Entity Selection Under the New Tax Law
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