What You’ll Learn

• Why the 20% pass-through deduction your firm already qualifies for is now permanent, not a perk that was set to expire.
• The real cost of C corp status: double taxation that a lower corporate rate never solved.
• A specific Massachusetts election that puts real money back in your pocket, and why many firms still aren’t using it.
• The one scenario where converting to a C corp pays off, and why it doesn’t apply to architecture and engineering firms.
• What to adjust instead of converting your entity, so you capture more of the deduction you already have.

Most architecture and engineering (A&E) firms in Greater Boston should remain exactly as they’re structured. That was true when the Tax Cuts and Jobs Act first cut the corporate tax rate to 21% in 2018, and it’s truer now. The pass-through deduction that lets S corps, partnerships and LLCs compete with the lower C corp rate has just become a permanent part of the tax code. For nearly every A&E firm in Massachusetts, converting to a C corp to chase a lower rate is still the wrong move.

What’s Changed Since the Original Tax Law

The 2017 tax law cut the C corp rate from 35% to 21% and gave pass-through businesses, including S corps, partnerships, LLCs and sole proprietorships, a 20% deduction on qualified business income under Section 199A. That deduction was set to expire after 2025. It no longer is. The One Big Beautiful Bill Act, signed in July 2025, made the 20% deduction a permanent part of the tax code. For 2026, the income thresholds at which the deduction starts to phase out also moved up, to $75,000 for single filers and $150,000 for married couples filing jointly. The law also added a new minimum deduction of $400 for any taxpayer with at least $1,000 of qualified business income, adjusted for inflation each year after 2026.

None of this changed the most important fact for your firm: architects and engineers are still carved out of the “specified service business” rules that block law firms, accounting firms, and consultants from taking the full deduction. That exemption was true in 2018, and it’s still true today.

Why C Corp Status Still Costs You Twice

A 21% corporate rate sounds appealing next to individual rates that can run higher. But a C corp pays that 21% at the entity level, and then your shareholders pay it again when profits are distributed as dividends. Qualified dividends are taxed at 15% to 20% depending on income, and most owners of profitable firms also owe the 3.8% Net Investment Income Tax on top of that. Add it up, and the combined federal tax bite on C corp profits that reach a shareholder’s pocket is often close to, or higher than, what an S corp or partnership owner pays on the same dollar of income, especially once the 20% pass-through deduction is factored in. S corporations, partnerships and LLCs never face that second layer of tax.

The 20% Deduction Your Firm Already Gets to Keep

The qualified business income deduction isn’t automatic on every dollar. It applies only to qualified business income, calculated using a formula tied to W-2 wages paid by the business, the business’s qualified property, and the extent to which an owner’s pay is treated as guaranteed payments rather than business income. Above the annual threshold amounts, the wage and qualified property limitations begin phasing in before ultimately applying in full. Below them, most A&E firm owners take the full 20% with little restriction.

Because A&E firms are specifically excluded from the specified service business limits that block other professional firms, your income doesn’t get shut out of the deduction just because the firm’s value depends on the skill of its principals. That’s a meaningful, permanent advantage your firm has over a law firm or consulting practice down the street.

A Massachusetts Lever Worth Pulling: The Pass-Through Entity Excise

There’s a real restructuring move worth considering, and it isn’t converting to a C corp. Since 2021, Massachusetts has allowed S corps, partnerships and certain trusts to elect the pass-through entity excise under Chapter 63D. The entity pays a 5% excise on its income at the state level, and owners get a credit equal to 90% of their share of that tax against their personal Massachusetts income tax. The benefit is that the excise is paid by the business, not the individual, which allows owners to deduct it on their federal return as a business expense rather than running into the $10,000 federal cap on state and local tax deductions.

That cap was raised by the same 2025 federal law to $40,000 for joint filers in 2025, rising to roughly $40,400 in 2026, and increasing each year slightly through 2029 before it is scheduled to drop back to $10,000 in 2030. Because the cap still exists, the Massachusetts election still has real value for owners whose state tax bill exceeds it, which describes most profitable A&E firms in Massachusetts. The election is made annually and is irrevocable for that year, so it’s worth reviewing with your tax advisor before your return is filed, not after.

