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