Why Advisors Are Rethinking Entity Structures, and Why Those of Us in Specified Service Businesses Have Fewer Options

By Jessica Irving Marschall, CPA, ISA AM, President & CEO, Marschall Accounting Services, LLC, September 27th, 2026

MAS LLC | www.MarschallTax.com

Accounting Today ran a piece this week, written by Zoe Sagalow and originally published in Financial Planning, that caught my attention for two reasons. The first is that it says out loud what we have been telling clients since the One Big Beautiful Bill Act (OBBBA) was signed on July 4, 2025: the old reflex that a pass-through entity is always the right answer for a closely held business no longer holds, and for certain businesses a C corporation has become genuinely attractive again despite the dreaded “double taxation”. The second reason is the part of the headline most readers will skim past, the words “and maybe themselves.” The article turns at the end to financial advisors deciding how to structure their own registered investment advisory firms and concludes, in effect, that the two biggest carrots in the current Code, the Section 199A deduction for pass-through owners and the Section 1202 qualified small business stock (QSBS) exclusion for C corporation shareholders, may not be available to them at all.

As the owner of a CPA firm and three other companies that are not accounting firms, I read that paragraph and recognized my own situation with MAS LLC, and the situation of nearly every attorney, physician, dentist, consultant, and financial advisor we serve. This article connects the Accounting Today discussion to what we have already published on QSBS, Section 351 conversions, and S corporations, and then highlights the part of the conversation that does not get nearly enough attention: what entity planning actually looks like when you are a specified service trade or business (SSTB), your household income blows straight through the caps, and you are shut out of both the pass-through incentive and the C corporation incentive at the same time.

What the Accounting Today article gets right

Tony Nitti, who leads the S corporation team in EY’s National Tax Department, observed that the tax industry is now watching businesses voluntarily move into C corporation status in a way it has not seen since before the Tax Reform Act of 1986, and that anyone advising on choice of entity has to let go of the assumption that a pass-through structure will always be best. He was equally careful to point out that OBBBA did not tilt the field decisively in one direction, because there were significant positives for every entity type in the reconciliation bill, and that the correct approach is simply to run the analysis on the rates as they now stand, with the individual rates, the 21% corporate rate, and Section 199A, which are now all permanent. Ryan Vas Dias of Compound Planning added the practical observation that it is far easier to move assets into a corporation than it is to get them back out, and harder still to extract appreciated assets from an S corporation. Nitti closed with a line I have already repeated in several client meetings: “for the first time since 2017, we’re not waiting for something.”

I agree with all of their sentiments, and I made a similar point in my August article on the S corporation questions our clients are asking, where I noted that permanence finally removed the asterisk that had hung over every entity decision since 2017. I also cautioned there, and I will repeat it here, that greater certainty in the tax code is not the same thing as greater certainty in the economy, and that every entity plan should still be built with room to adapt. Where I want to add to the Accounting Today discussion is in the middle ground it only touches on briefly: the professional practice that is too profitable for Section 199A, categorically ineligible for Section 1202, and still has to choose a structure and live with it for at least five years.

The C corporation case, briefly, because we have covered it at length

For stock issued after July 4, 2025, OBBBA raised the per-issuer QSBS exclusion from $10 million to $15 million (or ten times basis, if greater), raised the corporate gross asset ceiling from $50 million to $75 million, and replaced the all-or-nothing five-year holding period with a graduated schedule that excludes 50% of the gain after three years, 75% after four years, and 100% after five years, with any non-excluded gain taxed at the 28% Section 1202 rate. In our October 2025 article on the C corporation conversion rush, we walked through how Section 351 and the check-the-box regulations allow an LLC or partnership to move its assets into a new C corporation, generally without current tax, and in our September 2026 QSBS Technical Implementation Guide we laid out the full qualification roadmap, including the Section 1202(i) rule that treats contributed property as having a basis equal to its fair market value, which means the appreciation that built up before conversion is never eligible for the exclusion. The practical lesson from both pieces is that the earlier a qualifying business converts, the more of its future growth can fall under the exclusion.

Two rules from that body of work matter a great deal for what follows. First, stock issued while a corporation is an S corporation can never be QSBS, and a C corporation that later makes an S election causes its outstanding stock to lose QSBS status. Second, the exclusion is only available if at least 80% of the corporation’s assets are used in a qualified trade or business, and Section 1202(e)(3) defines that term by listing everything that does not qualify. That list is where professional practices run into the wall.

