Most business owners have avoided C-Corporations like the plague, and for good reason. In many cases, an S-Corporation election makes sense. But with the Tax Cuts and Jobs Act (TCJA), the rules have changed substantially, and you must re-evaluate your situation.
The primary tax difference between an S-Corporation and a C-Corporation is that the S-Corporation pays no tax, and the income flows through to the shareholders. A C-Corporation not only pays tax on its income, but the shareholders pay tax on the dividends when the money is distributed. This is known as the dreaded double-taxation.
There are a couple of other differences between and S-Corporation and a C-Corporation that need to be considered:
· Different limits on charitable deductions
· Fringe benefits are deductible in a C-Corporation
· Other taxes are possible in a C-Corporation(e.g. Accumulated Earnings Tax)
· Shareholder compensation is an issue in both types, although both are subject to the standard of “reasonableness.” In an S-Corporation the IRS looks to see if you’re taking enough, and in a C-Corporation, they want to make sure you’re not taking too much
· Only S-Corporation shareholders can deduction the Section 199A deduction. This is the 20% deduction allowed to certain flow-through stakeholders.
· C-Corporations have no limits on deduction of taxes, while individuals are limited to $10,000 in state and local taxes per year.
· C-Corporations have a lower maximum tax rate of 21% versus 37%
You can read more about choosing the S-Corporation election in this article. Choosing the correct entity for your business is a complicated decision.Give us a call to discuss. You don’t want to make the wrong choice!