2020 Year-End Tax Guide

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The lower 21% tax rate offered to C corporations and the potential for 100% gain exclusion makes changing entity types worthy of consideration. However, it is important to note the major qualifications and considerations: X The stock must be original issued stock. By definition, the conversion of an S Corporation to a C Corporation will not meet this definition since the stock was originally issued by an S Corporation. However, converting a partnership to a C Corporation could qualify since a partnership does not issue stock. The stock must be held for five years. If there is the potential for a stock sale in the near future, the gain would not be excluded. X

X The stock is expected to appreciate in value substantially. Since C corporations are subject to double taxation (once at the entity level and again when the funds are distributed to the shareholders), the amount of gain to be excluded can overcome this double taxation. Additionally, the TCJA established a qualified business income deduction for pass-through entities of up to 20%. Again, if the potential gain exclusion is significant, this could overcome the loss of this 20% deduction. X Potential changes in income and capital gain tax rates. The decision to convert to a C Corporation could be impacted by any upward revisions to income and capital gain tax rates. This is especially relevant in the 2020 election year.