Tax Changes for C Corporations

Chances are that if you’re reading this blog post, you have a vested interest in the subject. And by “chance,” I mean a 100% chance. If you are reading this for entertainment, then I would suggest that you consider heading over to the Employment Opportunities area of our site. Either way, unless you have been off the grid for the past 2 months, you are aware that the top corporate tax rate has decreased from 35% to 21%. For this reason alone, we have entered the C Corporation renaissance, a true revival of an otherwise neglected entity type for non-public small businesses. No longer in the shadows, the modern C-Corp boasts the following in 2018 and beyond:

• No Alternative Minimum Tax. Yes, you read that correctly. Corporations are NOT subject to AMT. If you make substantial money and are continually paying additional tax in the form of AMT, you are going to want to strongly consider shifting a large chunk of that income into a C Corp, for the lower tax rate AND the avoidance of AMT.
• Corporations can deduct unlimited state taxes. If the significance of this escapes you, recall that all of the state taxes that you pay on an individual level are currently combined with your property taxes and capped at $10K per year. Not bad, right?
• For conversions from a C from an S, you do can distribute the S-Corp earnings tax free. The point here is that if you have say $100K in after-tax earnings (in your Accumulated Adjustments Account) in your S-Corp prior to the conversion to a C Corp, your first $100K in distributions from the corp do not need to be reported as dividends and are thus tax free.
• C Corporations with average annual gross receipts of $25M or less can use the cash basis of accounting. Even if the business has inventories this is true. This means that a cash basis business can deduct the costs of producing/acquiring inventory when paid, not when sold. Say what!? That is a huge benefit to small business taxpayers from both the standpoint of pushing forward deductions and reducing the administrative burden of accurately determining their COGS and inventory levels. The old threshold was $5M, which is determined with reference to the previous 3 tax years, and it was nearly impossible to expense inventory when purchased.

What are some possible C-Corp Strategies?

• Use the C-Corp as a retirement vehicle. Divert some or all of your income to a C-Corporation that would otherwise be taxed at higher personal tax rates. Let the assets grow quicker because you will have more after-tax money to invest. This brings us to the next point:
• Invest through the C-Corp. Whether or not you are using this as a retirement vehicle, investing through the C-Corp will allow for generally more after-tax money to reinvest, especially as it pertains to dividends. Dividends received from domestic corporations by your corporation are only 50% taxable. For interest income, you could be paying north of 40% if taxed at personal ordinary income rates, that leaves a lot less to re-invest than if it was taxed at 21%.
• Time your dividends wisely. Take out your dividends during years of lower income. If you are in the 12% tax bracket or lower, you could be able to take out the dividends tax free.
• Take advantage of tax free gains on the sale of your business. If your C-Corp issues Qualifying Small Business Stock, then the gains on the sale of your company could potentially be tax free at the Federal level.

We’re not saying C-Corps are the best entity type, but for certain taxpayers, it will make a lot of sense to switch. If you’re curious about which entity type is best for your situation, give us a call or shoot us an email.