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Evaluating corporate status and tax options

Entrepreneurs who are looking to start a new business always need to choose an operational stucture. In so doing, they also choose a corresponding tax model and when it comes to C and S corporations, the tax model can vary greatly. Many companies elect to use the S corporation structure in large part due to the tax advantages they enjoy compared to with a C corporation. However, with the new tax code in place, many companies may be re-evaluating this decision.

As explained by Inc. magazine, the Tax Cuts and Jobs Act will see the maximum tax rate for C corporations drop from 35 to 21 percent. This change may make starting a business as a C corporation or switching from an S corporation to a C corporation financially advantageous. Another perk is that this change is permanent where some other elements of the legislation are only temporary.

For example, Accounting Today notes that individuals who report income from S corporations or other pass-through entities on their personal tax returns will be able to deduct as much as one-fifth of their qualifying business income from their personal returns. However, that deduction is only valid for the 2018 through 2025 tax years. In addition, qualifying business income does not include every bit of money received from the company.

Dividend interest, capital gains or personal compensation for work performed for the company are some of the types of income that will be outside the scope of the deduction. In addition, a C corporation will remain subject to double taxation.

 

 

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