The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, represents the most significant tax legislation since the Tax Cuts and Jobs Act of 2017. For S-Corporation owners, the bill delivers a mix of permanent extensions, expanded deductions, and new planning opportunities that will reshape how you think about compensation, distributions, and long-term business strategy.
Here is a breakdown of every major provision that affects S-Corp owners, what changed, and what it means for your bottom line.
The QBI Deduction Is Now Permanent
This is the headline for S-Corp owners. The 20% Qualified Business Income (QBI) deduction under Section 199A was originally set to expire after December 31, 2025. The OBBBA made it permanent.
If your S-Corp generates qualified business income, you can continue deducting up to 20% of that income on your personal return, reducing your effective federal tax rate on pass-through income from 37% to roughly 29.6% at the top bracket.
What Changed Beyond Permanence
The OBBBA did not just extend the QBI deduction. It also made several meaningful adjustments:
Wider phase-out range. For tax years beginning in 2026, the Section 199A threshold amount is $403,500 for married-filing-jointly taxpayers, and the limitations are not fully phased in until $553,500. For single filers and other non-joint returns the 2026 threshold is $201,750, phasing in fully at $276,750 (married filing separately: $201,775 and $276,775). That is a $150,000 phase-in window for joint filers and $75,000 for everyone else, up from $100,000 and $50,000 under the original TCJA rules. This means more S-Corp owners in the upper-middle income range will retain at least a partial QBI deduction. (2026 figures per Rev. Proc. 2025-32, §4.26; these amounts are adjusted annually, so confirm the current year before relying on them.)
New minimum deduction. For tax years beginning after December 31, 2025, a taxpayer with at least $1,000 of QBI from active qualified trades or businesses in which the taxpayer materially participates is guaranteed a minimum deduction of $400. The $400 and $1,000 amounts are fixed for 2026 and are adjusted for inflation only for tax years beginning after 2026 (Rev. Proc. 2025-32, §2.12). This is a small but notable floor for lower-income pass-through owners.
Specified Service Trade or Business (SSTB) rules remain. If your S-Corp operates in a specified service field such as law, accounting, health, consulting, or financial services, the income-based phase-out still applies. However, the wider phase-in range gives SSTB owners more room before the deduction disappears entirely.
Planning Implications
With Section 199A now permanent, decisions around reasonable compensation, retirement contributions, and entity structure have lasting consequences. The annual balancing act between W-2 wages and distributions is no longer a temporary optimization. It is a core part of your ongoing tax strategy.
100% Bonus Depreciation Is Back and Permanent
Bonus depreciation had been phasing down since 2023. Under the prior schedule, businesses could only deduct 40% of qualifying asset costs in 2025, dropping to 20% in 2026 and disappearing entirely in 2027.
The OBBBA restored and permanently locked in 100% bonus depreciation under Section 168(k). If your S-Corp purchases equipment, machinery, or other qualifying assets, you can deduct the full cost in the year you place the asset in service.
Two limits worth knowing before you count on this. First, there is an acquisition test: property must be acquired after January 19, 2025 — generally the date a written binding contract was entered into — as well as placed in service after that date. Assets locked in under a contract signed before January 20, 2025 stay on the old TCJA phase-down schedule no matter when they are placed in service (see IRS Notice 2026-11). Second, passenger automobiles remain subject to the Section 280F depreciation caps, so a company car is not a full first-year write-off even with 100% bonus available.
This is a significant cash flow advantage. Instead of spreading depreciation deductions over five or seven years, the entire expense flows through to your K-1 in year one. For S-Corp owners planning capital expenditures, the timing pressure that existed under the phase-down schedule is gone.
Business Interest Deduction Returns to EBITDA
Section 163(j) limits how much business interest expense you can deduct. Since 2022, the limitation was calculated based on 30% of EBIT (earnings before interest and taxes), which excluded depreciation and amortization from the calculation and resulted in a smaller cap.
The OBBBA permanently restores the more favorable EBITDA-based calculation, effective for tax years beginning in 2025. By adding depreciation and amortization back into the base, the deductible interest ceiling increases substantially.
