Do I Convert Back to C Corporation, S Corporation or Not Convert At All?

We consistently get the question from clients and contacts about how the new tax law impacts them. For example, business owners want to know whether to convert back to a C Corporation due to the lower rate. We answer with a phrase from our colleagues in the legal profession, “It depends.” Remember that in an environment of lower tax rates, income is worth more, and deductions are worth less. Clearly, this is something many large companies understood when they paid bonuses and made large charitable donations attributable to the 2017 tax year.

Our answer is usually, “It depends,” because there are a myriad of factors that one needs to consider. However, we would suggest to business owners to begin with the end in mind. If you are growing your small technology business and are profitable, and need to reinvest all of your capital, you likely qualify for tax credits and will want to stay in a lower tax bracket. With that in mind, a C Corporation designation may make sense. Additionally, it may be a very tax efficient structure for an exit, should you sell stock that qualifies as Small Business Stock under IRS Code Section 1202.

If you are a mature, closely held family business that is creating a lot of cash flow, and you are not in a professional services industry, a flow through entity such as an S Corporation may make sense. This structure allows for more tax efficient distributions of cash. It also allows for stock basis to accumulate in the event of a sale, reducing the tax burden.

These are very simple examples. As we know, every business is unique and there are many factors including our level of activity and involvement in the business, state taxes, capital needs, and likely successor ownership, that need to be considered. It is time for business owners to start to tie their long-term business strategy to their long-term tax strategy.

To learn more about how to define your business and how the new tax law impacts you personally and professionally, join us at our seminar at the Hampton Inn in Keystone Crossing to learn about tax strategies to employ under the new tax rules. Register for the seminar here—seating is limited.

This publication contains general information only and Sikich is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or any other professional advice or services. This publication is not a substitute for such professional advice or services, nor should you use it as a basis for any decision, action or omission that may affect you or your business. Before making any decision, taking any action or omitting an action that may affect you or your business, you should consult a qualified professional advisor. In addition, this publication may contain certain content generated by an artificial intelligence (AI) language model. You acknowledge that Sikich shall not be responsible for any loss sustained by you or any person who relies on this publication.

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