The part that hits closer to home: life as a specified service trade or business

Section 199A defines a specified service trade or business (SSTB) largely by borrowing the list of excluded fields from Section 1202(e)(3)(A): health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, and any business whose principal asset is the reputation or skill of its owners or employees, together with investing and investment management, trading, and dealing in securities, partnership interests, or commodities. If your firm sits in one of those fields, and a CPA firm plainly does, the Section 199A deduction is available in full only while your taxable income stays below the annual threshold, phases down across a defined range, and then disappears entirely.

For tax year 2026, the thresholds and ranges are as follows.

OBBBA did help at the margins. Beginning in 2026, the phase-in range widened from $50,000 to $75,000 for single filers and from $100,000 to $150,000 for joint filers, and there is a new minimum deduction of $400 for taxpayers with at least $1,000 of qualified business income from an active business in which they materially participate. Those are real improvements, but for a household where two professionals are both earning, or where one successful practice owner is having a good year, the widened range is still a runway that ends quickly, and we blow through the cap far more often than we land inside it.

Consider a married CPA whose practice produces $300,000 of qualified business income after a reasonable salary, and whose household taxable income is $480,000. That household is $76,500 into the $150,000 phase-in range, so only 49% of the deduction survives, and assuming the practice pays enough W-2 wages that the wage limitation is not the binding constraint, the deduction falls from the $60,000 it would have been at or below $403,500 to roughly $29,400. At $553,500 it is zero. What is less obvious, and what I spend a good deal of time explaining to clients, is how steep that slope is. Across the $150,000 range, this household loses $60,000 of deduction, which is forty cents of deduction for every additional dollar of income, and at a 35% marginal bracket that adds roughly fourteen percentage points to the effective federal rate on income earned inside the range, before state taxes and before the 3.8% Medicare and net investment income taxes are considered.

The same household is simultaneously running into the state and local tax deduction phase-down. The OBBBA SALT cap is $40,400 for 2026, but it is reduced by 30% of modified adjusted gross income above $505,000 until it returns to the $10,000 floor, which happens at roughly $606,000 of MAGI. The Section 199A phase-out and the SALT phase-down overlap almost perfectly for a married professional couple, which means the income band between roughly $400,000 and $600,000 is one of the most expensive places in the Code to earn a dollar of service income.

We also lose the alternative calculation

For a business that is not an SSTB, crossing the income threshold is not fatal. Above the threshold, the deduction is limited to the greater of 50% of the W-2 wages the business pays, or 25% of W-2 wages plus 2.5% of the unadjusted basis of its qualified property, and that alternative calculation is what allows a manufacturer, a contractor, or a real estate operator with meaningful payroll or property to keep a full 20% deduction at any income level. An SSTB receives no such lifeline. Inside the phase-in range, the applicable percentage reduces the qualified business income, the W-2 wages, and the property basis all at once, and above the range the deduction is zero regardless of how many people the firm employs. A CPA firm with twenty employees and two million dollars of payroll receives nothing, while a construction company with the same payroll and the same profit keeps its entire deduction. Hiring, which is the conventional answer for a wage-limited business, does not rescue a service practice.

And we cannot be QSBS

This is the part of the Accounting Today article that applies well beyond financial advisors. Because Section 1202(e)(3) excludes health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, and any business whose principal asset is the reputation or skill of its people, converting a professional practice into a C corporation buys the 21% corporate rate but does not buy any exclusion on the eventual sale. The SSTB owner is excluded from the pass-through incentive once income rises and excluded from the C corporation incentive regardless of income, which is exactly the squeeze the article describes for registered investment advisers.

The two lists are not identical, and the differences matter. Architects and engineers are not SSTBs for Section 199A purposes, so a profitable engineering firm with adequate payroll can keep its qualified business income deduction at any income level, yet those same firms are excluded from QSBS under Section 1202. Financial advisors and investment managers, by contrast, are excluded under both provisions. And while the Section 199A regulations narrowed the “reputation or skill” catch-all to endorsement income, licensing of a person’s name or likeness, and appearance fees, there are no comparable regulations under Section 1202, so the same phrase remains broader and less certain for QSBS purposes. A business owner who has confirmed that she is not an SSTB for Section 199A has not yet answered the QSBS question, and should not assume the two analyses will reach the same result.

What is left on the table for a professional practice

None of this means professional practices are without options. It means the options are narrower, more technical, and more dependent on disciplined execution, and in our experience they fall into five categories.

The S corporation remains the workhorse, but for a different reason. For the high-income service professional, the S corporation’s value is no longer the Section 199A deduction, which will often be zero, but the employment tax savings on distributions above a defensible, reasonable salary. That calculus depends on reasonable compensation analysis done honestly, as I discussed in our December 2025 article on IRS reasonable compensation requirements, and it still carries the compliance burdens we covered in our August 2026 S corporation guide, including basis tracking, health insurance reporting for greater-than-2% shareholders, and the one-class-of-stock rule. For owners whose income sits inside the phase-in range, the salary decision also shifts the balance between wages and qualified business income, which is a trade-off worth modeling each year rather than setting once and forgetting.

