Should I switch from an S corp to a C corp in 2026?

It depends on the 2026 rate structure. If individual rates increased and the Section 199A deduction expired, the C corporations flat 21% rate becomes more competitive for retained earnings. However, the double taxation of C corp distributions must be factored in. A comprehensive analysis with your tax advisor is essential before making any entity changes.

What should business owners do first in January 2026?

Schedule a meeting with your tax advisor to review the new rate structure and its impact, update estimated tax payments, reassess retirement plan contributions, review your estate plan, and evaluate whether your entity structure remains optimal for the new tax environment.

Planning for 2026: What the Tax Landscape Looks Like Next Year | Lynch Law

Planning for 2026: What the Tax Landscape Looks Like Next Year

Lynch Law, PLLC

With the 2025 tax year coming to a close and a new tax landscape taking shape for 2026, business owners face a critical planning inflection point. Whether the TCJA was extended, modified, or allowed to sunset, the start of a new year requires a fresh assessment of tax strategies, entity structures, compensation arrangements, and investment plans. The businesses that thrive in a changing tax environment are those that plan proactively rather than react after the fact.

Reassessing Entity Structure

The relative advantage of different entity types depends on the tax rates in effect. If TCJA rates were extended, the current S corporation and pass-through entity advantages largely continue. If the TCJA expired and rates reverted to pre-2018 levels—with the loss of the Section 199A deduction—the calculus shifts. At higher individual rates without the 199A deduction, the C corporation's flat 21% rate becomes more competitive. Business owners should revisit the entity selection analysis with updated numbers.^[1]

Compensation Planning

Changes in individual tax rates directly affect the optimal compensation strategy for owner-employees. S corporation shareholders must balance reasonable compensation (subject to employment taxes) with distributions (not subject to employment taxes). At higher rates, the value of tax-deferred retirement plan contributions increases. Deferred compensation arrangements may need to be reconsidered based on the relative rates in the year of deferral versus the expected rates in the year of payment.^[2]

Estimated Tax Recalibration

Business owners must recalibrate their estimated tax payments for 2026 based on the new rate structure. If rates increased, the prior year safe harbor (110% of the prior year's tax for high-income taxpayers) provides protection against underpayment penalties while the new rates are being assessed. However, relying solely on the safe harbor may result in a large balance due at filing time if income is significantly higher or rates are significantly higher than the prior year.^[3]

Estate Planning Updates

If the estate tax exemption dropped, individuals who did not use the enhanced exemption before the sunset need to revisit their estate plans. Trusts that were designed to hold the maximum exemption amount may need to be updated with new formula clauses. Credit shelter trust provisions should be reviewed to ensure they still operate correctly at the lower exemption level. Life insurance needs may have increased to cover the additional estate tax exposure.^[4]

Action Items for January

The first month of 2026 should include a meeting with your tax advisor to review the new rate structure and its impact on your business, a review and update of estimated tax payments for the first quarter, a reassessment of retirement plan contribution strategies under the new limits, a review of your estate plan with your estate planning attorney, and an evaluation of whether your current entity structure remains optimal. The cost of delaying these reviews increases with each passing month as planning opportunities are lost and the risk of underpayment penalties grows.^[5]

References

^[1] Entity selection analysis must be updated based on 2026 individual and corporate rates; the loss of § 199A may shift the advantage toward C corporation status for some businesses.
^[2] S corporation reasonable compensation and retirement plan contribution strategies should be recalibrated for the 2026 rate environment.
^[3] IRC § 6654 (estimated tax rules); the 110% prior year safe harbor protects against penalties but may result in large balance due if rates increased significantly.
^[4] Estate plans with formula clauses referencing the applicable exclusion amount will automatically adjust to the new exemption level; however, the overall plan should be reviewed for adequacy.
^[5] See Estate Planning (discussing estate plan reviews and updates in response to legislative changes).

This article is for informational purposes only and does not constitute legal advice. The facts of every situation are different, and you should consult with a qualified attorney before taking action based on the information in this article.