Plain and Simple: Bright Business Insights Summer 2018 | Page 7

3. sheet that’s under water could trigger an immediate taxable event. On the flipside, if your tendency is to distribute large portions of Since this would go against your primary goal of minimizing your business-generated profit, then switching to a C corp may not be tax burden, there’s a good chance that changing your entity type for you. Any distribution of profit as a C corp dividend would could offset any potential future tax benefits. be subject to that second layer of tax at the individual level as previously discussed. This would offset – or possibly eliminate – Do you retain a substantial amount of the profit generated by any benefit generated by the lower corporate rate. your business in your business? Historically, C corps weren’t a preferred entity of choice for small 4. Do you plan to retain long-term ownership of your company? businesses due to the double taxation on profits distributed to If you’re planning to sell your business in the next few years, the owner. What may be forgotten, however, is that the second it’s better to operate as a pass-through entity rather than a C corp layer of tax is not imposed until the profit is actually distributed (especially if the company’s assets are being bought and sold). from the business to the owner as dividends. If the profit never This isn’t as critical if the transaction is structured as a sale of leaves the business, the second layer of tax is never incurred. corporate stock, but such a transaction is usually not as lucrative There are a number of reasons the owner of a business may choose for the buyer when compared to purchasing a company’s assets, to not distribute profits to themselves, like the high rates of capital which would include goodwill. reinvestment and the repayment of debt, both of which are usually Once you’ve transitioned to a C corp, you must retain C corp undertaken to support growth within the business. If this sounds like your scenario, there’s a good chance the new lower tax rate at the corporate level could generate substantial tax savings on the amount of profit being used for these purposes. status for at least five years. Additionally, the IRS imposes an additional five-year waiting period to avoid a business-level tax on the sale of assets if a change is made back to a pass-through entity from a C corp. This means that if you were to sell your busines’s assets during the 10 years after you elect to become a C corp (at a minimum), you would be taxed on all of the gains. That includes any depreciation recapture, at the business level first, and then again when the proceeds are distributed from the company to you as a dividend. Being subjected to two layers of tax would be much less advantageous when compared to the single layer of tax you would pay on the same transaction if your business was a pass-through entity the entire time. If you answered “yes” to all of the questions above, it may make sense to switch from a pass-through entity to a C corp and enjoy the nice, new lower rate. However, these questions are just the tip of the iceberg. There are many other facts and items to be considered. Give me call to find out if an entity change is right for you. by: Andrew Geiser, CPA Senior Accountant 212 North Washington St. Millersburg, OH 44654 330.521.4562 [email protected]