Should I switch from S-corp to C-corp?

The recently enacted tax law, known as the Tax Cuts and Jobs Act, dramatically lowers the effective income tax rates for most businesses. For businesses operating as regular C corporations the top tax rate has been reduced from 35% to 21%. Also, for pass through entities, such as S corporations or Limited Liability Companies (LLCs), the combination of lower individual tax rates and the new 20% Qualified Business Income deduction could reduce the top federal tax rate on income from those entities from 39.6% to 29.6%.

The news about reduced tax rates has created a predicament for some businesses currently taxed as pass through entities. Since the reduced potential net effective pass through income tax rate of 29.6% is greater than the flat 21% regular corporation tax rate, it appears that switching to C corporation status may be valuable.

There are a few advantages and disadvantages to making the switch from S-corp to C-corp.

Advantages:

More flexible fringe benefit rules for C corporations
Some tax favored fringe benefits, such as employer provided health insurance and cafeteria plan benefits, are limited for a more than 2% owner of a pass-through entity. Regular C corporations do not have these limitations.

Special gain exclusion rules for some C corporations
There is a special benefit for owners of small C corporations to exclude most if not all the gain from the sale of the stock of those corporations. 

Deductions like state & local taxes and entertainment
Under the Tax Cuts and Jobs Act the deduction for state and local income taxes is severely limited. These would be fully deductible by a C corporation.
Furthermore, beginning for amounts paid or incurred after December 31, 2017 entertainment expenses are no longer deductible. 

Disadvantages:

C-corporations are still subject to double taxation
One disadvantage to C corps, of course, is that they are subject to two levels of taxation, one at the corporate level on earnings and one at the shareholder level, for example, on dividends. 

C corporations face a tax disadvantage when sold
 If a company is sold, it is most often structured as an asset sale, which results in two levels of tax for a C-corp – one tax to the corporation when it sells its assets in exchange for cash and a second tax if the corporation is liquidated and the stockholders exchange their shares for the sale proceeds.

The 21% corporate rate could always increase
Although the tax rate reduction to 21% is currently considered to be permanent, based on prior history the only permanent aspect of tax law is change. It is very likely that a different administration could increase the corporate tax rate in the future.

If you, as a business owner, are asking yourself, “Should I switch to a C corp?” note that there is not a one size fits all answer. To discuss why making this change may be beneficial to you, contact us today.

BluePoint Financial, LLC
151 Regions Way, Suite 6B
Destin, FL 32541
850.460.2222