The Incentive to be Taxed as a C Corporation Under the New Tax Law

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The C Corporation tax rate has been lowered to 21 percent. There is no Personal Service Corporation nonsense like their used to be.

The main question is: Why would the government incentivize C Corporations? The answer is quite simple. There was an exodus of C Corporations to other countries because the tax rate was so much less than the 35 percent being charged in the U.S. With those C Corporations moving overseas, jobs went with them. The U.S. had the highest corporate tax rate in the world, and the smart companies were leaving. That meant the U.S. government was getting nothing in taxes.

An unintended consequence of the C Corporation tax bracket being lowered to 21 percent is that a majority of my client base, which are S Corporations, will pay more in taxes by remaining as an S Corporation than they would by revoking the election and being taxed as a C Corporation.

There is something that you need to get out of your head, that we have been brainwashed to think since college. You don’t want to have your clients taxed as a C Corporation because of double taxation. However, about five years ago, I began working a lot with C Corporations, as I was using them in conjunction with S Corporations, and what I found was that if you set these up properly, double taxation never comes into play.

Before you stop reading and think that I need to be committed to an insane asylum, let me explain.

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About Craig W. Smalley, EA

Craig Smalley

Craig W. Smalley, MST, EA, has been in practice since 1994. He has been admitted to practice before the IRS as an enrolled agent and has a master's in taxation. He is well-versed in US tax law and US Tax Court cases. He specializes in taxation, entity structuring and restructuring, corporations, partnerships, and individual taxation, as well as representation before the IRS regarding negotiations, audits, and appeals. In his many years of practice, he has been exposed to a variety of businesses and has an excellent knowledge of most industries. He is the CEO and co-founder of CWSEAPA PLLC and Tax Crisis Center LLC; both business have locations in Florida, Delaware, and Nevada. Craig is the current Google small business accounting advisor for the Google Small Business Community. He is a contributor to AccountingWEB and Accounting Today, and has had 12 books published on various topics in taxation. His articles have also been featured in the Chicago Tribune, New York Times, Yahoo Finance, Nasdaq, and several other newspapers, periodicals, and magazines. He has been interviewed and been a featured guest on many radio shows and podcasts. Finally, he is the co-host of Tax Avoidance is Legal, which is a nationally broadcast weekly Internet radio show.

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Feb 5th 2018 21:06

Pass-throughs can but vehicles, deduct health insurance for the owners, set up 401(k)'s, and will have an effective maximum tax
rate of 29.6% Federal while avoiding double taxation completely. I am not jumping the gun on C-Corp status without some other very compelling reasons.

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Feb 13th 2018 05:34

AFAIK, S-corp more-than-2%-shareholders may deduct their health insurance on their 1040s "above the line" as self-employed medical, to the extent of wages (another reason for s-corp owners to take reasonable compensation). So...they are still getting the deduction, just not directly on the 1120S corporate return.

From what I can see, C-corps are going to be best for very profitable corporations that don't distribute dividends to their shareholders. Of course, there is then the issue of the accumulated earnings tax, but that can be avoided by demonstrating a valid business purpose for retaining earnings and marking the earnings as restricted on the corporate return.

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