Making the right choice: passthrough or C corporation?

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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.

C-corp, tax considerations

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

Shari Forman

Private Company Services (PCS) Tax Leader, PwC US

Karen Lohnes

National M&A Passthrough Group, PwC US

David Sapin

PwC Risk & Regulatory Leader, PwC US

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