David, Brody & Dondershine, LLP Experienced General Business Law Attorneys
2100 Reston Parkway, Suite 370
Reston, VA 20191

Thinking of changing your business structure due to tax reform?

Last year, the Tax Cuts and Jobs act brought dramatic changes for businesses around the country. Significantly, it slashed the corporate tax rates to a mere 21 percent and introduced a qualified business income deduction for pass-through entities. As a result, many companies have considered changing their structure to take advantage of these corporate tax breaks.

In this post, we will examine a few of the implications for companies that wish to switch their legal status.

  • S corporation to C corporation

Pros: If 50 percent of shareholders agree, then S corporations can shift to C corporations. This would allow a company to enjoy the newly-slashed corporate tax rate.

Cons: However, if the company wishes to change back to an S corporation, it cannot make this change for another five years.

  • Sole proprietorship to corporation

Pros: A sole proprietor who wants to incorporate can then take advantage of the flat, 21 percent tax rate.

Cons: However, incorporating comes with additional tax administration. And corporations must pay additional taxes, such as the accumulated earnings tax.

  • Partnership or LLC to C Corporation

Pros: Incorporating does not have any immediate tax costs, and the newly formed corporation will be taxed at the 21 percent rate.

Cons: But the company cannot deduct business expenses from 2018 to 2025 because the deduction for miscellaneous itemized deductions has been suspended.

Making the decision to change a business’s status

Perhaps you and your colleagues weighed the pros and cons of shifting your business’s legal structure. If you decide that a different structure would be best, then you should take the steps to begin the transition. Many companies retain outside counsel from corporate attorneys to help ensure a smooth transition. Once the company has legally changed its status, it can begin reaping the full benefits of the lower corporate tax rate.

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