Managing taxable income into or below the range. Because the thresholds are measured against taxable income, deductions that reduce taxable income can restore part or all of the Section 199A deduction for an owner hovering near the top of the range. Qualified retirement plans, particularly a 401(k) with profit sharing paired with a cash balance or other defined benefit plan, are the most powerful tool here, because a professional in her fifties can often shelter six figures a year while building retirement savings she would want anyway. Charitable planning, which we addressed in our August 2026 article on charitable giving under OBBBA, and careful timing of income and expenses can also move a household across the line. Our January 2026 article on navigating the qualified business income phase-outs through strategic wage and asset planning walks through these levers in more detail.

The pass-through entity tax election, where the state offers it. Many states allow partnerships and S corporations to pay state income tax at the entity level, where it is deductible without regard to the individual SALT cap, and OBBBA did not eliminate that workaround. For an SSTB owner who is losing both the Section 199A deduction and most of the SALT deduction, the entity-level election can be one of the few remaining federal benefits, but state regimes differ, some have sunset dates, and the election should be confirmed for the current year before it is relied upon.

A C corporation as a reinvestment vehicle rather than an exit vehicle. A professional practice that intends to retain earnings to fund growth, technology, or acquisitions can benefit from the flat 21% corporate rate, and the C corporation opens the door to the employee benefit programs we described in our December 2025 article on C corporation employee benefits. The trade-offs are significant, however. Earnings distributed as dividends are taxed a second time, a personal service corporation in fields such as accounting, law, health, and consulting receives only a $150,000 accumulated earnings credit rather than the $250,000 available to other corporations, and a sale of the practice will generally be taxed at both the corporate and shareholder levels unless the value can properly be attributed to the owner’s personal goodwill. Without QSBS, a C corporation is a tool for deferring tax on retained earnings, not a tool for eliminating tax on an exit.

Separating genuinely different lines of business. Where a professional firm has developed something that is not a service, such as a software product, a manufactured good, or a real operating business with its own customers, that activity may belong in its own entity, where it might keep the Section 199A deduction as a non-SSTB pass-through or, if organized as a C corporation from the start, potentially qualify for QSBS. The regulations anticipate this planning and limit it: a business that provides property or services to an SSTB with 50% or more common ownership is treated as an SSTB to that extent, and the de minimis rule only rescues a business whose service receipts stay below 10% of gross receipts (5% once gross receipts exceed $25 million). A separate entity needs separate books, its own employees or clearly allocated personnel, its own customers, and real economic substance, and for QSBS purposes the analysis turns on what the corporation actually does, how it earns revenue, and what its assets are used for.

Choose what you want, because many of these doors only open one way

The Vas Dias observation that it is easier to put assets into a corporation than to take them out has a precise technical foundation, and it is the reason I tell every client considering a change to decide what they actually want before anything is filed.

When an eligible entity changes its classification on Form 8832, Treasury Regulation Section 301.7701-3(g) treats the change as a series of deemed transactions. A partnership or disregarded entity that elects to be taxed as a corporation is treated as contributing its assets and liabilities to a new corporation for stock, which is generally tax-free under Section 351 if the owners control at least 80% of the corporation immediately afterward, subject to the familiar traps of liabilities exceeding basis under Section 357(c), stock issued for services, and the built-in loss limitation of Section 362(e)(2). Going the other direction, a corporation that elects to be treated as a partnership or a disregarded entity is treated as liquidating, which triggers gain at the corporate level under Section 336 and again at the shareholder level under Section 331, and any net operating losses trapped in the corporation are lost. The election itself is administratively simple, and the election can be made effective up to 75 days before filing or up to twelve months after, but the economics of the deemed transactions are anything but simple.

Then there is the 60-month rule. Under Treasury Regulation Section 301.7701-3(c)(1)(iv), once an entity changes its classification by election, it generally cannot change again for 60 months after the effective date. The initial classification election of a newly formed entity, effective on the date of formation, does not count as a change for this purpose, and the IRS may permit an earlier change by private letter ruling if more than 50% of the ownership has changed hands, but otherwise the choice is locked in for five years. An LLC that files Form 2553 to be taxed as an S corporation is deemed to have elected corporate classification, and if that S election is later revoked or terminated, Section 1362(g) generally bars a new S election for five years without IRS consent, leaving the entity as a C corporation in the meantime. Moving from C corporation status to S corporation status, in turn, starts a five-year recognition period for built-in gains tax under Section 1374 and brings accumulated earnings and profits into the distribution ordering rules, which we explained in our August 2026 article.