For S-Corp owners who carry business debt, whether from real estate, equipment financing, or acquisition loans, this change could unlock interest deductions that were previously disallowed. Any suspended interest carryforwards from prior years may also become deductible under the expanded limit.
SALT Cap Increases to $40,000 ($40,400 for 2026)
The state and local tax (SALT) deduction cap, one of the most controversial provisions of the TCJA, increases from $10,000 to $40,000 beginning in 2025. That $40,000 cap applies to single filers, heads of household, and married couples filing jointly alike; only married-filing-separately taxpayers are limited to half, at $20,000. For 2026 the figures are $40,400 and $20,200 (IRC §164(b)(7)).
The cap increases by 1% annually through 2029, then reverts to $10,000 in 2030.
The phase-down is the part that matters most to S-Corp owners. The higher cap is reduced by 30% of the amount by which your modified adjusted gross income exceeds a threshold — $500,000 for 2025 and $505,000 for 2026, halved for married filing separately — and the reduction cannot push the cap below $10,000. In practice, a joint filer is back to a $10,000 cap once MAGI reaches roughly $606,000 in 2026. If your pass-through income puts you in that range, run the PTET comparison below against your actual phased-down cap, not the $40,400 headline (IRC §164(b)(7)(B); IRS Topic No. 503).
How This Affects S-Corp Owners
As an S-Corp owner, you likely pay state income tax on your pass-through income and may also pay property taxes on business real estate held personally. The higher SALT cap means more of those state and local taxes become deductible on your federal return if you itemize.
However, many states now offer pass-through entity tax (PTET) elections that allow the S-Corp itself to pay state income tax at the entity level, effectively bypassing the SALT cap entirely. The final law made no change to entity-level PTET deductions, which continue to rest on IRS Notice 2020-75. With the cap now at $40,000, it is worth re-evaluating whether the PTET election still makes sense for your situation, or whether claiming the deduction on your individual return produces a better result. We walk through that comparison in our SALT cap vs. PTET election guide.
Individual Tax Rates Made Permanent
The OBBBA permanently extends the individual income tax brackets established by the TCJA. The seven-bracket structure remains at 10%, 12%, 22%, 24%, 32%, 35%, and 37%. Without this extension, the top rate would have reverted to 39.6% in 2026.
For S-Corp owners, this matters directly. Your pass-through income is taxed at your individual rate. Keeping the top rate at 37% rather than 39.6% translates to real savings, especially when combined with the permanent QBI deduction.
The standard deduction also increases for 2026: $32,200 for joint filers, $16,100 for single filers, and $24,150 for heads of household (Rev. Proc. 2025-32, §4.14).
Estate and Gift Tax Exemption Permanently Raised
The unified estate and gift tax exemption is permanently increased to $15 million per individual ($30 million for married couples) beginning January 1, 2026, with annual inflation adjustments beginning in 2027 (Rev. Proc. 2025-32, §2.14).
For S-Corp owners thinking about succession planning, this is a major development. The higher exemption means more of your business value can be transferred to the next generation without triggering estate or gift taxes. Combined with valuation discounts commonly applied to closely held S-Corp stock, many family-owned businesses will now fall well below the taxable threshold.
QSBS Exclusion Expanded for Business Sales
If you are considering selling your business, the Qualified Small Business Stock (QSBS) exclusion under Section 1202 received notable enhancements. Your own S-Corp stock cannot be QSBS — the issuing corporation has to be a C corporation — though an S-Corp that holds QSBS in another company is treated as a pass-thru entity under §1202(g) and can pass the exclusion through to its shareholders. Either way, these changes are relevant if you are evaluating entity structure as part of an eventual exit.
The key changes include an increased exclusion cap from $10 million to $15 million (indexed for inflation), expansion of the gross asset threshold from $50 million to $75 million, and a tiered holding period structure for stock issued after July 4, 2025.
