C-Corp Tax Rates

If you're looking to start a business, it's critical to choose the right business entity; and there are a range of factors to consider. Arguably, the most important factor is the tax rate. And with today's preferential C-Corp tax rates, a growing number of business owners are asking "Should I restructure my company?" Before you decide to start a C-Corp or restructure your company, the experts at MB Group have provided an easy-to-read guide on C-Corp tax rates. Continue reading to learn more and don't hesitate to reach out to the business consultants and CPAs at MB Group for tailored solutions. 

What Is a C-Corp?

A C-Corp or C corporation is a very popular legal business entity where the shareholders or owners are separately taxed from the business. Corporations pay C-Corp tax rates on earnings before they are distributed to shareholders in the form of dividends. Then, shareholders will be subject to pay the personal income tax rate on dividends. While double taxation isn't desirable, the benefit of being able to reinvest profits at a lower C-Corp tax rate is undeniable. A few key highlights of a C-Corp include:

1. C-Corps separate the assets and income of shareholders or owners from those of the corporation. 
2. C-Corps limit the liability of owners, shareholders, and investors to the amount they have invested in the company. 
3. C-Corps must have a board of directors and must hold annual meetings. 

How Did the Tax Reform Impact C-Corp Tax Rates? 

In 2018, the federal government enacted sweeping tax reforms that directly impacted all business entities. The biggest change pertaining to corporations was a reduction in the C-Corp tax rate from 35% to a flat 21%. Previously, $1,000 in corporate profits would have been taxable at 35%. All earnings passed through to shareholders would be subject to the tax rate on dividends. 

Under the new tax reform law, the same $1,000 in corporate profits will be taxed at a lower 21%. The tax rate on dividends will be 20%, 15%, or 0% rate based on the individual's tax bracket. It's important to understand the new tax rate may not lower tax liability for corporations that have lower profits. These businesses may have previously been taxed at 15%, but will now pay the flat C-Corp tax rate of 21%. Other changes to C-Corp tax rates under the recent reform include the elimination of the Alternative Minimum Tax (AMT). 

C-Corp Tax Rates vs. Other Business Entities

For federal income tax purposes, a C-Corp is a separate taxpayer entity, and any income will be subject to the flat 21% federal C-Corp tax rate. If you're looking to avoid the double taxation associated with a C-Corp, you may be able to form an S-Corp. With an S-Corp, all corporate income passes-through to individuals who will file their share of losses, gains, credits, and deductions on their individual tax returns. Under the most recent tax reform, S-Corps will pay a flat tax rate of 21% — just like C-Corps. 

With unincorporated businesses — like LLCs, partnerships, and sole proprietorships — profits and losses will typically flow directly to the owners. As a result, these losses or gains must be reported on each individual's personal tax returns. This means LLC profits are subject to the individual's income tax rate. 

Should I Restructure My Company to a C-Corp? 

Unfortunately, there is no clear-cut, hard-and-fast answer to the question "Should I restructure my company to take advantage of the C-Corp tax rate." It's vital to make this monumental consideration based on the unique needs and status of your business. 

For example, consider the impact of double taxation — once on the preferential 21% C-Corp tax rate and the tax on dividends. These two levels of taxation could make the C-Corp structure significantly less advantageous than an LLC. In general, on the other hand, if you are not planning on paying out dividends and intend on reinvesting the lion's share of the profits back into the business as a long-term strategy, you may benefit from restructuring your business. 

Contact MB Group for C-Corp Taxation and Restructuring Consultation

When it comes to deciding whether you should restructure your business, you don't have to do it alone! The qualified business consultants and CPAs at MB Group will carefully review your financial picture and help you understand the pros and cons of each option. This way, you can confidently make a decision and move forward knowing you're on the best path to success. 

Contact the MB Group today for C-Corp restructuring consultation.