The One Loophole That Doesn’t Apply to A&E Firms

Some business owners convert to a C corp to position their stock for the Section 1202 qualified small business stock exclusion, which can erase federal capital gains tax on a future sale of the company. It’s a real benefit for the right business. It isn’t available to you. Section 1202 specifically excludes engineering and architecture firms from qualifying, just as the original specified service business rules tried to exclude them from the 20% deduction, but in the opposite direction. If a financial planner or banker suggests a C corp conversion to set up a tax-free exit, ask them how that squares with your industry’s exclusion from Section 1202. For most A&E firms, it doesn’t.

What to Do Instead of Restructuring

Rather than changing your entity type, look at moves that increase the qualified business income your deduction applies to:

• Review partner and shareholder compensation. Guaranteed payments to partners don’t count as qualified business income, so a partnership may benefit from reworking how income is distributed.
• Check your wage base. S corp owners near the income thresholds may benefit from adjusting how much they take as W-2 wages versus distributions.
• Review the classification of any  long-term 1099 contractors and correct to  W-2 employees where  applicable. It raises your Section 199A wage base, which matters more once income exceeds the 2026 thresholds, and ensures you are following employment tax rules
• Claim the credits your industry already qualifies for. Many Massachusetts A&E firms still leave R&D tax credits and the Section 179D energy-efficient building deduction unclaimed.
• Elect the Massachusetts pass-through entity excise if your state tax bill exceeds the federal SALT cap.

Talk to Your Tax Advisor Before You File Anything

Tax law changes every year, and the rules that applied to your firm in 2018 aren’t the same ones that apply in 2026. The right move is almost never a wholesale conversion of your entity. It’s a series of smaller, deliberate adjustments made before your return is due, not after.  

Whether you’re evaluating compensation strategies, state tax elections, or available credits and deductions, our team can help. Contact our team to discuss your firm’s specific circumstances.           

FAQs

Did the 20% pass-through deduction expire in 2025?

No. The deduction was originally scheduled to expire after 2025, but the One Big Beautiful Bill Act, signed in July 2025, made it permanent. Losing the 20% deduction is no longer something firms need to plan around.

Are architecture and engineering firms exempt from the specified service business income limits?

Yes. Unlike law firms, accounting firms, and consulting practices, architecture and engineering firms are not classified as specified service businesses under Section 199A. That means firm owners can take the full 20% deduction without the income-based restrictions that apply to those other professions, subject only to the standard wage and property limits at higher income levels.

What is the Massachusetts pass-through entity excise, and should our firm elect it?

It’s an optional state-level tax under Massachusetts Chapter 63D that lets S corps and partnerships pay a 5% excise at the entity level instead of leaving that tax exposure on the owners’ personal returns. Owners receive a 90% credit against their state tax bill, and the firm can deduct the full excise tax on its federal return, thereby circumventing the federal cap on state and local tax deductions. Many profitable Massachusetts A&E firms benefit from making the election, although the results depend on each owner’s individual tax situation. The election is irrevocable for that year, so review it with your tax advisor before filing.

Is there ever a good reason for an A&E firm to convert to a C corp?

Rarely. The most common reasons other businesses convert, like accessing the Section 1202 capital gains exclusion or attracting institutional equity investors who require C corp stock, generally don’t apply to architecture and engineering firms. Section 1202 specifically excludes your industry. Most A&E firms are better served by staying a pass-through entity and optimizing within that structure.

How often should we review our entity structure and tax strategy?

At least once a year, and immediately after any major change: a new partner, a significant jump in revenue, a planned sale, or a new tax law. Waiting until tax season limits your options. Many of the moves that reduce your tax bill, like adjusting your compensation structure or electing the Massachusetts pass-through entity excise, have to be made before the year closes, not after.

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