The Tax Cuts and Jobs Act of 2017 reduced the maximum corporate income tax rate to 21% for regular "C" corporations. The marginal maximum tax rate for individuals was lowered, but not quite so drastically, to 37%. Many believe that the lower corporate tax rate would influence taxpayers to convert organize their sole proprietorships, partnerships, and "S" corporations to "C" corporations. Much has been written and discussed regarding this issue.
On September 24, Steve Phillips, in conjunction with his former law partner, Cindy Grossman, of Giordani, Swanger, Ripp & Jetel, LLP, Austin, presented a highly-attended national webinar on just this topic. Entitled Revoking S Corp Elections to Take Advantage of Tax Reform: Converting from S Corp to C Corp, their presentation took the participants through the multiple-faceted analysis required to determine if a "C" corporation is a prudent selection in which to operate a business or investment activity.
As Steve and Cindy explained, while each case depends entirely on its specific facts, more often than not, small and closely-held businesses will be still be best served in utilizing the S corporation or a partnership. Nonetheless, they provided the webinar participants many of the key touchstones necessary to properly and evaluate the issue. Perhaps the key issue to consider is that, even in light of the very low C corporation tax rate, the so-called "double-taxation" inherent in a C corporation structure rarely makes economic sense when the owners (or the ultimate owners in a tiered structure) are individual or pass-through tax entities. Additionally, there is an entire menu of "traps for the unwary" in operating a C corporation which can drastically reduce or even eliminate the value of the lowered corporate rate.
Nonetheless, there may be circumstances where the conversion of an existing pass-through entity to a C corporation, or the formation of a start-up entity as a C corporation,will be wise in order to take advantage of certain favorable provisions of the code such as IRC Code Section 1202. That provision allows the elimination of some or all of the capital gain on stock held in certain C corporations, so long as numerous requirements are properly fulfilled. For example, the "qualified" stock must have been received directly from the C corporation in an original issuance; the total value of the C corporation at the date of issuance cannot exceed $50,000,000; etc.
In conclusion, the presenters concluded that the TCJA, and its new domestic and foreign provisions, have made an already complex area of tax law even moreso. The need for experienced and up-to-date tax professionals is a necessity in determining which type of entity to use for almost any business venture.