S-Corp vs C-Corp, What to Consider

Are you looking to start a new corporation?  Or maybe you’ve been operating as a C corporation or an S corporation for several years and now you’re asking if this is the best operating structure?  What changes did the Tax Cuts and Jobs Act (TCJA) have on corporations?  We’ll take a look at some of the tax options to consider when choosing what your corporate structure should be.  One of the main considerations is how will your corporation be taxed and is it more beneficial to be a C or S corporation?

A C corporation pays taxes at the corporate level, with the recent passage of TCJA the corporate tax rate has been changed to a flat 21% tax rate effective January 1, 2018 and the alternative minimum tax has been repealed.  However a C corporation still faces “double taxation” on its income which means the corporation pays taxes on the income earned at the corporate level then again the income gets taxed at the individual level when corporate income gets distributed to its shareholders.

By comparison an S corporation does not pay income tax at the corporate level which means the income is taxed only once.  The income passes through to the shareholders where the income gets reported and taxed on the shareholders personal tax return.  The TCJA temporarily changed the individual tax rates so an individual’s tax rate can range from a low of 10% up to the maximum rate of 37%.  To help offset the flat 21% C corporate tax rate the owners of pass through entities are entitled to claim a deduction of up to 20% of qualified business income (QBI) on their personal tax returns.  TCJA does include some limitations on the QBI deduction where certain specified trades or businesses are subject to phase out rules.  For somebody filing as single the phase out occurs when taxable income is between $157,500 and $207,500 ($315,000 and $415,000 if married filing jointly).

The TCJA defines a specified trade or business subject to the phase out as any trade or business providing services in the fields of health, law, accounting actuarial science, performing arts consulting, athletics, financial services, brokerage services or any other trade or business where the principal asset is the reputation or skill of one or more of its employees (further explained as endorsements or use of images of high profile celebrities).

The corporate tax law changes brought on by the Tax Cuts and Jobs Act has changed how we look at C and S corporations and it also brings with it some planning opportunities.  Many of the corporate changes made by TCJA are permanent and many of the individual changes will expire in 2025 so there are other items to consider not covered in this article.  For additional information about planning opportunities for C and S corporations please contact Ken at kgschafer@manercpa.com or contact Maner Costerisan PC at 517-323-7500.

About the author, Ken Schafer CPA, CGMA is a senior manager in the tax department, he provides comprehensive tax, accounting and consulting services for the firm’s clients.  Specifically assists with tax review services.