Making the right choice: passthrough or C corporation?
US tax reform legislation created a new benefit for pass-through businesses: a 20% deduction for qualified business income from an entity that is treated for tax purposes as a partnership, S corporation, or sole proprietorship. Alternatively, C corporations will enjoy a reduced rate of 21%.
The decision is not clear-cut. Each pass-through will have its own tax profile, as well as related business considerations to address. The new law includes various, interrelated provisions that make this analysis fact-specific and difficult to tackle. Modeling will be required to understand the impact and should be flexible to enable adjustments as more guidance is released.
Six C-corporation conversion considerations
- Compare applicable US tax rates
- Evaluate if limitations negate the benefit of the 20% deduction
- Consider the longevity of the 20% deduction
- Calculate the impact of the new international provisions
- Evaluate one-time tax cost of conversion
- Think ahead to exit strategies and other changes in ownership
"The 20% deduction, coupled with the reduction of the top individual tax rate to 37%, could yield a top rate of 29.6% for individual pass-through owners if certain requirements are met."
Contact us
