With Recent Tax Changes, Are S Corporations Still More Advantageous for Small Business Owners? – Los Angeles Income Tax Planning and Income Tax Litigation Attorney Bruce Givner

by Bruce Givner on February 11, 2014

For some time now, conventional wisdom has held that S corporations are generally the better option for small business owners. As pass-through entities, S corporations allow for profits to be taxed only on the owners’ personal tax returns. In this way, the business is not taxed, itself. Rather, profits and losses are reported on the shareholders’ personal income tax returns and assessed according to the individual income tax rates. By contrast, C corporations face what is called “double taxation”, as both the business’s net income and the profits distributed to the shareholders are taxed according to the corporate tax rate and the personal income tax rate, respectively.

So why would any business choose to file as a C corporation? Well, not only can C corporations shield shareholders from direct tax liability, but they also have no restrictions regarding the number and type of shareholders they can have. Although S corporations are restricted to only 100 shareholders and having only one class of stock, they generally provide business owners with greater flexibility. This is one of the reasons why, according to recent IRS data, about 70% of all corporations are filed as an S corporation.

However, following passage of the American Taxpayer Relief Act of 2013, signed into law by President Obama in order to avoid the dreaded “fiscal cliff”, this conventional wisdom regarding the preference of S corporations over C corporations is now in question. This is because the ATRA, for the first time in years, legislated a difference between the top marginal tax rates of corporations and individuals. Specifically, where the highest rate for individuals and corporations was 35% before, the rate for individuals has now increased to 39.6%, with an additional 3.8% tax on net investment income (the Medicare Surtax). The highest rate for corporations remains at 35%. And the rate is only 15% on the first $25,000 and 25% on the next $50,000.

With these changes in place, are S corporations still the better option for small business owners? Would S corporations be wise to revoke their election under Subchapter S of the Code in order to avoid this new higher individual tax rate? Stay tuned for future posts as we flesh out the reasons why, in fact, S corporations remain more advantages for small business owners.

Givner & Kaye focuses on sophisticated income tax planning and compliance, tax litigation and procedure, estate planning, and asset protection plans for individuals and businesses in Beverly Hills, Calabasas, West Los Angeles, Hollywood, and other areas of Los Angeles, Orange, Ventura, San Bernardino, Riverside and Santa Barbara Counties. Call Los Angeles Estate Planning and Asset Protection Plan Attorneys Givner & Kaye at (310) 207-8008 today.

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