The BBB's Effect on S-Corps

S-corp owners will find a lot to like in the new bill. As pass-through entities, S-corps themselves don’t pay tax (income flows to owners’ personal returns), so most changes that matter are at the owner level. Key impacts on S-corps and their shareholders include:

• Bigger Pass-Through Deduction: The 20% Qualified Business Income (QBI) deduction is a lifeline for S-corp owners. The bill makes that deduction permanent and even increases it to 23% starting in 2026. This means a shareholder of an S-corp can deduct 23% of their qualified S-corp income from taxable income going forward, further lowering effective tax rates on business profits. The phase-out rules for high earners (and service businesses) are also relaxed to be more forgiving, preventing the extreme marginal tax spikes that existed under the old phase-out design. Practical effect: S-corp owners will keep more of their earnings, and high-income owners will face a smoother, fairer phase-out of the deduction rather than a sudden cutoff.

• No 2026 Tax Hike: S-corp income is taxed at individual rates, which are staying low. Your share of business income will continue to be taxed at the TCJA-era rates (the ones you’ve seen for the past several years) instead of higher pre-2018 rates. The top rate remains 37%, and brackets stay wider due to the extended tax cuts. So there’s relief that the “impending” individual rate increases of 2026 won’t hit your S-corp profits.

• Equipment Expensing and Depreciation: S-corps get to utilize the business expensing provisions. If your S-corp buys new equipment, machinery, computers, vehicles, etc., you’re in luck – 100% bonus depreciation is back through 2029. You can write off the full cost in the first year, which reduces the pass-through income (and thus taxes) for shareholders. Also, the expanded Section 179 limits ($2.5M immediate expensing) mean even relatively larger S-corps can deduct most asset purchases upfront. These provisions give S-corps big incentives to invest in their businesses, knowing they can slash their taxable income by expensing growth-related purchases immediately.

• Interest and R&D Breaks: The return of full R&D deduction (no amortizing research costs) will help any innovative S-corps that invest in developing new products or technology – those costs stay fully deductible each year. And if your S-corp has business loans, the looser interest deduction limit (using EBITDA) means you can deduct more interest expense from 2025–2029 than you otherwise could. This is particularly helpful if your S-corp is expanding and has financed growth with debt; you won’t be as constrained by the old interest cap.

• State Tax Deduction (SALT) Workaround – Watch Out: Many S-corporations in high-tax states have been paying state income taxes at the entity level (via special state passthrough entity tax elections) to get around the $10k SALT deduction cap. This bill doesn’t outlaw that strategy, but it adds guardrails. It extends the SALT cap permanently (with a higher $30k limit for middle incomes), and specifically requires S-corps to report any state and local taxes paid on owners’ behalf as separately stated items on the K-1. It also penalizes any arrangement where the tax payment allocation doesn’t match the distribution of the state tax benefit. In short, you can still have your S-corp pay state taxes for the deduction at the entity level, but it must be done transparently and proportional to each owner’s share. The IRS is empowered to crack down on creative maneuvers to bypass the SALT cap. S-corp action item: Continue to utilize state pass-through entity tax elections if available (since the $10k federal SALT cap remains for owners, especially high earners), but ensure compliance with the new rules to avoid penalties. And note the SALT cap is now $30k for couples if your income is moderate, but for higher-income owners it effectively remains $10k.

• Limitation on Losses: If your S-corp (or combination of pass-through businesses) generates a large loss, be aware the bill locks in the Excess Business Loss limitations permanently. In 2025, for example, a married shareholder could only use roughly up to $626,000 of business losses to offset other income; anything beyond that carries forward as an NOL. This rule was temporary but now it’s permanent. Most everyday S-corps won’t hit that cap, but for those that do, you can’t use an unlimited loss in one year to wipe out other income anymore – that safeguard isn’t expiring. Plan to carry forward excess losses.

• Other Goodies: S-corps will benefit indirectly from lots of general business incentives in the bill – for instance, the extension of the Work Opportunity Tax Credit and other hiring credits (if included), or credits for providing paid family leave (now permanent) and building childcare facilities (more generous now). If your S-corp invests in qualifying Opportunity Zones, the program’s extension means continued deferral and potential tax-free gains down the road. And if you run an S-corp in a farm or rural area, new provisions like the partial interest exclusion on loans for rural property financing could improve loan terms. Overall, S-corps see mostly positives: tax cuts preserved, deductions enhanced, and new incentives to grow. Just mind the new compliance pieces (SALT and others) that aim to prevent abuse.