marginal tax rates. ([irs.gov](https://www.irs.gov/newsroom/irs-releases-tax-inflation-adjustments-for-tax-year-2026-including-amendments-from-the-one-big-beautiful-bill?utm_source=openai))
## Choosing Entity Types Based on New Regime
| Entity Type | Potential Benefit Under OBBB | Considerations / Drawbacks |
|---|---|---|
| **C-Corporation** | Fixed marginal rates and inflation-indexed thresholds may stabilize expected tax burdens; eligible for certain credits and deductions at higher ceilings. | Double taxation of dividends; AMT/other local taxes may offset gains. |
| **S-Corporation / Partnership / LLC taxed as pass-through** | Income flows to individual rates benefitting from higher standard deduction and bracket adjustments; self-employment deductions and credits still available. | State taxes and limits on deductions may erode benefit; added complexity if partner/shareholder incomes within high thresholds. |
| **Sole Proprietorship** | Simplest setup, direct leverage of increased standard deduction; easier to access certain business deductions; flexibility. | Liability and financing constraints; may lose opportunity with tiered split between entity vs payroll compensation. |
## Action Items for Entity Setup or Adjustment
1. **Assess Expensing vs Depreciation**: For entity planning capital asset purchases, determine whether taking the full § 179 expensing in 2025 is more advantageous than depreciating over time, especially given phase-out thresholds.
2. **Compensation Planning**: Since employer-provided childcare credits have higher ceilings, consider offering childcare benefits if entity has capacity. Also review whether employee overtime/tips obligations are fully met.
3. **Ownership Structuring**: For partnerships and pass-through alone, consider restructuring capital distribution or compensation to reduce exposure to phase-out thresholds or AMT limits.
4. **State vs Federal Alignment**: Some states do not adopt federal inflation indexing or OBBB provisions. Entities operating across multiple states should map out conflicts and potential double taxation or mismatch exposures.
## Example Setup Comparison
Two small entities:
- **Entity A**: LLC taxed as S-Corp, 5 members, revenue $2 million, invests in equipment $500,000 in 2025. With § 179 expensing max $2,500,000, they can expense full amount, reducing net taxable income significantly.
- **Entity B**: C-Corporation with same revenue, planning childcare benefits for employees. With new OBBB ceilings, they may claim employer-provided childcare credit up to $500,000, which wasn’t possible before.
Revising entity classification and operating agreements may open up credits, reduce taxable income, and align structure with benefit streams under OBBB.
Entity setup decisions always depend on unique risk tolerance, growth paths, and long-term strategy. But with OBBB’s changes now in effect or becoming effective, aligning entity form to these structural shifts could provide meaningful tax efficiency.