The new tax law made several changes to business taxes that an analysis of entity selection may be appropriate.
The new tax rate for a C corporation is a flat 21%. For a pass-through entity (S corporations and partnerships) and sole proprietorships, the income is taxed on the owner’s personal return. The highest tax rate for an individual is 37%. At first blush, it would appear that a C corporation is a better deal. However, the overall rate for a C corporation is still higher than other entities.
Income from a C corporation is subject to two levels of taxation: first at the corporate level on any income and second by the owner when they receive a dividend. Because of this, the total tax rate for a C corporation is much higher than the 21% corporate rate. Assuming the C corporation distributes all its post-tax income, the total Federal tax rate between the corporation and owner comes to 39.8%. This includes the corporate rate plus the owner’s tax rate on the dividend income. Therefore, the overall rate for the C corporation is actually higher by 2.8%. The difference is more once state taxes are considered.
The non-C corporation entities may also get an additional benefit over the C corporation. Individuals can deduct up to 20% of business income reported on their personal tax returns (see separate article on the qualified business income deduction for more information). Once this deduction is considered, a C corporation is even less attractive.
If you would like to discuss any of these items or would like additional information please give us a call.
Sean Hauenstein, CPA
Copeland Buhl & Company PLLP
(952) 476-7100
