New Tax Law Impacts Choice of Entity: The new tax law makes major changes to the choice of entity decision. Because C corporations are now taxed at a flat rate of 21% (as opposed to a top rate of 35% under prior law), many business owners wonder whether they should structure or restructure their business operations as a C corporation. Unfortunately, the answer is not simple. For one thing, the top individual tax rate also fell, from 39.6% to 37%. In addition, the new qualified business income deduction isn’t available for C corporations or their shareholders. There are other factors to consider as well, such as self-employment and state taxes.
A huge factor to consider is that C corporations are subject to double taxation, meaning that corporate income is taxed once at the entity level and again when it’s distributed to shareholders as dividends. This can be avoided if the corporation retains all profits to finance growth. However, this opens the door to the accumulated earnings tax (or personal holding company tax) if profits accumulate beyond the reasonable needs of the business.
Although C corporations are now more attractive due to the lower tax rate, it may make more sense to continue operating as a pass-through entity. Especially if you can claim the full 20% deduction for qualified business income. It’s risky to hold significant assets that are likely to go up in value (like real estate) in a C corporation. If the assets are sold for substantial gains, it may be impossible to get the profits out of the corporation without double taxation.
As you can see, the choice of entity decision is complicated, but we’re here to help. We would be happy to analyze your situation to see if a C corporation is right for you
For information on Boyum Barenscheer’s business tax services, please contact John Csargo, CPA, MBT, CFP at firstname.lastname@example.org 952.858.5553