The number one reason most organizations avoided forming a C Corp – double taxation – is (thanks to the Tax Cuts and Jobs Act) now essentially off the table. The permanent installation of a flat 21% federal income tax came into effect for tax years beginning in 2017. It applies uniformly to PSCs which, prior to the new law, were more heavily taxed than other C corps.
Some Things Remain the Same
While TCJA changes many tax law provisions for C corps, some general tax planning priorities still hold true:
If a venture stands to incur ongoing tax losses, C Corp status isn’t usually advisable. Why not? Those losses can’t be passed through to the owners/shareholders. Instead, net operating losses are created that are carried over to future tax years and used to shelter any corporate taxable income. And, in tax years beginning after 2017, NOLs can’t shelter more than 80% of taxable income in the carryover year.
It’s still something C Corps can be subject to, though the cost will be dampened by the new 21% corporate rate. It isn’t a problem, though, when a C Corp needs to retain all its earnings to finance capital investments and growth. In those cases, double taxation is avoided because the earnings stay inside the corporation, with no dividends paid to shareholders.
When C Corps pay salaries and bonuses to shareholder employees and provide them with tax-favored fringe benefits, it often keeps the corporation’s taxable income levels low (and limits double taxation). Your tax accountant in Las Vegas can more fully explain how to reduce C Corp taxable income through this smart tax planning strategy.
Tax accountants still recommend foregoing C Corp status if you have appreciating assets like real estate and certain intangibles. The reason? If you eventually sell the assets for substantial gains you may find it impossible to take the profits out of the corporation without incurring double taxation. In these cases, a pass-through entity is still a smarter choice and an option you should discuss with your tax accountant.
Tax Planning Considerations
The new 21% flat rate under the TCJA offers some real advantages and benefits, deferring business income being one of the biggest. It’s much easier to accomplish for one simple reason: you don’t have to guess what this or next year’s tax rate will be. Tax experts suggest a suitable strategy is using a cash-method accounting to defer income into next year while accelerating deductible outlays into this one, thereby postponing corporate federal income tax bills.
There are several ways to defer income:
- Prepay expenses for next year and deduct them in the current tax year.
- Delay invoices so that income is received the following year.
- Charge recurring business expenses before year end. You can claim the deductions even though the non-revolving credit card bills won’t be paid until the following year.
- Pay expenses by check and mail them shortly before year’s end. The expenses can be deducted in the year you mail the checks.
There are pros and cons to using any of these methods, so be sure to talk with your tax accountant about whether they’re right for you.
Other tax planning considerations include:
- Making the most of bonus depreciation. For new and used qualified property, the TCJA increases the first-year bonus depreciation from 2017’s 50% to 100%. When allowed, it’s a better choice over the Section 179 deduction privilege because there are fewer restrictions.
- Taking advantage of the generous Section 179 rules whereby the deduction has increased from $510,000 to $1 million. Under the new rules, the definition of eligible property has expanded to include some depreciable tangible personal property like furniture, kitchen appliances, beds, and other items used in facilities where sleeping accommodations are rented out and provided. Other expansions include qualified expenditures for HVAC equipment, roofs and alarm, security and fire protection systems for non-residential real property. Your tax accountant can explain more about which prior deductions can still be claimed.
- Buying a “heavy” vehicle like an SUV, van or pickup. As long as it’s placed in service between September 28, 2017 and December 31, 2022, major tax advantages can be realized by writing off 100% of the cost of acquiring one of these vehicles. To qualify for this specific tax break, the vehicle must have a manufacturer’s gross vehicle weight rating above 6,000 pounds. Lighter vehicles have skimpier depreciation deductions.
Meet with a Tax Accountant in Las Vegas
To a large extent, opting for a C Corp can now be predicated on your business plan rather than tax considerations. But hiring employees or deploying significant capital are good reasons for doing a thorough tax and business analysis before making a decision.
As the bill’s name implies, the TCJA includes numerous provisions for helping C Corps cut their tax bills while simplifying tax planning. An experienced and qualified tax accountant in Las Vegas can supply more details on what’s covered in this post. Contact us today at 702-870-7999 to learn more about C corps, the TCJA and other creative tax-planning strategies for your business.