The MHEDA Journal - Third Quarter, 2018 - 88

MONEY

CORPORATE STRUCTURE

MATTERS
Should I Stay an S Corp or Convert to a
C Corp Under the New Tax Law?

O

BY ROMAN A. BASI

ne of the most significant elements of the Tax Cuts and Jobs Act (HR 1, "TCJA") is the
permanent reduction of the tax rate for regular "C" corporations from a top rate of 35%
to a flat tax of 21% for all C corporation income. While C corporations are no longer
taxed at 15% for the first $50,000 in income, the 21% flat tax rate is still substantially

lower than pre-TCJA tax rates and the income tax rates paid by high-income individuals.

However, most businesses cannot
take advantage of the 21% rate because
most individuals who own their own
businesses, especially smaller businesses, have not formed C corporations.
Instead, their businesses are owned
and operated as pass-through entities:
sole proprietorships, limited liability
companies (LLCs) taxed as partnerships, partnerships, or S corporations
(corporations taxed as pass-through
entities). Such pass-through owners
pay tax on their business profits at
their individual tax rates, not the corporate tax rate. So, if your business is a
pass-through entity, should you form a
C corporation to take advantage of the

new 21% corporate rate? It depends...
and it's complicated.
You can compare the rates for individuals and corporations in the charts
below. The top individual rate under
the TCJA is 37%, 16% higher than the
21% corporation rate. However, the fact
the corporate tax rate is lower than
your individual income tax rate doesn't
necessarily mean you'll save on taxes
if you form a C corporation. You may
not save tax-wise for two main reasons, double taxation and an inability
to take advantage of the new passthrough tax deduction, thus it may
be advantageous to remain or form a
pass-through entity.

Under "double taxation," if you're the
owner of a C corporation, any direct
payment of your corporation's profits
to yourself will be taxed twice. More
specifically, the corporation will pay
corporate income tax on profit at the
21% corporate tax rate with an additional personal income tax on what
you receive from the corporation, along
with dividends that are usually taxed at
capital gains rates. Higher income taxpayers must also pay a 3.8% Medicare
tax on net dividend and investment
income. Dividends from stock owned
more than one year are taxed at the
long-term capital gains rate shown in
the chart. So, the question is, depending

2018 Income If Married Filing Jointly

Tax Rate on Qualified Dividends

$77,200 or less

-0-

$77,201 to $250,000

15%

$250,001 to $479,000

18.8% (15% long-term capital gains rate + 3.8% Medicare tax)

All over $479,001

23.8% (20% long-term capital gains rate + 3.8% Medicare tax)

2018 Income If Single

Tax Rate on Qualified Dividends

$38,600 or less

-0-

$38,601 to $200,000

15%

$200,001 to $425,800

18.8% (15% long-term capital gains rate + 3.8% Medicare tax)

All over $425,801

23.8% (20% long-term capital gains rate + 3.8% Medicare tax)

88

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Table of Contents for the Digital Edition of The MHEDA Journal - Third Quarter, 2018

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