When it comes to tax strategies, many business people are wondering which business structure is best for their bottom line in 2018. Following the passage of the 2017 Tax Act, American companies registered as C-Corporations now qualify for a permanent maximum 21% tax rate, while U.S. businesses registered as S-Corporations (which are pass-through entities) will see owners’ or partners’ profits taxed at their individual tax rate of up to 37%. C-Corps can also fully deduct state and local taxes while S-Corps are subject to the individual deduction limited to a maximum of $10,000. It’s true, with tax reform, S-Corps will be able to deduct up to 20% of qualified business income, but that change is only temporary, (for tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026) and still leaves the pass-through entity technically paying more taxes than companies registered as C-Corps. Thus, the question, C-Corp or S-Corp?
The advantages of a C-Corp also include lower tax rates, tax deductions, limited liability, strong growth potential and unlimited shareholders, just to name a few. At first blush, a switch to C-Corp status may sound like a great idea, but there are also disadvantages to take into consideration such as high filing fees, double taxation (on revenue & dividends), no loss deductions and stricter government regulations.
The advantages of an S-Corp include single taxation, protection for shareholders against financial or legal issues, income options such as salaries, dividends or tax-free distributions, loss deductions and ease of ownership transfer. The disadvantages of an S-Corp range from high filing fees, less income allocation options, and stock limitations to (often) more IRS scrutiny since shareholders can take a salary or dividend.
Those are just the broad-strokes, with a variety of issues to be “weighed” when choosing to be defined as a C-Corp or S-Corp. At Tax Savings Professionals, we have studied the new tax code to devise tax strategies for small businesses to large corporations, and are proficient at helping CPA’s “run the numbers” to help clients make an informed decision on S-Corp or C-Corp status.
Because the new Tax Code (like all U.S. law) can be subject to repeal, amendment or a court-ordered change in the future, some business owners may be reluctant to convert their status as a tax strategy, only to find the rates or rules changing again. What are the odds of that happening, and when? No one knows for sure. At Tax Savings Professionals, we still think it’s a good idea to measure out any potential savings doing business as a C-Corp and an S-Corp. Then compare side by side. If you stand to gain by switching status to save on taxes, it might be worth the effort.
For more than eighteen years, we’ve helped thousands of clients around the country. Give us a call at (772) 257-7888 or use our convenient Contact form to discuss your options and what will best fit your business needs.