S-Corp Tax Changes Could Mean a Reconsideration… to C-Corp

If you are a business owner with an S-Corp designation, you may want to consider changing to a C-Corporation designation thanks to the Tax Cuts and Job Act. These changes could mean more money in your pocket thanks to the new 21% flat tax rate on C-Corporations.

These two business structures offer benefits in different ways. The taxable earnings of C-Corporations are first taxed through the company. The shareholders are taxed after the earnings are distributed as dividends. As for S-Corporations, the corporate tax is passed on to the shareholders through income, losses, deductions, and credits on their personal income taxes. Rather than paying a corporate rate, they pay taxes at the individual income rates. The advantage of choosing an S-Corp designation is the ability to avoid double taxation at the corporate level. However, S-Corporations are responsible for tax on certain built-in gains and passive income at the entity level.

The Tax Changes

Two changes from the new tax law affect a corporation’s ability to revoke an S-election over a C-election:

• The corporation should report net adjustments attributable to the revocation over six years. For more information see Revenue Procedure 2018-44.
• Distributions of cash following the post-termination transition period may be treated as coming out of the corporation’s accumulated adjustments account and accumulated earnings and profits proportionally resulting in part of the distributions being non-dividend distributions from the C corporation. The non-dividend distributions may not be subject to tax at the shareholder level if the shareholder has sufficient stock basis. Additional guidance will be coming.

Changes that only apply to a C corporation are:

• Being S corporation on December 21, 2017,
• Revokes its S corporation election after December 21, 2017, but before December 22, 2019, and
• Has the same owners of stock in identical proportions on the date of revocation and on December 22, 2017.

Please seek counsel from your qualified tax advisor before taking any action.