TCJA Hot Topics: Pass-Through vs. C Corporation - What Business Owners Need to Know
Kevin Boeving, a Principal in our Tax practice, has spent the majority of his career working with partnerships, S corps and C corps, as well as related technical issues. Here are a few questions Kevin has been answering since the TCJA was passed:
Q: I’ve looked at the numbers, and it seems beneficial for me to convert my pass-through entity to a C corporation. Is there anything else I need to consider?
A: Income tax rates aren’t the only taxes to consider. C corporations are subject to a tax on dividends which when combined with the C corporation income tax rate, actually makes C corporations less desirable in most situations. In addition, the lack of bipartisan support for this legislation means that a change in control of Congress and the presidency could mean that the tax rates change again some time in the next few years. If this happens, reversing course in your tax plan may prove to be much more difficult.
Q: How does self-employment tax affect my comparison of pass-throughs and C corporations?
A: If you are subject to self-employment tax because you own a partnership, it does subject you to taxes which wouldn’t apply if you were a C corporation, but those taxes probably aren’t as significant as you would expect. The Medicare tax is 2.9 percent if you are self-employed and the social security tax is 12.4 percent. The social security tax only applies to the first $128,400 of income, so if you have a relatively successful business, you would likely be maxing out your social security tax regardless of how your company is organized. This means that the real cost of self-employment tax for a partnership is only 2.9 percent and possibly an additional .9 percent, which comes into play if your self-employment income goes over $250,000.
Q: Are there any other planning ideas that should be implemented before we file our 2017 business tax return?
A: There are a variety of tax accounting methods, which many companies haven’t taken advantage of in the past. These tax methods allow you to deduct expenses in 2017 that might not otherwise be deductible until 2018. The benefit of changing to one of these methods is that a deduction in 2017 can be applied against a higher tax rate; therefore, providing an additional benefit over what you would receive in 2018. There are additional filings that may be necessary if you make a method change, so you should consult your tax advisor.