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Switching from a S corporation to a C corporation

The Internal Revenue Service provided new guidelines for how companies can change their accounting and business structure. The Tax Cuts and Jobs Act has now reduced the top tax rate of C corporations from 35 to 21 percent. According to accounting experts, the new law also gives pass-through (and start-up friendly) entities such as S corporations a 20 percent tax deduction on business income, although there are certain limitations, including its expiration in 2025 unless Congress extends it.

Differences between the two

Many are projecting that these changes will provide significant savings to S corps who switch to C corp. with its higher tax break, particularly high income ones. While not comprehensive, here are some key differences between the two models:

  • While S corporations have just one level of taxation levied upon shareholders, a C corporation’s earnings are taxed as are dividends paid to the shareholders.
  • Shareholders of an S corporation can generally deduct loses in their individual taxes, while C corporations only get to offset corporate earnings.
  • S corporations are useful for splitting income and distributing it to family members through sales of stocks and gifts.

How the switch works

The businesses with the consent of a stockholder majority can revoke its S corporation election. However, if that company wants to go back from C to S corporation, it must be done with a unanimous vote.

The effect

This slash to C corporation taxes will encourage many S corporations to change over to C. Nevertheless, each business decision should be analyzed on a case-by-case basis to see what the most efficient model is for the company. It is advisable to speak with an attorney with tax law and business law experience. They can help determine the best choice for you.

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