Is a C Corp Conversion Right for S Corps?
Now that the law has been established for 2018 and beyond, S corporation clients are asking whether the more advantageous tax rate of a C corp (a flat 21% rate) makes sense for them.
There are a few perspectives to consider prior to this conversion. While the praise for C corp conversion is high for many businesses, like manufacturers, there are many business entities that should hesitate and analyze whether or not their business stands to benefit from this conversion.
Cautionary flags for S corps considering making the move to a C corp:
- operations in multiple states could face differing state tax rates (while the C corp federal rate may now be lower, the state corporate rate in some cases could be higher than the state individual rate, therefore the advantage will be reduced)
- estimate payments may be required electronically, potential for timing issues and additional registration/withdrawal issues
- NOLs at the individual level could be lost
- shareholder remunerations—specifically between wages and dividends—could be an issue
- shareholder distributions will need to be treated as dividends if moving to a C corp tax structure
- double taxation on earnings still exists and may, or may not, make sense
- international implications
The decision regarding conversion from an S corp to a C corp taxation should be carefully considered and reviewed with your tax advisor to ensure that your business stands to benefit.
Requirements of a conversion, and how it’s done to benefit under the new rules
To be eligible as a terminated S corp:
- The corporation must be an S corporation as of 12/31/2017, and on the date of revocation have the exact same ownership as of 12/31/2017.
- The revocation of its S selection must occur by 12/31/2019 (two years from enactment of the Tax Reform Bill) – effective C corporation date no later than 1/1/2020.
- Once the “post-termination period” ends (generally one year after the conversion to a C corporation), cash distributions of money are allocated (against stock basis) and chargeable to any remaining AAA and AE&P in the same ratio as the amount of AAA bears to AE&P.
Note: the special transition rules do not currently apply to property distributions.
To become more informed about effects on your current structure and operations, you can request a strategic assessment from a K·Coe Isom tax expert here: Tax Reform Impact Assessment