With special thanks to Mariya Luqmani, CPA, MST, President of MLCPAS Inc specializing in business and international taxation, for her contributions to the article.
Lately a lot of my small-business clients have been asking me about C corporations. I understand why. The Tax Cuts and Jobs Act (TCJA) has bestowed a very preferential 21% flat tax rate on corporations, replacing the previous graduated tax rate of 15% to 35%.
Does converting to a C corp make sense for you? Since the graduated rate was based largely on taxable income, the simple answer would appear to be to determine whether your company's taxable income is closer to the 15% mark (in which case converting would be a bad idea) or the 35% mark (in which case converting could be a great idea).
But as with most simple answers, the reality isn't so simple. This is particularly true of businesses that are still in the planning stages, where projecting the bottom-line taxable-income numbers is just that — a projection.
So what's a small-business owner to do?