Is a C-Corporation in Your Future?

With the recent changes in the tax code, some small business owners are questioning if their S-corporation tax status is the most tax efficient tax strategy.  Close to 30 million business owners have elected an S-corporation tax status resulting in their business profits being included on their personal tax return.  This year single individuals earning over $400,000 and joint filers earning over $450,000 will see their incremental top rates increase from 35% to 39.6%.  This compares to the top corporate tax rate of 35%.  Further, President Obama mentioned lowering the corporate tax rate in his State of the Union address and he previously proposed lowering the rate to 28%.

Many small business owners who take a modest salary from their business may find themselves pushed up into the highest tax brackets when their company’s profit are included with their personal income.   According to a Wall Street Journal and VIstage survey, thirty-five percent of the 848 small business owners included in a recent survey said they would consider reorganizing from an S-corporation to a C-corporation if Congress and the President are successful in reducing the top corporate tax rate.

However, though paying a lower tax rate is appealing, there are many other issues to consider before making the move from an S to a C-corporation.  C-corporation profits are taxed at the corporate level, and if distributed to shareholders as dividend, taxed a second time on the shareholder’s return.  When the company is sold, after the corporation satisfies its tax liability, there is a double tax owed by the shareholder for his profit in the corporation’s stock.  Also the IRS requires companies wait five years after switching from an S-corporation to a C-corporation to switch back to an S-corporation.  Of course there are various legal and accounting costs associated with changing a firm’s tax status.  The bottom line is the optimal tax structure for your business is more than choosing the structure that yields the lowest tax rate on your business’s annual income

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