Invest1 publisher3 min readPublished
Corporate-side tax breaks are drawing some passthrough owners into C corporations
EY's Tony Nitti says owners are moving into C corporations as they have not since 1986, even after the July 2025 law made the 20% passthrough break permanent. The pull comes from the corporate rate and a wider stock exclusion, so the case holds only for owners those provisions reach.
The Investor · Invest desk
What happened
- The same law expanded the Section 1202 exclusion that lets individuals avoid tax on qualified small business stock, a benefit tied to organizing as a corporation.
- EY partner Tony Nitti says many businesses are willingly becoming C corporations, something the tax industry has not seen since before 1986.
- Leaving a C corporation for a passthrough requires distributing its assets first, with tax consequences, while switching between passthrough types is more flexible.
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Why it matters
- decision Advisors can compare a passthrough against a C corporation on rates they now treat as permanent, so putting off the choice until Congress acts no longer has a tax reason behind it.
- constraint An owner who converts to a C corporation stays there unless they pay tax on distributed assets, so the move pays only if corporate treatment holds for as long as they own the business.
- constraint Existing S corporation owners with appreciated assets have less room to re-sort than a new business does, because those assets are hard to get out of the entity.
Permanence for the 199A break, taken alone, favors staying a passthrough. A deduction of 20% off qualified business income leaves 80% of that income in the owner's taxable base [1]. The pull toward C corporations comes from the corporate side of the code: the rate cut in the 2017 law [2] and the wider Section 1202 stock exclusion [6]. Nitti, who leads the S corporation team in EY's National Tax Department [4], put little weight on the new law by itself. He said there were "kind of positives on all sides coming out of the reconciliation" [7].
The law's contribution is inputs that stay put, or rather, inputs that stay put until Congress takes another pass. "I think for the first time since 2017, we're not waiting for something," Nitti said [17]. For the eight years between the 2017 law and the July 2025 one [2], an owner comparing structures had to guess whether the passthrough deduction would survive. Advisors can now proceed "with pretty darn solid inputs," he said [19].
The cost of a conversion shows up at the exit. Ryan Vas Dias is director of tax at Compound Planning, a New York City registered investment advisor [11]. He said moving from a flowthrough into a C corporation "is a little bit easier" because the owner is "essentially just taking your assets" and "putting them into the corporate entity" [10]. "It's harder to get things out of a corporation than it is to put them in," he said [12].
That asymmetry matters if the rules move again. Nitti said "a second bite of the reconciliation apple is possible" because "we do still have complete Republican control" [18]. A bill that raised the corporate rate or trimmed the stock exclusion would change the terms for firms that had already converted and could not cheaply leave.
The incentives also miss some businesses entirely, including the advisors' own. Registered investment advisors might not qualify for the 199A deduction and might not hold qualified small business stock [14]. "Some of the bigger incentives that are dangled out there for both C corps and passthrough owners probably do not apply to your financial advisor businesses," Nitti said [15]. Vas Dias said that "for advisors, the LLC is often a more favorable entity structure," though it depends on specific circumstances [16].
I think the evidence supports conversions for a subset of owners, with the cause in the corporate rate and the stock exclusion [2][6]. For an owner outside their reach, the permanent 20% deduction argues for staying put [1]. Nitti limited his case to "certain types of businesses" [5] and did not say which types, or how many have converted.
What to watch
- Any count of C corporation conversions by industry or business type, since Nitti's description covers only 'certain types of businesses.'
- Whether the owners converting are the ones holding qualified small business stock, which would show Section 1202 driving the moves more than the corporate rate.