If a business sale is on your horizon and the numbers are significant, this may be worth discussing with your CPA in the context of whether an entity conversion makes sense well in advance of a transaction.
Other OBBBA Changes S-Corp Owners Should Have on the Radar
The provisions above are the headline changes, but several other pieces of the law will show up in your S-Corp’s payroll, bookkeeping, and equipment planning.
Section 179 expensing nearly doubled. The OBBBA raised the Section 179 expensing limit to $2,500,000 for tax years beginning in 2025, with the phase-out starting once total purchases exceed $4,000,000. For 2026 those amounts are $2,560,000 and $4,090,000 (Rev. Proc. 2025-32, §4.24). With 100% bonus depreciation back, Section 179 matters less than it did during the phase-down years, but it still helps for assets that do not qualify for bonus or when you want asset-by-asset control over the deduction.
Domestic R&D costs are deductible again. New Section 174A restores immediate expensing of domestic research and experimental costs for tax years beginning after December 31, 2024 (foreign research still amortizes over 15 years). Small businesses that meet the Section 448(c) gross receipts test can elect to apply the change retroactively to 2022 through 2024 by amending those returns, or instead deduct the R&D costs still sitting unamortized from those years, under the procedures in Rev. Proc. 2025-28. We cover the mechanics in our S-Corp R&D deduction guide.
The new tips and overtime deductions come with employer paperwork. For 2025 through 2028, workers can deduct up to $25,000 of qualified tips per year (Section 224) and up to $12,500 of qualified overtime pay — $25,000 on a joint return — counting only the premium portion above the regular rate (Section 225). Both deductions shrink by $100 for each $1,000 of modified AGI above $150,000 ($300,000 on a joint return). If your S-Corp employs tipped or hourly staff, you are the one who has to report the qualified amounts on Forms W-2 and 1099: the IRS has published the official list of tipped occupations, and Notice 2025-62 waives the related reporting penalties for 2025 while payroll systems catch up. See our guides to the tip deduction and the overtime deduction for the payroll setup.
The 1099 reporting threshold jumps from $600 to $2,000. For payments made after December 31, 2025, the information-reporting threshold under Section 6041 rises from $600 to $2,000, with inflation indexing in years after 2026 (Rev. Proc. 2025-32, §2.15). That means fewer 1099-NEC and 1099-MISC forms to issue starting with tax year 2026 — details in our 2026 1099 filing threshold guide.
Clean energy credits are gone or going. If your S-Corp was counting on energy incentives, most windows have already closed: the new, used, and commercial clean vehicle credits (Sections 30D, 25E, and 45W) ended for vehicles acquired after September 30, 2025, and the Section 179D energy-efficient commercial buildings deduction is not allowed for property whose construction begins after June 30, 2026 (IRS OBBBA energy credit FAQs).
What S-Corp Owners Should Do Now Under the One Big Beautiful Bill Act
The One Big Beautiful Bill Act provides welcome certainty after years of temporary provisions and expiration cliffs. Here is what we recommend for S-Corp owners heading into 2026:
Review your reasonable compensation. With the QBI deduction permanent, the split between W-2 wages and distributions has lasting tax implications. Make sure your compensation level is defensible and optimized.
Reassess your SALT strategy. The higher $40,000 cap may change the math on your state pass-through entity tax election. Run the numbers both ways.
Accelerate or plan capital purchases. With 100% bonus depreciation permanently restored, there is no longer a rush to buy before year-end phase-downs, but strategic timing of large purchases can still help manage taxable income.
Update your estate plan. The permanent $15 million exemption opens new gifting and succession strategies for S-Corp owners looking to transfer business interests.
Talk to your CPA. Many of these provisions interact with each other. The QBI deduction depends on your W-2 wages and qualified property. Bonus depreciation affects your taxable income, which affects your QBI phase-out. A coordinated strategy across all of these provisions will produce the best result.
Need help navigating these changes? Our team of CPAs specializes in S-Corporation tax strategy. Schedule a consultation to make sure your business is positioned to take full advantage of the OBBBA.