Considerations for Utilizing C Corporations Under New Tax Law


While the reduced 21% tax rate for C corporations under the Tax Cuts and Jobs Act (TCJA) has been wonderful news for these entities and their owners, there are fundamental tax principles that largely remain unchanged that should remain in consideration.

1. C Corporations are subject to double taxation – Double taxation transpires when corporate income is taxed once at the corporate level, and then again at the shareholder level as dividends are paid-out. The cost of double taxation, however, is now reduced due to the 21% corporate rate. For those businesses where the intent is to retain earnings to finance growth and capital investments, the C corporation is attractive. Since all earnings remain within the corporation, no dividends are paid to shareholders, and therefore, no double taxation.

Further, double taxation is of little concern when a C corporation’s taxable income levels are low. With proper planning, we can look at payment of reasonable salaries/bonuses to shareholder-employees and providing tax-favored fringe benefits (which are deductible by the corporation and tax-free to the recipient shareholder-employee).

2. I advise against using C corporations for ventures with appreciating assets or certain depreciable assets – If assets such as real estate are eventually sold for substantial gains, it may be impossible to extract the profits from the corporation without being subject to double taxation. Instead, deployment of a limited liability company or a partnership will result in the gain being taxed only once at the owner level (and at favorable capital gains rates).

However, assets held by a C corporation do not necessarily have to appreciate in value for double taxation to transpire. Depreciation lowers the tax basis of the property, so a taxable gain results whenever the sale price exceeds the depreciated basis. In effect, appreciation can be caused by depreciation when depreciable assets hold their value.

To avoid this double-taxation issue, you might consider using a pass-through entity (i.e., an LLC) to lease to your C corporation appreciating assets or depreciable assets that will hold their value. This will also create additional deductions (rent, lease payment, etc.).

3. C corporation structure is not advisable for ventures incurring ongoing tax losses – When a venture is structured as a C corporation, losses are not passed through to the shareholders like they would in an LLC or partnership entity. Instead, they create corporate net operating losses that can be carried over and used in future years when there is C corporation taxable income. Under the TJCA, net operating losses that arise cannot offset more than 80% of taxable income in the net operating loss carryover year. Therefore, it will take even longer to absorb losses.

4. What about conversion of S to C? – Immediately after the TCJA was enacted, many practitioners considered whether S corporations should revoke their elections to take advantage of the reduced 21% C Corp tax rates. While it may make sense in some situations, I perceive S Corporations are still more advantageous in most small or family owned business situations, especially if the business qualifies for the Section 199A “qualified business income” 20% deduction. If you consider the double taxation of C Corporations, total tax paid by C Corporations that pay dividends is higher than S Corporations eligible for the qualified business income. deduction. In some situations, C Corporations may still want to consider making an S-election to benefit from the QBI deduction.

Do you have questions about the use of C corporations under the TJCA? Please do not hesitate to contact me.

Jonathan Mishkin

Jonathan D. Mishkin focuses his practice on tax/trust controversy, estate planning, taxation and closely-held business advisory services with offices in Portland, Bend and West Linn. Drawing on deep experience gained inside both large accounting firms and large law firms, Mr. Mishkin capably advises and counsels individuals, families and their businesses, and trusts/trustees.


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