How the New Tax Law Affects C Corporations

The Tax Cuts and Jobs Act (TCJA) made significant changes to the federal tax law, including a significant decrease in the corporate tax rate.

Beginning in 2018, the tax rate for c-corporations is a flat rate of 21%. This is great for existing corporations, as they were previously taxed at rates up to 38%.

But what if your business is not currently classified as a c-corporation? Does it make sense to switch entity types to take advantage of the new, lower rate? The answer is it depends. Every business is different, and their tax situation should be analyzed carefully before making a decision on an entity change.

However, it is important to note some factors that should go into this decision. One is that c-corporations are still subject to double taxation. This means that the corporation pays income tax at the entity level. Then, if the owners take the profit out of the company, they are then taxed on that distribution as dividend income or compensation. Thus, the profit of the company has now been taxed twice.

In addition, one of the other changes in the TCJA is a new 20% deduction on pass-through business income. If your business is classified as a pass-through (including sole proprietorship, partnerships, and s-corporations), you may be eligible for this deduction which would lower the tax on your business income.

There are other tax and accounting changes that may be required to change to a c-corporation, so it is very important to consult your tax advisor regarding this decision.

If you have any additional questions, please contact Rebecca Bischoff, CPA at 314-576-1350 or rbischoff@bwtpcpa.com.

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