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 married-filing-jointly taxpayers in 2026, the income threshold where QBI limitations begin is $394,600, but the deduction is not fully phased out until $544,600. That is a $150,000 phase-in window, up from $100,000 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.
New minimum deduction. Starting in 2026, taxpayers with QBI over $1,000 are guaranteed a minimum deduction of $400, indexed for inflation going forward. 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. If your S-Corp purchases equipment, vehicles, machinery, or other qualifying assets, you can deduct the full cost in the year you place the asset in service.
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
The state and local tax (SALT) deduction cap, one of the most controversial provisions of the TCJA, increases from $10,000 to $40,000 for joint filers beginning in 2025. Single filers and married-filing-separately taxpayers see the cap rise to $20,000.
The cap increases by 1% annually through 2029, then reverts to $10,000 in 2030.
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. 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.
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.
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 going forward.
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. While QSBS does not apply directly to S-Corp stock (S-Corps are ineligible for QSBS treatment), 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.
What S-Corp Owners Should Do Now
The OBBBA 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.