Revoke S Corp, Back to C Corp
Posted October 3, 2018
The hot question since the passage of the Tax Cuts & Jobs Act of 2017 and Section 199A is, “Should I revoke S Corp status and go to C Corp?” The answer is No.
Quick Numbers-
| S Corp Income | 100,000 | 200,000 | 300,000 |
| Salary | 40,000 | 80,000 | 120,000 |
| Payroll Tax | 6,120 | 12,240 | 18,360 |
| Income Tax | 6,980 | 24,150 | 44,266 |
| Total Tax S Corp | 13,100 | 36,390 | 62,626 |
| C Corp Income | 100,000 | 200,000 | 300,000 |
| C Corp Tax | 21,000 | 42,000 | 63,000 |
| Dividends | 79,000 | 158,000 | 237,000 |
| Dividend Tax | 0 | 23,700 | 44,556 |
| Total C Corp Tax | 21,000 | 65,700 | 107,556 |
| Effective S Tax Rate | 13.1% | 18.2% | 20.9% |
| Effective C Tax Rate | 21.0% | 32.9% | 35.9% |
| Delta (extra tax because of C Corp) | 7.9% | 14.7% | 15.0% |
Assumptions included Section 199A deduction for the S corporation’s shareholder plus $24,000 in standard deduction, in addition to the 3.8% surtax on top of the 15% capital gains tax rate for the $300,000 column. As you can see, a C Corp does not make sense after you add in capital gains tax on the dividends. This in turn makes sense- the lawmakers didn’t set out to kill S corporations. They set out to give every business owner a tax break. Geez… half of Congress (535 doesn’t divide evenly, we get it) probably run S corporations on the side.
So, please pump the brakes on the “I wanna dump my S Corp for the magical tax arbitrage offered by a C Corp” nonsense.
Taxpayer’s Comprehensive Guide to LLCs and S Corps : 2019 Edition
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