For QSBS specifically, the sequencing rules are unforgiving. Stock issued during an S period is never QSBS, an S election made by a C corporation destroys the QSBS status of its outstanding stock, the holding period for converted stock begins at issuance after the conversion, and the fair market value basis rule means that value built up before conversion stays taxable. A business owner who converts to capture QSBS, grows for two years, and then elects S status to reduce current tax has given up the exclusion permanently. A professional practice that converts to a C corporation for the 21% rate and later decides it wants pass-through treatment again faces a deemed liquidation. These are not decisions to make because of a single good year or a single article. Rather, they are decisions to make against a five-to-ten-year plan for the business and the owners.

What we are telling clients, and ourselves

For clients whose businesses genuinely qualify for QSBS, the post-OBBBA opportunity is significant, and we continue to help them evaluate conversions, structure Section 351 transfers, and build the documentation file that the exclusion requires. For clients in the professions, and for our own practice, the conversation is different. We start by classifying every line of business twice, once under Section 199A and once under Section 1202, because the answers can diverge. We model the household’s taxable income against the phase-in range and the SALT phase-down together, because the combined marginal rate is what drives behavior. We decide whether the practice is primarily a distribution vehicle, in which case a well-run S corporation or partnership with a pass-through entity tax election usually remains the better fit, or a reinvestment vehicle, in which case the C corporation deserves a hard look even without QSBS. And we look for the genuinely separate, non-service activity that can stand on its own, rather than trying to relabel the practice itself.

The bottom line

The Accounting Today article is right that the entity choice analysis has changed and that advisors need to shed the reflex that pass-through is always best. For the manufacturer, the technology company, and the growth-oriented operating business, the expanded QSBS rules may justify a C corporation that would have been unthinkable a decade ago. For those of us in specified service businesses, the permanence of the law is still welcome, but the honest answer is that the two headline incentives largely pass us by once our income reaches the level most established practices reach, and our planning has to come from reasonable compensation, retirement plan design, state entity-level elections, disciplined income management, and careful separation of genuinely distinct businesses. Whatever you choose, choose deliberately, because the 60-month rule, the five-year S corporation re-election bar, and the deemed liquidation rules mean that the door you walk through today may not open again for some time. If your business sits anywhere near these lines, we would be glad to walk through the numbers with you.

Related reading from MAS LLC

• QSBS Technical Implementation Guide Updated September 2026
• The S Corporation Questions Our Clients Are Asking Right Now, and What the Latest Developments Mean for You (August 2026)
• The Complete Client Guide to S Corporations: Benefits, Risks, Compliance, and Common Mistakes (August 2026)
• Charitable Giving in 2026: How the One Big Beautiful Bill Act Reshapes the Rules for Donors (August 2026)
• QSBS Eligibility Evaluation and Ongoing Compliance Consulting (February 2026)
• The Qualified Business Income Deduction: Navigating Income Phase-Outs Through Strategic Wage and Asset Planning (January 2026)
• IRS Reasonable Compensation Requirements for S Corporations (December 2025)
• Maximizing Tax Benefits: A Comprehensive Guide to C Corporation Employee Benefit Programs (December 2025)
• Qualified Small Business Stock (QSBS): Technical Requirements, Implementation Strategies, and Post-OBBBA Planning (December 2025)
• The C Corp Conversion Rush: How Section 351 Tax-Free Transfers and Enhanced QSBS Benefits Are Driving Business Entity Transformations (October 2025)
• An Argument Against Holding Real Estate in an S Corporation (May 2024)

Sources

• Zoe Sagalow, Why advisors are rethinking entity structures for clients, and maybe themselves, Financial Planning and Accounting Today, September 24, 2026
• Mark Baran, Should You Reconsider Your Post-OBBBA Entity Selection?, CBIZ, November 2025
• Bryan Martin, CPA, QBI Deduction: 2026 Rules, Income Limits and SSTB Traps, Taxstra, August 2026
• Tax Consequences of Changing Entity Classification, SDO CPA, April 2026
• Ryan Foley, Entity Structure, The One Big Beautiful Bill, and Selling Your Business, Cunningham & Associates, August 2025
• Internal Revenue Service, Form 8832, Entity Classification Election
• Additional background: Integra Biz Solutions, HCVT, Blue Cloud CPA, AE Tax Advisors, Ramp

Jessica Irving Marschall, CPA, ISA AM, is President and CEO of Marschall Accounting Services, LLC, a tax advisory and consulting firm based in Fredericksburg, Virginia. This article is for general information only and is not tax, legal, or financial advice for your specific situation. Please consult your advisor before acting. Circular 230 Disclosure: any tax advice contained in this communication was not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code.