2019 Year-End Tax Guide

THE MARCUM 2019 YEAR-END TAX GUIDE | www.marcumllp.com

BUSINESS TAXATION C Corporation

Section 199A Qualified Business Income Deduction Since most business in the United States is not conducted through C corporations, Congress recognized that it needed to provide relief to businesses that operate as sole proprietors (including single member limited liability companies), partnerships, and S corporations – commonly referred to as “flow-through entities.” The result is a rather complicated set of rules under new section 199A of the Code, under which a 20% deduction is allowed on qualified business income (QBI). A taxpayer in the top 37% tax bracket, after this deduction, pays an effective 29.6% tax on qualified business income. Part of the reason for the complexity under this section is that while Congress wanted to provide a tax benefit to these businesses, it believed that reduced tax should not extend to amounts received for services. n For those with taxable income under $315,000 in 2018 and $321,400 in 2019 for joint filers, and $157,500 in 2018 and $160,700 in 2019 for other filers, the 20% deduction applies to all qualified trade or business income. n For those with taxable income over $415,000 in 2018 and $421,400 in 2019 for joint filers, and $207,500 in 2018 and $210,700 in 2019 for other filers, the 20% deduction applies to qualified trade or business income. However, two separate limitations apply: (i) the deduction is limited to the greater of (a) 50% of W-2 wages or (b) 25% of W-2 wages and 2.5% of the unadjusted basis of investment assets (UBIA) used in the business; and (ii) certain “specified service trades or businesses” do not qualify for the 20% deduction. n For those with taxable income between the amounts above, a complex set of phase-out rules apply, so that a portion of specified service trade or business income qualifies for the deduction, and the W-2 or W-2/UBIA limits apply in part. For the Section 199A deduction, “specified services trades and businesses” (SSTBs) includes the fields of law, accounting, consulting, financial services, and performing arts; performance of services that consist of investing and investment management trading, dealing in securities, partnership interests, or commodities; and a catch-all provision that includes any trade or business where the principal asset is the reputation or skill of one or more of its employees or owners. REIT dividends and publicly traded partnership distributive income are eligible for the new 20% deduction, but are not subject to any of the limitations discussed above.

C corporations are now subject to a flat 21% rate. While considerably lower than the maximum 35% which applied under prior law, many small corporations saw a tax increase since the lower brackets no longer apply. The new law did not eliminate the potential second tax on distribution of corporate funds through a dividend or on a sale of stock. The structure of the law is such that if the corporation is subject to a 21% rate on its income, and the remaining 79% net after-tax income is distributed and taxed at a federal 20% rate (producing a 15.8% tax), the combination equates to an effective 36.8% rate – which is essentially equal to the maximum individual rate. However, this is considerably higher than the 29.6% maximum rate that applies to flow-through entity trades or businesses where the section 199A deduction can be fully utilized. Furthermore, the combined corporate rate excludes the 3.8% net investment income tax, which may apply to the dividend. However, if the company can justify maintaining assets in the corporation to avoid accumulated earnings tax issues and enough active income to avoid personal holding company tax issues, this second personal level tax can be deferred. In evaluating the selection of C corporation status, a number of factors should be considered, including: (i) exit strategy for the owners (stock sale or asset sale); (ii) timing of the exit; (iii) ages of the owners; (iv) potential impact on stock value through annual use of the increased after-tax cash flow of the corporation; and (v) potential application of the new GILTI tax for multinational entities (where C corporations get a tax deduction not available to flow-through entities). Additionally, not all owners will be in the top tax bracket, and their tax rates (adjusted for any section 199A deduction) may equal or be lower than the 21% corporate rate. n Section 1202 Stock: The C corporation benefits have attracted increased interest in the qualified small business stock rules of IRC section 1202 (see detailed article in this guide.) For certain corporations satisfying an active trade or business requirement, original issuance stock held for five years can be eligible to have gain excluded from tax, to the extent of the greater of $10 million or 10 times tax basis. n Alternative Minimum Tax (AMT) Repeal: The TCJA repealed the AMT for corporations for 2018 and later. In addition, C corporations with an AMT credit in 2017 can recover the credit via refund over a four-year period starting in 2018 through 2021.

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