Figuring out the best entity for your business’ success is about more than luck. Business owners are wise to put in some due diligence to figure out the best option to meet their needs. Tax rules that lead to the benefits and risks with each option can change, as was recently highlighted when the current administration passed the most significant piece of tax reform in decades.
As a result, business owners can find the process overwhelming. Having a basic understanding of the impact of tax reform on two of the more common examples, the S corporation and C corporation, can help.
What is the difference between an S corporation and a C corporation?
The simple answer: tax treatment. An S corporation is subject to different tax rules compared with its C corporation alternative. The Internal Revenue Service (IRS) generally taxes the S corporation like a partnership or limited liability company (LLC) instead of a corporation. As a result, those who own an S corporation pay taxes on business income at their own tax rate.
Tax professionals refer to this process as a “flow-through” tax treatment. This is because the tax obligations flow through the individual instead of the corporation.
How can a business owner tell the difference?
In most cases, the only way a corporation is an S corporation is if the business owners specifically filed for S corporation status. Without that filing, the IRS generally views the corporation as a C corporation.
How did recent tax reform change things?
The Tax Cuts and Jobs Act (TCJA) increased the benefit of flow-through treatment for certain businesses. It is important to note that there are some exceptions. Most notable is the fact that certain service professionals are not able to take advantage of this benefit.
Should business owners change to an S corporation?
Tax benefits may seem plentiful with an S corporation, but it is not the right choice for every business. Eligibility rules that guide S corporations, for example, could pose a problem. Due to the complex nature of the decision, business owners are often wise to have an experienced attorney discuss how each option will impact their business. The attorneys at Goldburd McCone are familiar with the relationship between tax and business law. They can discuss your options and better ensure you find the right fit for your business needs.