TO C , OR NOT TO C ?
Should you Switch to a C Corporation Under the New Tax Law ?
One of the most highly touted aspects of the Tax Cuts and Jobs Act ( TCJA ) has been the reduction in the corporate tax rate from a top rate of 35 percent to a flat rate of 21 percent . This particular change prompted many business leaders to consider whether switching from a pass-through entity ( single-member LLC , partnership , S corporation ) to a C corporation to capitalize on this new , lower rate is the way to go , or if the benefits of the new qualified business income deduction for pass-through entities would make up the difference .
While the tax rate reduction does present the potential for significant tax savings for the business and its owner , making the switch could have lasting implications . What some are realizing is that it may ultimately make sense to forego the tax savings in the short-term to better align with their long-term objectives .
Four Questions to Consider
We ’ ve spent a lot of time analyzing how the changes for C corps and pass-through entities would impact a business owner ’ s choice of entity decision . Perhaps the biggest takeaway is that all business situations are unique , and this type of decision should be thoroughly evaluated before moving forward in any direction . Small details that have little impact on one aspect of the decision may end up having a huge impact in another way .
Unfortunately , digging into these details can be costly and timeconsuming . So , to save time and money , we ’ ve identified the four key questions you should ask before deciding whether a shift in entity type makes sense for your business .
1 . Are you profitable ? You want to reduce your tax burden , right ? Well , since tax is paid on profit , it would seem logical that if you have little or no profit to pay tax on , the potential savings a change in entity could generate would probably not outweigh the time , effort and cost to actually make the change . The more profit there is to tax , the more potential there is for a reduction in tax paid .
2 . Is your balance sheet “ above water ?” If your balance sheet is “ above water ,” it is reflecting more assets than liabilities . If it ’ s “ under water ,” it ’ s showing more liabilities than assets . When considering a change of entity , your balance sheet should be above water . Depending on your business ’ s existing entity type , conducting a change of entity with a balance