Very small family owned S Corp. I'm wondering if there aren't tax advantages and other advantages to converting to a C Corp.

My thoughts are the following…what am I missing?

All owners are currently in brackets that are way over the 21% C Corp tax bracket. My guess is it is all being taxed currently in the 24% or even much higher personal tax brackets.

S Corps only distributions to shareholders are those for their owed taxes. No plans to distribute corp income/assets in future to shareholders.

S Corp greatly affects MAGI thus impacting owners ability to qualify for college aid and scholarships as well as Medicare and other income based programs.

Makes filing personal taxes a pain. Takes me longer to do K1 than my entire personal return.

TIA. What am I missing? I guess corp tax rate could go back up to the historical 35% level? As far as I can tell, the corporate tax rate cut is permanent. Granted, I know that could be changed.

Owners of the S-Corp are using the pass through deduction from Trump's 2017 reform correct? That's a helpful mitigation on the overall rate.

I would imagine at some point there will be distributions or a sale/transfer...something. Maybe not envisioned today, I get that.

You'd be unable to go back to S for 5 years, is that tolerable?

BCOBQ98 said:

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Makes filing personal taxes a pain. Takes me longer to do K1 than my entire personal return.

TIA. What am I missing? I guess corp tax rate could go back up to the historical 35% level? As far as I can tell, the corporate tax rate cut is permanent. Granted, I know that could be changed.

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I don't follow "to do K-1" or why it takes so long. If you are doing the S corp return, the K-1 is just the prorata amounts of income and deductions for each shareholder. If you mean to include the K-1 items in your personal return that shouldn't be much of an undertaking. Maybe I am missing what you are saying.

As someone else pointed out, the annual tax is only part of the situation. Whenever the C corporation is liquidated, you will again have tax at the C corp level (based on the difference in the FMV of the C corp assets vs. the corporation's basis of those assets) and also at the individual level (based on the difference in the FMV of the assets distributed vs. your basis in your corporate stock.

This can be a mess if you have a lot of assets being depreciated and/or assets that are increasing in value (such as real estate).

C corp is taxed at 21% at the corp level, then any dividends are taxed at the individual level. Sometimes this is described as the profits being taxed twice which is basically true but technically not exactly right.

S corp is not taxed at the corp level, it's only taxed at the individual level, so profits are taxed once.

The advantages of C Corp are that you can take advantage of section 1202 (only matters when you sell, but you have to have been a c corp for 5 years), you can have more than 100 investors, and you can have foreign investors.

Section 1202 says if you sell qualified c corp stock after holding for 5 years you can deduct up to 10 million from taxes, which is massive. But irrelevant if you aren't going to sell

Basically gotta high revenue and high profitability, in general to make it worth it.

handle234 said:

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C corp is taxed at 21% at the corp level, then any dividends are taxed at the individual level. Sometimes this is described as the profits being taxed twice which is basically true but technically not exactly right.

S corp is not taxed at the corp level, it's only taxed at the individual level, so profits are taxed once.

The advantages of C Corp are that you can take advantage of section 1202 (only matters when you sell, but you have to have been a c corp for 5 years), you can have more than 100 investors, and you can have foreign investors.

Section 1202 says if you sell qualified c corp stock after holding for 5 years you can deduct up to 10 million from taxes, which is massive. But irrelevant if you aren't going to sell

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To get the 1202 treatment you would have to get the buyer to buy the stock, not the assets. I seldom saw any that were stock sales, most buyers wanted to purchase assets, not stock, for obvious reasons. But it is a great provision when it can be used.

Also, as I recall (and maybe it has changed) but to get the 1202 exclusion, the stock had to be originally issued by a C corporation. Again, maybe that has changed.

BCOBQ98 said:

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S Corps only distributions to shareholders are those for their owed taxes. No plans to distribute corp income/assets in future to shareholders.

S Corp greatly affects MAGI thus impacting owners ability to qualify for college aid and scholarships as well as Medicare and other income based programs.

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Something else that occurred to me is that since the income from the business is impacting the owners as you indicate, it must be showing a lot of profit. Couple that with the distributions being relatively small (only enough to pay taxes from the S corp profit pass-through) be sure you visit with someone with experience in this area if you do decide to revoke the S election.

Given the above, your S corp will have a large balance in the accumulated adjustments account which basically is S corp profit the shareholders have paid tax on but has not yet been distributed. The person you talk to should discuss getting out that AAA tax-free as well as using the post-termination transition period in connection with that.

We did exactly what one safe place is talking about re: getting the AAA out tax free. I think you have two years (something like that) to get the AAA out after converting to c corp.

We did it in creative ways using promissory notes in order to retain capital/cash in the entity (I represent a lot of S corp banks, thus the desire to retain the capital).

I also recall that retained earnings in S corps get added to the basis, reducing capital gains exposure later if the stock is sold.

aglaw01 said:

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We did exactly what one safe place is talking about re: getting the AAA out tax free. I think you have two years (something like that) to get the AAA out after converting to c corp.

We did it in creative ways using promissory notes in order to retain capital/cash in the entity (I represent a lot of S corp banks, thus the desire to retain the capital).

I also recall that retained earnings in S corps get added to the basis, reducing capital gains exposure later if the stock is sold.

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The time frame to get the AAA out is one year. Promissory notes work only if issued during the last S corporation year. After that, during the one-year post termination transfer period, you can only use cash to pull out AAA tax-free. Use of a promissory note after the last S corporation year would not be a distribution of AAA and would be taxable (at least in part, based on the rules for regular C corp distributions).

That sounds the way I recall it. Yessir.

Scenerio -

My Company (call it Company B) was bought/broke off from Company A. Company A has been around since the late 1970s, they are an Inc, filing as an S-Corp. Past 10 years, average gross company profits about 10 million, with 5-7 company owners. I don't think it would ever make sense for them to change to a C-Corp.


Company B, we purchased through an SBA loan our business assets and started our own, completely separate firm, an LLC filing as an S-Corp. While we will have to pay taxes on all money in our business account, whether we drain the corporate bank account or not, still seems like it makes way more sense to do it this way (only 2 owners).

If you plan on having an exit sale of the company...

Tax Code Sec 1202 allows for a capital gains tax exemption for QSBS C-Corps up to 100% for up to $10MIL in gains.

https://www.investopedia.com/terms/s/section-1202.asp#:~:text=Section%201202%20allows%20capital%20gains,order%20to%20exclude%20the%20gains.

Depending on your type of business, this alone could be a great reason to revoke from S to C.

EvenPar said:

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If you plan on having an exit sale of the company...

Tax Code Sec 1202 allows for a capital gains tax exemption for QSBS C-Corps up to 100% for up to $10MIL in gains.

https://www.investopedia.com/terms/s/section-1202.asp#:~:text=Section%201202%20allows%20capital%20gains,order%20to%20exclude%20the%20gains.

Depending on your type of business, this alone could be a great reason to revoke from S to C.

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As I mentioned earlier, it was my understanding that to be QSBS, the original issuance had to be by a C-corp. Are you aware of any change in that?

It is not clear from the OP whether it was issued by a C-corp that then later made an S election. If so, then it would have to meet the requirement of having been a C-corp for "substantially all" of the holding period (assuming again that those rules have not been changed).