A company that is an LLC can elect to be treated as a corporation for tax purposes. If a partnership has losses that flow through to its partners, those losses would not flow through if the entity becomes a C corp, so C corp status would be disadvantageous.ДЁ. However, it does not avoid a tax to the corporation on any appreciated assets that are distributed in liquidation or later sold by the C corp.Д§. This will avoid a shareholder level tax if the C corp liquidates. If an owner dies owning C corp stock, the stock will receive a step-up in basis to its fair market value. See Martins Ice Cream, Norwalk, and related tax cases on вЂњpersonal goodwill.вЂќД¦. The owner may consider whether he or she can own goodwill, client lists or other intangible assets in his or her own name rather than in the corporation to avoid double tax. On the other hand, if there are no plans to sell the company (eg, children in the business), this may not be a concern. For a company that may be sold in the near future, C corp status would be disadvantageous. If a company is sold, it is most often structured as an asset sale, which results in two levels of tax for a C corp вЂ“ one tax to the corporation when it sells its assets in exchange for cash (or a note, etc.) and a second tax if the corporation is liquidated and the stockholders exchange their (low basis) shares for the sale proceeds. In addition, a C corp is subject to the accumulated earnings tax if it accumulates earnings beyond the reasonable needs of the business.ДҐ. If the C corp accumulates cash, it can be subject to one of two penalty tax regimes вЂ“ accumulated earnings tax and personal holding company tax.Д¬losely held C corps are subject to the personal holding company tax if 60% or more of their income is passive income, which they retain in the C Corp and do not distribute to their shareholders, though the personal holding company tax often can be avoided. On the other hand, if the business distributes all of its profit out to its owners annually, then the double tax resulting from a C corp structure will be disadvantageous.Д¤. If a business does not make distributions to its owners (for example, the owners generally take only salary and perks and profits are reinvested), then a C corp structure may result in income tax savings. This may be the deciding factor for many businesses. If only federal taxes are considered, the effective federal double tax rate is 39.8%. Dividends also may be subject to the 3.8% net investment income tax. Dividends usually are taxed at the qualified dividend rate of 20%, though there is usually no preferential tax rate at the state and local level. The drawback to C corps, of course, is that they are subject to two levels of taxation, one at the corporate level on earnings and one at the shareholder level, for example, on dividends. Bottom line вЂ“ you have to run the numbers.ДЈ. There are also other limitations that only generally allow the QBI deduction to be claimed if the business employs many people or owns depreciable tangible property (such as real estate). Furthermore, the 20% QBI deduction is not allowed for most service businesses (except for partners or S corp shareholders whose taxable income is less than $315,000 ($157,500 if not married filing jointly), with the benefit phased out over that amount so it is totally lost once the partnerвЂ™s taxable income equals $415,000 ($207,500 if not married filing jointly). Pass-through income (eg, S corporation or partnership) may be eligible for a 20% deduction for qualified business income (QBI), but that still leaves the effective tax rate at 29.6% (ie, higher than the C corp 21% tax rate). In addition, C corps can fully deduct state and local taxes whereas an individualвЂ™s deduction is limited to a maximum of $10,000.Дў. C corp income is taxed at a flat 21% rate whereas partnership income flowing through to an individual partner is subject to tax at a maximum 37% rate. Here are some of the pros and cons of using a C corp after Tax Reform:ДЎ. Business owners should discuss the various considerations of this decision with their tax advisors. The answer, unfortunately, is not simple. Because C corporations (вЂњC corpsвЂќ) are now taxed at a flat 21% federal income tax rate, many business owners are asking whether they should structure their businesses as C corps. The recently enacted 2017 Tax Act (originally called the Tax Cuts and Jobs Act вЂ“ вЂњTax ReformвЂќ) made major changes to the US tax system.

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