S Corp Banks: Does a C Corp Conversion Make $ense?

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Considerations for the Board, Shareholders, and Business will determine.

Now that the law has been established for 2018 and beyond, S corporation banks are asking whether the more advantageous tax rate of a C corp (a flat 21% rate) makes sense for them. There are many things to consider, and the answer could be different depending on what your goals are.

Boards of Directors and shareholder groups will have some difficult analysis and planning to undertake in making a decision, and obviously shareholder situations and business strategies may change. The lower tax rates may require a more careful analysis of the individual situations of the shareholder group.

Cautionary flags for S corps considering making the move to a C corp:

  • capital plans and strategies will play an important role in determining the right entity
  • double taxation on earnings still exists and may, or may not, make sense
  • shareholder distributions will need to be treated as dividends if moving to a C corp tax structure
  • net investment income tax still applies to C Corp dividends whether you’re an active or passive shareholder
  • deferred taxes and income tax liabilities could impact capital and earnings
  • TEFRA disallowance on bank qualified municipal bonds comes back into play for C Corps
  • 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)

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 bank and it shareholders stand 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

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