Conventional wisdom says that sole proprietorships, partnerships, Sub-S Corporations and certain LLCs (“pass-through” business structures) should strongly consider converting from their present business form into a C Corporation (C Corp). Why? The 21% C Corp income tax rate from the Tax Cuts and Jobs Act can be seductive, especially when personal income tax rates can reach as high as 37%. Like many temptations, the rush to a C Corp may be a good one to resist.
- The C Corp income tax rate is a FLAT, not graduated, 21%. Unless your “pass-through” business client has taxable income of well over $330,000 (married filing jointly), the C Corp is highly unlikely to reduce income taxes. But remember, the higher your client’s taxable income above $330,000, the more attractive the C Corp’s 21% tax rate may become.
- The C Corp still imposes double taxation – in addition to income tax on earned income, dividends will also be taxed.
- Pass-through business owners, but not C Corp owners, may be eligible to deduct 20% of their qualified business income in arriving at taxable income.
Remember that there are factors other than current year income tax rates to consider, including fringe benefits for the owner/employee, asset protection, ability to take the C Corp public, and more.
Bottom line – there is no one-size-fits-all answer. Each client should consult his or her tax advisor to determine the best business entity; the optimum choice may or may not be the C Corp form.