A Wall Street Journal article published this week - "Small Businesses Puzzle Over Tax Riddle," by Emily Maltby (2/20/13), states that some small business owners are considering converting to C corporation form now. Today, the top C corp rate is 35% and the top individual tax rate is 39.6% (20% on capital gains; or really 23.8% on capital gains with the Medicare tax).
So, if your sole proprietorship, S corporation or partnership or LLC generates over $400,000 of income, the C corp rates look good. They look even better than the 35% top corporate tax rate because that doesn't kick in until the corporation has over $10 million of income. With $400,000 of income, the C corp is in the 34% bracket with the first $50,000 taxed at 15% and the next $25,000 taxed at 25%.
The WSJ article also refers to a recent WSJ/Vistage International poll of 848 small businesses where 35% said they would consider the C corp form if the corporate rates were reduced from the current top 35%. Remember that Congressman Camp wants a 25% top rate and President Obama has called for 28% and even lower for advanced manufacturers.
But, there are downsides of the C corporate form, namely double-taxation of income. That is, when the corporation issues a dividend, the shareholder pays tax on that income (which was already taxed to the C corp when earned).
- Should all businesses be taxed similarly?
- Why have double taxation for C corporations? (an integrated tax system can be complicated to get to)
- Can/should Congress lower the corporate tax rate while leaving the top rate 39.6% for all other businesses? While few businesses have income in excess of $400,000 for each individual owner, it is still the possibility of that higher rate that would leave a significant tax discrepancy.
- Is elimination of most tax preferences to get to a 25% corporate tax rate helpful to businesses and the economy? Preferences that likely would go would be rapid depreciation, expensing research expenditures when incurred and the research tax credit.