Does converting your business to a C corporation make sense under the TCJA?
If you’re thinking about converting your business entity to a C corporation to take advantage of the new flat 21% corporate federal income tax rate under the Tax Cuts and Jobs Act (TCJA), it’s important to do your homework. The costs of converting an entity can be expensive and challenging depending on your state laws. Further, once you make the change, it may be difficult to convert back if the laws change again,or if you shift your business model.
Prior to the passage of the TCJA, a popular option for many businesses was conducting business as a pass-through entity to avoid double taxation. While this threat still exists under the new law, the impact is less due to the new 21% corporate rate.
Another new aspect of the TCJA is that the qualified business income (QBI) deduction is available to individual owners of pass-through entities. That deduction can be up to 20% of your share of passed-through Qualified Business Income (QBI). However, it’s only available for 2018-2025, unless Congress extends it.
Here are a few key points to keep in mind during your decision-making process.
- If you are a professional service firm reporting as a pass-through entity AND your table income is under the phaseout threshold for the passthrough deduction, there is no need to convert to a C Corporation.
- If your business has low wages, few depreciable assets, and you are in danger of losing the passthrough deduction, converting to a C Corporation could be the right choice for your business, especially if you can minimize dividend distributions.
For a more detailed look at various business entity scenarios, contact a ShindelRock tax professional for a personalized analysis of your business and long-term goals.