Business Income Tax Planning in Light of the OBBBA: What Owners and Investors Need to Know

The One Big Beautiful Bill Act (OBBBA) brings increased predictability for business owners, founders, family offices and investors in many tax planning aspects. Individual and corporate tax rates stay put, qualified small business stock (QSBS) and qualified opportunity zones (QOZ) rules are fortified, and domestic research and development (R&D) expenditures are once again fully deductible. 

This article highlights the most important considerations for individual owners and investors. 

What Changed and What Didn’t

The OBBBA keeps the 37 percent top individual rate, 21 percent corporate rate and 20 percent capital gains rate, while making Section 199A permanent and leaving carried interest unchanged. 

It restores 100 percent of bonus depreciation (for personal property and some real estate placed in service after January 19, 2025) and full domestic R&D expensing (retroactive to 2025, or to 2022 for smaller businesses). Interest deductibility returns to an earnings before interest, taxes, depreciation and amortization (EBITDA) cap, but capitalized interest remains subject to Section 163(j) after 2025. 

Excess business loss limits and the ban on miscellaneous itemized deductions are permanent, while several clean energy credits are phasing down. Workarounds related to state and local tax (SALT) deductions and the pass-through entity tax (PTET) deduction continue to be allowed.

Choice of Entity in a QSBS World

For tax planning, entity choice is still very important. LLCs provide one level of tax, flexible allocations, profits interests, and seller‑ and buyer-friendly asset sale treatment, whereas C corporations are compelling where a QSBS election is to be made. OBBBA’s QSBS upgrades strengthen that case for scalable, venture‑style or small businesses. 

Hybrid stacks (e.g., an LLC parent owning a QSBS eligible C corporation) can preserve tax effective incentive equity at the LLC while positioning operating stock for QSBS. Fit depends on investor mix, exit path, projected future taxable income and distributions, and compensation strategy. 

QSBS: Bigger Caps, Larger Companies and Faster Partial Exclusions

QSBS remains a powerful incentive. For stock issued after July 4, 2025, the OBBBA: 

• introduces partial gain exclusions for earlier exits: 50 percent if held for three years, 75 percent if held for four years and 100 percent if held for five years.
• raises the per‑issuer gain exclusion cap to the greater of (a) $15 million (indexed in 2027) or (b) 10x the taxpayer’s adjusted basis in the stock.
• increases the issuer gross assets cap to $75 million (which increases every year based on inflation). 

Fundamentals still apply regarding original issuance in a C corporation engaged in a qualified trade or business. Execution details matter — gifts and partnership distributions of QSBS stock can preserve status, but contributions to partnership of QSBS stock generally do not. Contemporaneous redemptions can taint purported QSBS issuances. Whether a husband and wife are treated as one or two taxpayers is still somewhat unclear. Additionally, state conformity is uneven (e.g., California does not recognize QSBS). If QSBS is a goal, companies should consider converting to a C corporation to start the clock for future appreciation. 

QOZs: Permanence, a Rolling Deferral and a Rural Boost

QOZ is now permanent with updated mechanics. Qualifying gains invested in a qualified opportunity fund (QOF) receive:

• a five‑year rolling deferral starting at investment, with a flat 10 percent basis step‑up if the investment is held for the full five years (30 percent for qualified rural opportunity funds, or QROFs).
• a full FMV basis step‑up on sale after 10 years (eliminating gain on appreciation).
• a 30‑year ceiling; basis steps up at year 30 and any appreciation after 30 years is taxable. 

The QOZ program under the OBBBA regime applies to amounts invested in QOFs after December 31, 2026, but may create a “dead zone” of investment in QOFs between 2025-2026 because investments made under the Tax Cuts and Jobs Act (TCJA) QOZ program prior to December 31, 2026, will recognize any deferred gain on December 31, 2026. Taxpayers should coordinate exit dates within the 180‑day window and expect enhanced reporting and penalties. Rural projects may benefit from the higher tax-basis step up and relaxed improvement thresholds. 

Preparing for and Structuring an Exit

Begin sale prep early, including accounting and personal assets clean‑up, sell‑side quality of earnings (QoE), contracts/consents, intellectual property and compensation, and business restructuring, since traditional processes run as long as six to nine months. 

Consider that buyers prefer asset deals, while sellers favor equity sales. Flow‑through sellers can often accommodate asset sales efficiently; however, C corporation sellers of appreciated businesses usually cannot without double tax. Representations and warranties (R&W) insurance can bridge equity deal risk.

Tax‑deferred rollovers can frequently be achieved via capital contributions to partnerships or corporations. Installment sales can also defer tax (watch out for recapture exclusions and interest on deferred taxes). If QSBS applies, sell stock rather than assets to preserve the full benefit of the exclusion. A parent LLC can facilitate reps/indemnities while holding corporate stock. 

State Tax Developments to Watch: The Illinois Shift

Illinois now has adopted legislation to source gains on sales of S corporation shares and interests in partnerships (other than investment partnerships) to Illinois if the entity is taxable there, using an average of the entity’s Illinois apportionment factors for the sale year and prior two years. In a departure from prior commercial domicile sourcing, nonresidents disposing of interests in S corporations and partnerships doing business in Illinois may owe Illinois tax on exit gains. 

Practical Takeaways for Individuals

For business owners, founders and investors, three themes dominate:

• Align entity choice with exit goals: If QSBS is plausible, test a C corporate path; otherwise, LLCs often maximize after‑tax flexibility, and hybrids can bridge both.
• Consider deferring capital gains through the updated QOZ program, tax-deferred rollovers and installment sales. 

In conclusion, while the OBBBA offers certainty, it rewards rigorous structuring and early planning to maximize after‑tax outcomes.