2020 Year-End Tax Guide

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THE MARCUM 2020 YEAR-END TAX GUIDE

C Corporation

The Effect of Tax Law Changes on Decisions Regarding Choice of Entity

As a result of the 2017 Tax Cuts and Jobs Act (TCJA), the 2020 Coronavirus Aid, Relief and Economic Securities (CARES) Act, and possible outcomes of the 2020 elections, business owners have a significant amount to consider when determining if their entities are set up in the most advantageous way possible for tax purposes. FACTORS FOR DECISION–MAKING: C CORPORATION The TCJA resulted in a dramatic decrease in corporate income tax rates from a maximum rate of 35% to a flat 21%. While on the surface the significant drop in rates is appealing to those contemplating conversion to C corporation status, business owners must consider their personal tax rates when assessing the benefits of conversion. The issue of double taxation on corporate distributions continues to burden shareholders. For C corporations, income is taxed at the corporate level at the 21% rate when earned by the entity and then taxed again when distributed to the shareholders, either in the form of a taxable dividend or when the corporation is sold. The individual dividend rate is generally 20%, but can be as high as 37% for certain dividends. In addition, under current legislation, for individuals, dividends and gains are subject to an additional net investment income tax at a rate of 3.8%.Companies that intend to retain profits may benefit from the lower 21% tax rate. But C corporation owners should keep in mind the accumulated earnings tax, which is an additional penalty on undistributed profits. CARES ACT PROVISIONS During the 2020 tax year, the coronavirus pandemic added additional factors to consider when making decisions regarding entity selection. The CARES Act, signed into law on March 27, 2020, provides several tax-related benefits for businesses. Certain provisions are specifically beneficial to businesses operating as C-corporations.