FOR BREAKING NEWS VISIT WWW.QNS.COM JULY 12, 2018 • QUEENS BUSINESS • THE QUEENS COURIER 35
S Corporations
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Co-Author of the
best selling book
“Breaking the Tax Code”
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Salvatore P. Candela, EA, ATA, ABA
Enrolled Agent - Tax Advisor
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BY JOHN SAVIGNANO, CPA
S corporation owners have a key
question: Is it time to switch to a regular
corporation?
We’ll look at some factors that come
into play.
Let’s first turn to the federal income
tax rates. Tax reform slashed the corporate
tax rate. Regular corporations,
also know as C corporations, now pay
federal income tax at a flat 21% rate…
down from a top rate of 35% under
prior law.
Individual rates have also been lowered…
but not as drastically. The maximum
rate is now 37% for married filers
with taxable incomes over $600,000
and single filers above $500,000. For
2017, the top rate was 39.6%.
Another consideration is whether the
entity plans to make regular dividends.
C corporations still bear the burden of
double taxation. Their profits are hit
with the 21% corporate tax, and shareholders
pay tax on dividends distributed
to them. Individuals with incomes over
$425,800 for single filers and $479,000
for joint filers will pay a 23.8% tax on
qualified dividends, which includes the
3.8% Medicare surtax on net investment
income. People with incomes
below these thresholds pay lower rates
on net investment income. People with
incomes below these thresholds pay
lower rates of 0%, 15% or 18.8% on
their qualified dividends, depending on
their taxable incomes.
S corporations are pass-through
entities, in which income from the
firm is generally not subject to corporate
tax but instead passes through
to shareholders for federal income tax
purposes and is taxed at the owners’
individual tax rates. S firm losses can
pass through to shareholders, too, subject
to various limitations. In general,
distributions are nontaxable to the
extent of the shareholder’s stock basis.
Take into account the new 20%
deduction for pass through income.
For an S firm owner in the 37% tax
bracket, getting a 20% pass-through
write off has the same effect as lowering
his or her tax rate on S corporation
profits to 29.6%. However, this break
is riddled with lots of restrictions and
limitations. For example, it’s not available
for high earners in many service
fields, Also, note that it is temporary.
As with most individual tax changes
in the new law, the 20% deduction
ends after 2015.
C corporations face a tax disadvantage
when they are sold. In most cases,
buyers want to purchase the firm’s
assets rather than buy the corporation’s
stock. This allows them to take
greater depreciation and amortization
deductions.
Asset sales of C corporations draw
two layers of taxation. The gains are
taxed at the corporate level at 21%,
and the at up to 23.8% when the aftertax
proceeds are distributed to shareholders.
Compare this to the general
single level of taxation at the individual
shareholder rates when asset sales
are done by S corporations.
There’s no guarantee that the 21%
corporate rate won’t go up in the
future. Democrats will clamor for tax
cut rollbacks, including boosting the
corporate rate to 25% or so, if they win
big in the midterm elections or take
the White House in 2020.
John Savignano is a partner with
Savignano Accountants & Advisors
located at 47-46 Vernon Blvd., Second
Floor, in Long Island City. If you have
any questions or require additional
information, please call John at 718-
707-0955.
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